CPM Transfer Pricing

A September 19, 2024 ruling by the Portuguese Administrative Arbitration Center upheld the cost-plus approach used by the taxpayer even though the Portuguese tax authorities objected to the exclusion of employee bonus compensation from the cost base. The cost base included certain pass-through costs, which led to the reported markup for 2019 being less than 4.1%.

Topics: TNMM/CPM Portugal Transfer Pricing

The operating profit margin (OMBD or OMAD) can be derived from the profit markup by indirect least squares (ILS). This is the most theoretically defensible and reliable operating profit indicator that can be obtained from comparable data.

Topics: Transfer Pricing Operating Profit Markup TNMM/CPM Profit Indicators

U.S. 26 CFR 1.482-5(b)(4)(i-ii) claim that the “return on capital employed” (return on assets) is less sensitive to “functional differences” than the operating profit margin or the operating profit markup. This claim is based on the unrealistic premise that “capital flows” to equalize profit rates (return on assets) among companies in the same (or in different) industries by some "invisible hand."

Topics: Return on Assets TNMM/CPM Profit Indicators

Quartiles are the most elementary form of univariate (single variable) data summary, because no statistical technique beyond sorting and slicing (tagging) of the data is employed. Distributions of profit indicators have long tails, suggesting that the Median is a good measure for only 50% of the dataset.

Topics: Arm's Length Principle TNMM/CPM

Determining arm's length remuneration for a Czech manufacturing affiliate under different transfer pricing models.

Topics: Return on Assets Contract Manufacturer Royalty Rates Tax Controversy TNMM/CPM

Determining an arm’s length profit indicator (profit ratio) requires two equations, and not one equation, as prescribed in financial statement analysis textbooks. E.g., Bernstein (1993), Drake & Fabozzi (2012). An accounting critique of univariate profit ratios is found in Whittington (1986).

Topics: TNMM/CPM Profit Indicators

Panama’s Administrative Tax Court ruled in favor of the tax authority Dirección General de Ingresos (DGI) in a January 19, 2023 decision involving remuneration for a related-party wholesale distributor of electronics determined using Transactional Net Margin Method (TMMM; CPM in the US). In earlier discussions, we noted how DGI benchmarked the return for a limited-function wholesale distributor of petroleum and the return for a high-function distributor of pharmaceuticals.

Topics: Limited Risk Distributor Asset Intensity Adjustment TNMM/CPM

On February 20, 2023 Ampol Limited settled its procurement hub transfer pricing dispute with the Australian Tax Office (ATO). Procurement affiliates have been a point of emphasis for the ATO in recent years, and have been gaining the attention of other tax authorities, including the US IRS.

Topics: Australia Australian Tax Office Singapore Procurement Hub Tax Controversy TNMM/CPM

A 2008 restructuring transferred the European rights to the McDonald’s intangibles to McD Europe Franchising Sàrl, a Luxembourg-resident subsidiary with branches in both Switzerland and the U.S. While this migration of intangible assets created substantial controversy in Europe, the real transfer pricing concern would be an IRS issue and not an issue for the French Tax Authority (FTA) if the royalty rate remained at 5%.

Topics: Intangibles Europe Best Method Royalty Rates Tax Controversy TNMM/CPM

Transfer pricing practitioners in the US as well as in other nations often face the dilemma that clients wish to establish intercompany management fees as a percentage of revenues while tax authorities may test the implied cost plus from any intercompany management policy.

Topics: Intercompany Services Management Fees CUP State Transfer Pricing TNMM/CPM

Licensees bear significant commercial risk when they use valuable intangible assets owned by another entity. As such, any method that affords them with an expected return to its tangible assets that is only as high as the overall enterprise’s cost of capital is inconsistent with sound economics.

Topics: Intangibles Medtronic Royalty Rates Tax Controversy Section 482 TNMM/CPM US Transfer Pricing

This discussion presents a simplified illustration of the issues with respect to the unspecified method applied in Medtronic III in contrast to the IRS' extreme CPM approach and a traditional RPSM approach based on sound financial economics.

Topics: Residual Profit Split Method Unspecified Method Intangibles Medtronic Tax Controversy Tax Policy Section 482 US Internal Revenue Service TNMM/CPM US Transfer Pricing

Italy’s Supreme Court remanded May 17, 2022 a case in which Regional Tax Commission of Lombardy challenged the transfer pricing between Promgas Spa and Gazprom Export, finding alleged deficiency in the tax authority’s application of the Transactional Net Margin Method (TNMM).

Topics: Resale Price Method CUP Oil and Gas Transfer Pricing TNMM/CPM

Use of the CPM/TNMM to determine royalty rates for valuable intangibles in transfer pricing is incompatible with basic financial economics.

Topics: DEMPE OECD Guidelines Intangibles Royalty Rates Tax Policy US Internal Revenue Service TNMM/CPM

To determine whether the usual financial ratios provide insights into what would represent an arm's length range, any analysis of controlled healthcare distributors must account for the underlying facts surrounding the functions and expenses occurred by the distribution affiliate.

Topics: Pharmaceutical Industry Benchmarking Resale Price Method Tax Controversy TNMM/CPM

Applied properly, the Comparable Profits Method (CPM) can be a useful approach for well-defined transfer pricing issues, such as the appropriate profitability of a sales affiliate. Unfortunately, CPM is often applied mechanically without regard for economic principles and functional comparability.

Topics: Benchmarking State Transfer Pricing Tax Policy TNMM/CPM Profit Indicators

Brazil’s unique transfer pricing rules have allowed multinationals to shift income to tax havens in certain situations. We explore through the lens of the Macopolo case how Brazil could benefit from adoption of the arm's length standard.

Topics: Base Erosion and Profit Shifting (BEPS) Brazil OECD Guidelines Tax Controversy Tax Policy TNMM/CPM

In February 2021, the Supreme Court of Canada declined to hear the Canadian Revenue Agency's (CRA) appeal in its case against uranium multinational Cameco Corporation. However, this only marked the end of Round 1, as the courts only ruled on 8 of 14 years under review.

Topics: Mining and Extractives Canadian Revenue Agency Tax Controversy TNMM/CPM Profit Indicators

A recent article asserted that state tax authorities should use the Comparable Profits Method (CPM) with care in the evaluation of transfer pricing for tangible goods. However, some of the examples cited, including the recent Coca Cola case, in their piece are misplaced for reasons we will address.

Topics: State Transfer Pricing Tax Controversy Tax Policy TNMM/CPM

Ad hoc adjustments are a risky endeavor in transfer pricing. Using regression analysis, we can test if asset intensity is relevant to explain the behavior of the operating profit markup or profit margin and calculate a reliable adjustment to the profit indicator.

Topics: Tutorial Asset Intensity Adjustment TNMM/CPM Profit Indicators

The prevalent use of quartiles to determine profit indicators often results in a wide (unreliable range) and ad hoc assets adjustments. These problems can be solved by using regression analysis, which produces more defensible statistical ranges of the profit indicator resistant to audit scrutiny.

Topics: Tutorial TNMM/CPM Profit Indicators

Changes to tax laws are often seen as the primary solution to curb profit shifting. However, proper application of the arm's length principle alongside BEPS CbCR disclosures already offer powerful tools in this endeavor.

Topics: Pharmaceutical Industry Base Erosion and Profit Shifting (BEPS) Tax Policy TNMM/CPM

Comparability is a key issue in transfer pricing that is often not fully appreciated. However, comparability issues are hardly uncommon in transfer pricing controversies and can create a trickle-down effect that leads to major taxation issues.

Topics: Comparability Limited Risk Distributor TNMM/CPM Profit Indicators