Resale Pricing Method (RPM)

What is the Resale Price Method?

The Resale Price Method is a transactional method used to evaluate the arm’s length nature of intercompany prices. It begins with the resale price of a product sold to an independent party and subtracts a gross profit margin to estimate the original transfer price between related entities.

This method is especially useful when the reseller adds limited value and performs only basic distribution functions. It’s less about the product’s nature and more about the reseller’s role.

When Should the RPM Be Applied?

Is RPM suitable for all industries?

Not quite. The Resale Price Method is best applied when:

• The reseller does not make significant changes to the product.
• The product’s value isn’t heavily influenced by the reseller’s marketing or transformation efforts.
• Reliable gross margin comparables can be sourced, either internally or externally.

Examples:

• A local subsidiary reselling imported electronics without modification.
• A regional office distributing branded luxury goods to local retailers.

Which companies are ideal candidates?

Entities that act as Limited-Risk Distributors (LRDs) or Buy-Sell Distributors are ideal. These firms typically take legal title of the goods but don't significantly alter them, making RPM a good fit.

How Is the RPM Calculated?

What is the step-by-step formula?

1. Start with the Resale Price to a third party.
2. Subtract an arm’s length gross profit margin—this represents what an independent distributor would typically earn.
3. Adjust for costs related to the acquisition, such as customs duties or local transport.
4. The result is the arm’s length transfer price.

Formula:

Transfer Price = Resale Price to Third Party - Gross Margin - Adjustments


What Makes a Good Comparable?

Are internal comparables better than external?

Yes, when available. An internal comparable exists if the tested party resells similar products under both related and unrelated transactions. If internal data is lacking, external comparables from public databases or industry benchmarks are used.

What about functional comparability?

The critical focus is on the functions, risks, and assets of the reseller, not the specific product. According to the OECD Guidelines:

“Because gross profit margins represent gross compensation after the cost of sales, product differences are less significant than functional differences.”

What Are the Pros and Cons of RPM?

Advantages of the Resale Price Method

• Relatively simple: Particularly for resale of finished goods.
• Useful for distributors: Especially those with limited functional contributions.
• OECD-endorsed: Broadly recognized and included in the OECD Transfer Pricing Guidelines (Para. 2.27).

Disadvantages of the RPM

• Requires gross margin comparables: Not always available in open-source databases.
• Not suitable for complex value chains: Like those with intangibles, services, or significant product customization.
• Doesn’t factor net margins: Making it less ideal when operating expenses vary widely across comparable companies.

How Does RPM Compare to Other Methods?

RPM vs CUP (Comparable Uncontrolled Price Method)

• CUP is stricter on product comparability.
• RPM is more lenient on product specifics, focusing instead on the reseller’s margin.

RPM vs TNMM (Transactional Net Margin Method)

• TNMM is used when gross margins are unavailable or unreliable.
• RPM may be used as a price-setting mechanism, with TNMM applied later as a testing method for validation.

Which Profit Level Indicator (PLI) Aligns with RPM?

The Gross Margin (or Gross Profit Margin) is the most appropriate PLI for RPM.

Gross Margin Formula:

Gross Profit / Sales


This margin must be adjusted to reflect differences in functions, market conditions, or risks. It ensures the reseller earns a profit commensurate with its role.

Practical Tips for Implementing RPM

What should taxpayers keep in mind?

1. Ensure consistency: Use consistent accounting treatments across all entities.
2. Focus on functions: Highlight the distributor’s routine functions in documentation.
3. Use multiple comparables: Don’t rely on a single third-party margin. Use a range of benchmarks.
4. Document everything: OECD Guidelines emphasize transparent, reproducible methods.
5. Beware of aggregation: RPM is best applied on a transaction-by-transaction basis, not to aggregated product lines unless justified.

Is RPM Accepted by Tax Authorities?

Yes. Most tax authorities recognize RPM under OECD Guidelines and local laws. However, the burden of proof rests on the taxpayer to show that gross margins used are arm’s length and well-documented.