Contents - AL-Tax

96 6 Intercompany Sale of Medical Devicesproducts that Company Y previously purchased from USP, for resale in the samegeographic market and to customers at the same market level. It will also have thesame advertising, marketing and inventory-carrying responsibilities. Hence, USPshould charge FS the same prices that it previously charged Company Y. (To theextent that FS bears incrementally higher advertising and promotional expenses, itshould be compensated for marketing services rendered.)6.3.2.2 Recommendations: Case BCase B is analogous to Case A, except that USP manufactures these (in-hospital)monitoring devices internally. We cannot use the CUP method to establish USP’sarm’s length prices on sales of in-hospital monitoring systems to FS, because USPhas historically sold these products exclusively in its domestic market.However, FS should earn approximately the same gross margin on productssourced from USP, for resale in the same geographic market and to customers atthe same market level, whether USP manufactures the subject products internally orengages an independent subcontractor to manufacture the products. Hence, USP’sintercompany selling prices for products covered by Case B should be establishedby (a) calculating FS’ gross margin on the resale of products covered by Case A,and (b) deriving USP’s transfer prices such that FS earns the same gross margin onproducts covered by Case B.The following example illustrates this approach: Assume that FS earns an averagegross margin of 48% on the sale of products covered by Case A, and sellsproducts covered by Case B at a price of P B to German customers. USP’s transferprice on the latter products, denoted by x, should solve the following equation:(P B − x)/P B = 0.48, or x = P B × 0.52. Hence, if P B is equal to $600.00, USP’sselling price to FS should be $312.00. As with Case A, to the extent that FS bearsincrementally higher advertising and promotional expenses, it should be compensatedfor marketing services rendered.6.3.2.3 Recommendations: Case CFS will act as a master distributor in European markets other than Germany, resellingto smaller independent distributors in these local markets (Case C in the abovematrix). While USP previously sold outpatient monitoring devices to third partydistributors in some of the same European markets, such transactions took place ata different market level than USP’s prospective sales of outpatient products to FS,for resale outside Germany. Relatedly, in its capacity as a master distributor, FS willassume certain of the functions that USP and its independent European stockingdistributors, respectively, previously performed (e.g., oversight of distributors in thecase of USP, and the maintenance of local stocks, advertising and promotion in thecase of European distributors). For these reasons, we do not utilize the CUP methodto analyze Case C transactions.On Case C transactions (where product is manufactured by Company X forexport to FS and resold by FS to distributors outside of Germany), USP’s substantive