Contents - AL-Tax

18 3 Overview and Critique of Existing Transfer Pricing Methods3.2.1 Circumstances when Resale Price and Cost PlusMethods ApplyThe resale price and cost plus methods (and, under the U.S. Temporary Regulations,the gross services margin method and the cost of services plus method) canbe applied under the following fact patterns:1. A single manufacturer sells similar products to both affiliated and unaffiliateddistributors;2. A single distributor sources similar products from both affiliated and unaffiliatedsuppliers;3. A single services provider renders similar liaison or agency services (in the caseof the gross services margin method) to both affiliated and unaffiliated companies,and, if relevant, utilizes the same intangible assets in doing so;4. A single services provider renders similar services (other than liaison services inthe case of the cost of services plus method) under the same contractual terms toboth affiliated and unaffiliated companies and utilizes the same intangible assets,if any, in doing so;5. Two or more manufacturers sell similar products, in one instance to affiliateddistributors, and in the other instances, to unaffiliated distributors;6. Two or more distributors source similar products, in one instance from affiliatedsuppliers and in the other instances, from unaffiliated suppliers; and7. A group member performs routine manufacturing or distribution functions andlicenses intellectual property from another group member.Given one of the above fact patterns, one’s choice between the resale price andcost plus methods depends principally on whether (a) one of the group membersengages in internal arm’s length transactions, and (b) the affiliated manufacturer orthe affiliated distributor is the least complex entity (and therefore, the designatedtested party). For example, under the first fact pattern, one would ordinarily applythe cost plus method, and under the second, the resale price method. As indicatedabove, the gross services margin method generally applies when the services at issueare intermediary in nature, and the cost of services plus method applies when thetested party renders the same services to both affiliated and independent companies.Under the fifth and sixth fact patterns, one’s choice between the resale price and costplus methods would be dictated by each group member’s ownership of intellectualproperty and the relative values thereof. Under the last fact pattern, the choice ofmethods depends on whether the licensee is a manufacturer or a distributor.The U.S. regulations impose higher standards of comparability under the resaleprice and cost plus methods, as compared to the CPM: Products must be “ofthe same general type (e.g., consumer electronics),” 11 and the parties being comparedshould perform similar functions, bear similar risks and operate under similarcontractual terms. As previously noted, the OECD Guidelines do not differentiate11 See Treas. Reg. Section 1.482-3(c)(3)(ii)(B).