Contents - AL-Tax

3.2 Resale Price and Cost Plus Methods 21There are certain instances in which internal comparisons may be feasible. Forexample, an affiliated distributor may be appointed in place of a predecessor unaffiliateddistributor in a particular geographic market, seek to round out its productofferings by sourcing from related and unrelated suppliers, or make a strategic decisionto dual-source. An affiliated manufacturer may seek to reach different typesof customers in the same geographic market, or the same types of customers indifferent locales, and employ both affiliated and independent distributors to theseends. However, in many of these instances, comparisons of resale margins or grossmarkups will still not be valid. If an affiliated distributor is stepping into the shoesof an unaffiliated predecessor, it may incur start-up costs. If an affiliated distributordual-sources as a matter of course, it may be doing so in part to limit its exposureto country-specific risks (e.g., strikes, natural disasters, political instability, etc.).Therefore, its affiliated and independent suppliers will probably not operate in thesame geographic market. If a manufacturer sells to both affiliated and unaffiliateddistributors in the same geographic market, they in turn will likely sell to distinctcustomer bases (e.g., large discount chains and small independent companies), andobtain different volume discounts or otherwise insist on different purchase prices,consistent with their disparate selling costs.3.2.5 Summary and Practical ImplicationsIn sum, comparisons of an individual distributor’s resale margins or an individualmanufacturer’s gross markups on internal transactions with related and unrelatedparties, respectively, are valid in certain hypothetical circumstances, but are rarelyfeasible in practice. Comparisons of resale margins or gross markups across firmshave the same shortcomings as comparisons of accounting rates of return, operatingmarkups, and other accounting measures of performance.As previously noted, both IRS agents in the field and IRS personnel in theNational Office hold prospective comparable companies to a higher standard ofcomparability than the U.S. regulations themselves would seem to require underboth the resale price and the cost plus methods. As a result, U.S. firms and the IRSuse these methods very sparingly. On the other hand, the OECD Guidelines looksubstantially more favorably on these transactions-based methods than the CPMand TNMM, and favor internal comparable uncontrolled transactions over externalcomparable uncontrolled transactions. The aforementioned series of Draft IssueNotes released by the OECD’s Center for Tax Policy and Administration reiteratethe OECD’s negative view of the CPM and TNMM, insofar as they entail “mechanicalcomparisons of financial indicia.”Just as there is no reason to expect close correlations in accounting rates ofreturn, gross margins and gross markups across firms, there is no compelling reasonto believe that two unafffiliated companies with similar accounting rates of returnwill also have similar gross margins or gross markups. Hence, if OECD membercountries apply the resale price and/or cost plus methods to the same intercompany