Contents - AL-Tax

88 5 Intercompany Sale of Diamonds Applying the more restrictive 10% upper bound, IS’ intercompany and thirdparty prices differed by no more than this magnitude in 78% of all paired transactions. The intercompany price exceeded the third party price in 42% of pairedtransactions meeting the 10% threshold, and the third party price exceeded theintercompany price in 58% of paired transactions meeting the 10% threshold.Based on these findings, we conclude that IS’ percentage discounts from RAP,used to establish its intercompany prices on sales of generic stones to USS, producearm’s length results.5.5 ComparisonUnder the existing transfer pricing regime, we analyze FP’s sales of rough stonesto IS by means of a variant of the resale price method. Under the alternativeregime, we would rely on published numerical standards. While the use of numericalstandards would greatly reduce compliance and dispute resolution costs, it wouldonly improve the reliability of results (within the inherent limits of transfer pricingmethods that utilize accounting measures of profit) if the studies used to establishsuch standards were sufficiently comprehensive and industry-specific.Under the existing regime, we analyze IS’ sales of generic polished stones toUSS by application of the comparable profits method. Under the alternative regime,we would rely on the modified inexact CUP method. The former method producesan adjustment in this case, while the latter does not. In view of the substantial differencesbetween our sample of standalone distributors and USS, respectively, andgiven that operating profits expressed as a percentage of sales or book assets arenot equalized across distributors, the comparable profits method produces distinctlyunreliable results. In contrast, our CUP application is based only on the uncontroversialproposition that similar stones will sell for similar prices. As such, it is morecompelling.