2. Case Study 1 - Traditional Transfer Pricing Methods TRANSFER PRICING CASE STUDIES WORKSHOP SAN JOSE 31 MARCH - 4 APRIL 2014 2. Case Study 1 - Traditional Transfer Pricing Methods OECD freely authorises the use of this material for non-commercial purposes. All requests for commercial uses of this material or for translation rights should be submitted to rights@oecd.org. The opinions expressed and arguments employed herein are those of the author and do not necessarily reflect the official views of the OECD or of the governments of its member countries.

Associated Wholesaler Costa Rica Independent Champagne Producer Facts of the Case (controlled) transaction Transfer Price? Associated Wholesaler Costa Rica Champagne Producer France 12.50 EUR Retailer Costa Rica (uncontrolled) transaction Sales Price 6 EUR Independent Champagne Producer France Independent Wholesaler Costa Rica 15 EUR Retailer Costa Rica The associated wholesaler (subsidiary) incurs transportation costs of 1.50 EUR. The independent wholesaler incurs no transportation costs. External Comparable

Questions Which factors should be taken into account in determining the arm’s length transfer price for one bottle of champagne sold by the French producer to its associated Costa Rican subsidiary? Which company should be selected as tested party and why? What transfer pricing method is the most appropriate method to the circumstances of this case and why? What is the arm’s length transfer price per bottle of champagne sold by the French producer (parent company) to its associated Costa Rican subsidiary?

Multinational Enterprise Group RESALE PRICE METHOD Tested Party Transfer Price Sales Price to Third Party Third Party Customer Manufacturer Distributor Multinational Enterprise Group Sales Price to 3rd Party - Gross Profit Margin Transfer Price Calculate gross margin for distributor/reseller Easiest to apply if reseller does not add substantially to value of product 12

RESALE PRICE METHOD P&L Account Sales Costs of Goods Sold Gross Profit Operating Expenses Net Operating Income Gross profit level indicator Looks at gross profit relative to sales

RESALE PRICE METHOD Sales Price Calculation of Arm’s length price (ALP): ALP = Resale Price - (Resale Price Margin x Resale Price) Resale Price Margin = Sales Price - Purchase Price Sales Price 14

Determined from comparable companies RESALE PRICE METHOD Determined from comparable companies Sale Price to Third Parties $ 100 Resale Price margin 20% Arm’s length price = $ 100 - (20% x $100) = $ 80 15

Example (controlled) transaction Transfer Price? Associated Wholesaler Costa Rica 12.50 € Retailer Costa Rica Champagne Producer France (uncontrolled) transaction Sales Price 6 EUR Independent Champagne Producer France Independent Wholesaler Costa Rica 15 € Retailer Costa Rica The associated wholesaler incurs transportation costs of 1.50 €. The independent wholesaler incurs no transportation costs. External Comparable

Example Solution Retail price charged by independent wholesaler 15.00 100% Purchase price paid by independent wholesaler - 6.00 - 40% Gross profit / margin of the independent wholesaler 9.00 60% Retail price charged by independent wholesaler 15.00 100% Purchase price paid by independent wholesaler - 6.00 - 40% Adjustment for CIF – FOB12% of sales price +1.80 +12% Gross profit / margin of the independent wholesaler 10.80 72%

Calculating the AL price Example Calculating the AL price Retail price charged by dependent wholesaler 12.50 100% Purchase price paid by dependent wholesaler TP ??? Gross profit / margin of the dependent wholesaler Retail price charged by dependent wholesaler 12.50 100% Purchase price paid by dependent wholesaler 3.50 - 28% Gross profit / margin of the dependent wholesaler 9.00 72%

Questions and/or comments?