Resale Price Method as a Transfer Pricing Method

When testing the fairness and reasonableness of a transaction, selecting the method should aim to determine the most appropriate method for each case. One of the transfer pricing methods that can be applied is the Resale Price Method. This article will discuss the Definition of Resale Price Method, When to Use Resale Price Method, Key Considerations in Using the Resale Price Method, and Examples of Resale Price Method Application.

What is the Resale Price Method?

According to Article 11, paragraph (4) of the Regulation of the Director General of Taxes No. PER-32/PJ/2011, the Resale Price Method (RPM) is a method of determining transfer pricing by comparing the price of a product in a transaction between related parties with the resale price of that product, after deducting a reasonable gross profit that reflects the functions, assets, and risks of the resale, to independent parties. In simpler terms, this method is used in transactions where products purchased from a related party are resold to an unrelated party.

When to Use the Resale Price Method?

The appropriate conditions for applying the resale price method include:

1. A high level of comparability between the transaction involving related parties and the transaction involving unrelated parties, especially in terms of functional analysis, even if the goods or services differ.

2. The reseller does not add significant value to the goods or services being sold.

Key Considerations in Applying the Resale Price Method

The OECD Transfer Pricing Guidelines 2022 outline several important factors to consider when applying the resale price method.

Product Characteristics

While product differences can be tolerated under this method, products must still be comparable. In cases where transactions involve unique processes or activities that enhance the value of the product (unique or valuable intangibles), products with a higher degree of comparability will yield better results. If product adjustments cannot be made but other characteristics are comparable, the resale price method may be more reliable than the CUP method.

Value Added to the Product

The resale price margin is easier to determine if the reseller does not add substantial value to the product. If the reseller makes material changes to the product, such as adding or combining components to create a finished good, determining the arm's length price with the resale price method becomes difficult.

Activities Performed by the Distributor/Reseller

The activities carried out by the distributor or reseller should be carefully considered when applying the resale price method. For example, whether the distributor acts merely as a forwarding agent or assumes ownership risks, including risks associated with marketing, distribution, product warranty, financing, and other activities. The more complex the activities and risks, the higher the resale price margin is likely to be. Conversely, simpler functions and activities will result in a lower margin.

Exclusive Rights to Sell the Product

The resale price margin for a product may vary if there are exclusive rights to sell that product. The value of these exclusive rights depends on geographical coverage or the level of competition from substitute products. Exclusive rights can encourage the reseller to make greater efforts to sell the product. On the other hand, these rights may provide a monopoly, allowing the reseller to earn profits with minimal effort.

Accounting Practices

Adjustments may be necessary if there are accounting differences between related-party and independent-party transactions. These adjustments ensure that the resale price margin is calculated based on the same costs. For example, research and development expenses might be recorded as operating expenses or as the cost of sales. Such differences in accounting treatment can impact gross margin, requiring adjustments.

Example of Resale Price Method Application

Consider two distributors selling products in the same market and under the same brand. Distributor X provides a product warranty, while Distributor Y does not. Distributor X does not include the warranty cost in its pricing strategy, leading Distributor X to sell the product at a higher price with a higher profit margin compared to Distributor Y, who sells at a lower price. Assuming other factors are comparable, the margins between Distributor X and Y are not comparable due to the significant impact of the warranty on the margins, necessitating adjustments.