TPG2022 Chapter II Annex I paragraph 2

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Category: OECD Transfer Pricing Guidelines (2022), TPG2022 Annex I to Chapter II – Sensitivity of gross and net profit Indicators | Tag: ,
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Under Illustration 1, if a taxpayer is operating with an associated manufacturer as in case 2 while the third party “comparables” are operating as in case 1, and assuming that the difference in the extent and complexity of the marketing function is not identified because of for instance insufficiently detailed information on the third party “comparables”, then the risk of error when applying a gross margin method could amount to 120 (12% x 1 000), while it would amount to 20 (2% x 1 000) if a net margin method was applied. This illustrates the fact that, depending on the circumstances of the case and in particular of the effect of the functional differences on the cost structure and on the revenue of the “comparables”, net profit margins can be less sensitive than gross margins to differences in the extent and complexity of functions.

Illustration 2: Effect of a difference in the level of risk assumed by a distributor

The example below is for illustration only. It is not intended to provide any guidance on the selection of the transfer pricing method or of comparables, on the efficiency of distributors or on arm’s length rates of return, but only to illustrate the effects of differences between the level of risk assumed by a distributor and by comparables.


(*) Assume that in this case the difference of 60 in transaction price corresponds to the difference in the allocation of the obsolescence risk between the manufacturer and the distributor (additional loss estimated 50 plus remuneration of the risk of the distributor), i.e. it is the price for the contractual “buy-back” clause.

Related Guidelines

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