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Transfer Pricing Low-Risk Distributor Model Use Cases

Use case

When one entity sells products of another entity in the group in its local market.

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In this example, the intercompany price, which is reflected as Canada subsidiary’s Cost of Goods, will be a plug number that will result in an operating profit margin which falls within the interquartile range. The determination of the Cost of Goods is bottom-up.

Profit and loss report

Canada Subsidiary*

Notes

Sales

1,000

Sales to third-party's clients. This value is fixed.

Cost of Goods

(670)

Plug number=1000-300-30

Operating Cost

(300)

Rent, wages, travel. This value is fixed.

Operating Profit

30

=1000 x 3%

Operating profit margin

3%

The targeted operating profit margin as decided by the company, which falls within the interquartile range.

*Canada Subsidiary’s Cost of Goods should be equal to the US parent’s sales.

When to use this model?

For intercompany services. The transactions are typically provided by either the subsidiaries as a service to their parent (principal company) /regional headquarter or by the parent/regional headquarter to their subsidiaries in a form of management services, administration services or combination of both.

When not to use this model?

When the service provider provides similar service to unrelated parties or when the recipient receives similar service from unrelated parties. High level of similarity typically includes similarity in the nature of the service, volume, different geographical markets, contractual terms (e.g., service liability, scope of service, payment terms).  

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