3.3 Resale Price Method (RPM)

The resale price method is generally most appropriate where the final transaction is with an independent distributor. The starting point in the resale price method is the price at which a product that has been purchased from an associated enterprise is then resold to an independent enterprise. This price (the resale price) is then reduced by an appropriate gross margin (the resale price margin) representing an amount from which the reseller would seek to cover its selling and other operating expenses and in the light of functions performed (taking into account assets used and risks assumed), make an appropriate profit. An arm's length price for the original transaction between associated enterprises is obtained after subtracting that gross margin, and adjusting for other costs associated with the purchase of the product (e.g. custom duties). A typical adjustment may be represented as follows:

As shown in the formula, the focus is on the resale price margin. This margin should ideally be established from comparable transactions between the reseller (involved in the controlled transaction) and other independent parties. In the absence of such transactions, the resale price margin may be determined from sales by other resellers in the same market. The resale price margin is expected to vary according to the amount of value added by the reseller. The factors that may be contributed to the value added depend on the level of activities performed by the reseller.

In making comparisons for purposes of RPM, the focus is more on functions performed compared to product characteristics. Factors which may influence the resale price margin and other considerations when performing a comparability analysis include:

  1. The functions or level of activities performed by the reseller: whether only performing minimal services to taking on full ownership and responsibility for the risk involved in the transactions e.g. whether the reseller is merely a forwarding agent or a distributor who assumes full responsibility for marketing and advertising the product by risking its own resources in these activities;

  2. The degree of added value or alteration the reseller has done before the product is resold. The method is difficult to apply if the product has gone through a substantial number of processes;

  3. Employment of similar assets in the controlled and uncontrolled transactions e.g. a developed distribution network;

  4. Although broader product differences are allowed as compared to the CUP method, product similarities are still significant to some extent particularly when there is a high value or unique intangible attached to the product;

  5. If the resale price margin used is that of an independent enterprise in comparable transaction, differences in the way business is managed may have an impact on profitability;

  6. A resale price margin will be more accurate if it is realized within a short time lapse between original purchase and the resale of the product as a longer time lapse may give rise to changes in the market, exchange rates, costs etc.;

  7. Whether the reseller is given exclusive rights to resell the products;

  8. Differences in accounting practices, where adjustments must be made to ensure that the components of costs in arriving at gross margins in the controlled and uncontrolled transactions are the same.