Strategy has identified ten independent enterprises

Strategy has identified ten independent enterprises as comparables. It can now look at
the net profit of these enterprises to determine the right arm’s length price for its
services. But how?
Transfer Pricing: Rules & Practice – Page 42

4.5.3 – Net Resale Minus Margin
The Net Resale Minus Margin is the ratio of EBIT to turnover. It measures an enterprise’s
return on sales . Using this net ratio, the comparison eliminates differences resulting from
categorizing sales under sales revenues or other revenues. This is not allowed under the
traditional transactions method Resale Price Method, as that method uses information on
gross sales level – and thus demands a detailed specification.
If the TNMM uses the Net Resale Minus Margin as a net profit indicator, it is often
referred to as the Net Resale Minus Method . This method is often used for sales and
distribution activities.
Let’s see how this looks:
Example 29 – Net Resale Margin
Step 1 : Desi Distribution renders distribution services. An associated enterprise
requests these services. It should thus find the terms and conditions (here: the price)
of a comparable transaction.
There are many enterprises around that provide comparable services. Desi
Distribution has identified 10 independent enterprises as comparables. It can now look
at these enterprises to find the right transfer pricing.
With the Net Resale Minus Method, we should first find the ratio of EBIT to turnover.
Let’s say that the average numbers of the ten comparables are as follows:
Step 2 : The second step is to calculate the arm’s length transfer price. For this, you
simply charge a price at which the Net Resale Minus Margin is 0.15.
Transfer Pricing: Rules & Practice – Page 43
Average Profit & Loss Comparables
Sales Revenue 500,000.00 USD
Costs of goods sold -325,000.00 USD
Selling and other operating expenses -100,000.00 USD
Total Costs -425,000.00 USD
Profit (EBIT) 75,000.00 USD
The Net Resale Minus Margin = EBIT(75.000) / Turnover (500.000) = 0.15