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Strategy has identified ten independent enterprises as comparables. It can now look atthe net profit of these enterprises to determine the right arm’s length price for itsservices. But how?Transfer Pricing: Rules & Practice – Page 42
4.5.3 – Net Resale Minus MarginThe Net Resale Minus Margin is the ratio of EBIT to turnover. It measures an enterprise’sreturn on sales. Using this net ratio, the comparison eliminates differences resulting fromcategorizing sales under sales revenues or other revenues. This is not allowed under thetraditional transactions method Resale Price Method, as that method uses information ongross sales level – and thus demands a detailed specification.If the TNMM uses the Net Resale Minus Margin as a net profit indicator, it is oftenreferred to as the Net Resale Minus Method. This method is often used for sales anddistribution activities.Let’s see how this looks:Example 29 – Net Resale Margin Step 1: Desi Distribution renders distribution services. An associated enterpriserequests 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. DesiDistribution has identified 10 independent enterprises as comparables. It can now lookat 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, yousimply charge a price at which the Net Resale Minus Margin is 0.15.Transfer Pricing: Rules & Practice – Page 43Average Profit & Loss ComparablesSales Revenue500,000.00 USDCosts of goods sold-325,000.00 USDSelling and other operating expenses-100,000.00 USDTotal Costs-425,000.00 USDProfit (EBIT)75,000.00 USDThe Net Resale Minus Margin = EBIT(75.000) / Turnover (500.000) = 0.15