Strategy has identified ten independent enterprises as comparables It can now

Strategy has identified ten independent enterprises

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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
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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
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