In transfer pricing, the practice of providing distributor entities (often called routine distributors) with a target operating margin within a range effectively shifts the bulk of entrepreneurial risk to the source entity (such as a manufacturing, sourcing, or HQ entity). Transfer pricing practitioners often use stand-alone, entrepreneurial companies to benchmark arm’s length returns when applying the comparable profits method (CPM). However, routine distributor tested parties are not entitled to returns associated with entrepreneurial risks. How can we address this problem?
In their article, “CPM Benchmarking Studies: Risk Adjustments to Improve Comparability” published in the August 12 issue of Tax Notes International, Kash Mansori and Guy Sanschagrin, CPA/ABV of WTP Advisors propose an approach to adjust CPM Benchmarking returns– helping US multinational companies avoid overpaying taxes caused by overcompensating foreign routine distributor entities. For more information, contact Kash or Guy.
Note that for the same reasons provided above, these CPM Benchmarking adjustments may also apply to service provider entities that are compensated via a markup on their total costs.
Here’s the link to the article in Tax Notes International: https://lnkd.in/gQT6inUf (subscription required) CPM Benchmarking Studies: Risk Adjustments to Improve Comparability | Tax Notes
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