The resale price method (RPM) is one of three traditional transaction methods under the OECD Transfer Pricing Guidelines. It works by deducting an arm’s length gross margin from the resale price charged to an independent customer. The result is the arm’s length transfer price for the original intercompany transaction.
What Is the Resale Price Method?
The resale price method (RPM) is a transfer pricing method used to determine whether the price in an intercompany transaction reflects arm’s length conditions. It sits alongside the Comparable Uncontrolled Price (CUP) method and the Cost Plus method as one of the three traditional transaction methods recognised by the OECD Transfer Pricing Guidelines (paragraphs 2.27 to 2.41).
The arm’s length principle requires that related companies price their transactions as independent parties would under comparable circumstances. The RPM applies this principle from the reseller’s perspective. It starts not with the cost of the product, but with the price at which it is sold to an external customer.
How Does the Resale Price Method Work?
The RPM works backwards from the final sale. It takes the price charged to an independent customer, deducts an appropriate gross margin, and adjusts for purchase-related costs. What remains is the arm’s length price for the original intercompany transaction.
Step-by-Step: Applying the RPM
- Identify the resale price – Find the price the distributor charges an independent customer for the product.
- Determine the arm’s length gross margin – Use internal or external comparables to establish an appropriate resale price margin.
- Deduct the gross margin – Subtract the margin. It should reflect the reseller’s functions, assets used, and risks assumed.
- Adjust for purchase-related costs – Account for costs such as customs duties tied to the original purchase.
- Arrive at the arm’s length transfer price – The remaining figure is the price that should apply to the original intercompany transaction.
When Should You Use the Resale Price Method?
The RPM is most useful in distribution arrangements. It works best when goods are purchased from a related party and resold without significant transformation, when the reseller performs standard distribution functions, and when comparable resale margins are available. Those comparables can come from the same reseller in uncontrolled transactions (internal comparable) or from independent distributors in similar arrangements (external comparable).
The method is less suitable when the reseller significantly processes or alters the goods, or when the reseller holds or develops valuable intangibles such as trademarks or brand equity.
Is the Resale Price Method Actually Used in Practice?
The RPM is a well-established method and the right choice in the right circumstances. That said, the Transactional Net Margin Method (TNMM) tends to be the more widely applied method in distribution benchmarking exercises. The primary reason is practical: net margin comparables are generally more accessible than gross margin comparables, and net margins are less sensitive to accounting differences between companies.
This does not make the RPM a lesser method. Where reliable gross margin comparables exist and the reseller’s functions are straightforward, RPM can be more direct and more accurate than TNMM. The key is selecting the method that best fits the facts – and ensuring that selection is well-documented.
RPM vs. TNMM: Which Method Is Right for Your Distribution Structure?
Criteria | RPM | TNMM |
Profit measure | Gross margin | Net margin |
Data required | Comparable gross margins from distributors | Comparable net margins from distributors |
Sensitivity to product differences | Low – margins reflect functions, not products | Low – net margins also reflect functions |
Sensitivity to accounting differences | Higher – gross margins vary with cost classification | Lower – net margins are more consistent across companies |
Best used when | Goods are resold without significant transformation and gross margin comparables are available | Gross margin comparables are unavailable or the reseller performs more complex functions |
Key limitation | Reliable gross margin comparables are difficult to find | Less precise at the gross margin level – may mask product-level differences |
What Are the Advantages of the Resale Price Method?
Where the conditions are right, the RPM has genuine strengths. Gross margins reflect functions performed rather than product characteristics. This makes the method less sensitive to minor product differences than the CUP method. For straightforward distribution arrangements with available comparable margins, RPM is practical and well-supported by the OECD framework.
What Are the Limitations of the Resale Price Method?
Product transformation. When the reseller further processes or significantly alters the goods, the method loses reliability.
Intangible contributions. When a reseller develops or maintains significant intangibles – brand value, trademarks, marketing assets – isolating the resale margin becomes difficult. Adjustments are required and introduce uncertainty.
Timing. The method works best when resale follows purchase promptly. Longer gaps allow market shifts, currency movements, and cost changes to distort the margin.
Data availability. Reliable comparable gross margin data is harder to find than net margin data. This is one reason TNMM tends to be the preferred method in many distribution benchmarking exercises.
What Documentation Do Tax Authorities Expect?
Tax authorities will typically expect the following when the RPM is applied:
- Evidence of the resale prices applied in transactions with independent customers.
- Comparable resale margins from internal or external sources, with a clear explanation of the selection process.
- A detailed functional analysis covering the reseller’s activities, the assets it uses, and the risks it bears.
- Clear justification for any adjustments made to account for differences between controlled and uncontrolled transactions.
Documentation should be prepared contemporaneously. Gaps or inconsistencies attract scrutiny and can expose the group to transfer pricing adjustments and penalties.
Conclusion
The resale price method is a recognised and logical tool for pricing intercompany distribution transactions. Its reliability depends on the quality of comparable data and the simplicity of the reseller’s functions – and when those conditions are met, it is a strong and defensible choice.
If you are reviewing your intercompany distribution pricing or assessing which transfer pricing method best fits your group’s structure, the method selection decision deserves careful analysis. Contact TPTAX to discuss your transfer pricing position and documentation strategy.
Frequently Asked Questions
What is the resale price method in transfer pricing?
The resale price method (RPM) determines an arm’s length transfer price by deducting a gross margin from the price a distributor charges an independent customer.
When is the resale price method most appropriate?
It is most appropriate for straightforward distribution arrangements where goods are resold without significant transformation and the reseller does not hold substantial intangibles.
Why is the TNMM more commonly used than the resale price method?
Net margin comparables are generally more accessible than gross margin comparables, and net margins are less sensitive to accounting differences between companies.
What is a resale price margin?
A resale price margin is the gross margin retained by the reseller. It reflects the functions performed, assets used, and risks assumed in the distribution process.
What are the main risks of using the resale price method?
Key risks include unreliable results when goods are further processed, when the reseller holds significant intangibles, or when comparable gross margin data is unavailable.
Is the resale price method recognised by the OECD?
Yes. The OECD Transfer Pricing Guidelines recognise the RPM as one of three traditional transaction methods, addressed in paragraphs 2.27 to 2.41.
