Resale Price Method (RPM) in Transfer Pricing

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Why is the Resale Price Method Used?

The Resale Price Method is useful because it directly links the reseller’s gross margin to independent market behavior. When distributors or sales entities perform routine functions and do not materially alter products, RPM provides a clear and reliable benchmark for testing whether intercompany prices reflect arm’s length conditions. This method ensures that distribution returns align with functional substance, reduces disputes, and supports OECD-compliant profit allocation.

Resale Price Method For CFOs

For CFOs, RPM offers predictable and market-aligned gross margins for sales and distribution subsidiaries. It supports stable profitability across markets, enhances financial planning, and minimizes unexpected tax adjustments that could distort consolidated results or disrupt commercial performance.

Resale Price Method For Tax Managers

For Tax Managers, RPM provides a transparent method for evaluating distribution margins based on external comparables. It simplifies audit defense by using publicly available industry data and creates a clear bridge between transfer pricing outcomes and commercial realities for low-risk distribution activities.

For CEOs, RPM demonstrates that pricing for distribution entities reflects genuine market behavior and operational roles. It reinforces strong governance, supports transparent cross-border supply-chain operations, and signals responsible tax management to regulators, investors, and commercial partners.

Resale Price Method For CEOs

How the Resale Price Method works?

The Resale Price Method starts with the price at which a distributor sells goods to independent customers, then subtracts an arm’s length gross margin to determine the transfer price. The margin reflects the reseller’s functions, assets, and risks, ensuring routine distribution entities earn returns aligned with comparable market behavior.

The Resale Price Method Calculation

Transfer Price = Resale Price to Third Parties − Arm’s Length Gross Margin

Resale Price Method OECD Guidelines Reference

The OECD Transfer Pricing Guidelines (2022) describe RPM in Chapter II as a traditional transaction method suitable for distribution arrangements where goods are resold without significant transformation. The method starts with the resale price to independent customers and subtracts an arm’s length gross margin that reflects functions performed, assets used, and risks assumed by the reseller. The OECD emphasizes the importance of functional comparability, consistent accounting treatment, and adjustments for differences in value-added activities, contract terms, and market conditions.

Key Benefits of Resale Price Method in Transfer Pricing

RPM is a transparent, defensible method for testing distribution margins. It supports compliance, increases pricing clarity, and reduces audit exposure for entities performing routine sales and marketing functions.

Directly Reflects Market Margins

RPM uses actual sales prices to independent customers as its starting point, making it closely aligned with real market behavior. This direct connection creates strong audit defensibility and ensures distribution returns reflect commercially realistic margins.

Ideal for Routine Distribution Activities

The method is particularly suited to resellers that do not significantly modify products. It ensures that routine distributors earn stable, arm’s length margins in line with their limited-risk profiles and operational roles across the supply chain.

RPM aligns well with publicly available industry benchmarks for distribution margins. This accessibility makes it easy to find comparable companies, validate margins, and support transparent documentation that satisfies OECD and local requirements.

Widely Supported by External Data

Because RPM relies on gross margins, which are common across industries, it adapts well to different markets. This consistency supports global policy alignment and simplifies compliance across jurisdictions with varying regulatory expectations.

Consistent Across Jurisdictions

Supports Pricing Transparency and Governance

RPM clarifies how transfer prices are set for distribution subsidiaries. By establishing margins based on market norms, it improves governance, strengthens internal control, and ensures financial results accurately reflect value creation.

RPM creates a clear evidentiary trail grounded in real sales prices and comparable margins. This reduces dispute risk by giving tax authorities a straightforward, market-based explanation of how distribution profits are allocated.

Enhances Audit Readiness and Defensibility

Resale Price Method in the Real World

A Singaporean distribution subsidiary purchases medical devices from its U.S. parent and resells them to hospitals in Southeast Asia. The devices are sold to independent customers at an average price of $2,000 per unit. Independent distributors in the same industry earn gross margins between 18% and 24%.

Applying a 20% arm’s length margin, the transfer price paid to the parent is $1,600 per unit. Because the applied margin sits within the benchmarked range—and the distributor performs routine sales and logistics functions—the RPM analysis confirms that the intercompany pricing reflects arm’s length market behavior under OECD guidance.

Resale Price Method Transfer Pricing FAQ

What is the Resale Price Method used for in transfer pricing?

RPM is used to test whether a distributor earns an arm’s length gross margin when reselling goods purchased from related parties. It starts with the resale price to independent customers and subtracts a market-aligned gross margin. This ensures the distributor’s profits reflect routine functions and OECD-compliant pricing outcomes.

When should the Resale Price Method be applied?

RPM should be applied when goods are purchased from a related party and resold without significant transformation. It is ideal for routine distributors, wholesalers, and trading companies. RPM is strongest when reliable gross margin comparables exist and when the reseller performs limited-risk sales and logistics functions.

How does the Cost Plus Method differ from the TNMM?

RPM works "top-down" by starting from the resale price to third parties and subtracting a market margin, whereas Cost Plus Method works "bottom-up" by adding a mark-up to production or service costs. RPM focuses on distribution margins, while Cost Plus Method applies to manufacturing or service entities. Both follow OECD arm’s length principles but suit different business models.