Cost plus method (CPM) for Transfer Pricing2012

-          in (Malaysian) IRBM Transfer Pricing Guideline 2012

==================================================

Cases applicable: Often useful for semi-finished goods sold between associated parties.

The appropriate mark-up should ideally be established by reference to the mark-up earned by the same supplier from comparable uncontrolled sales to independent parties, due to the fact that similar characteristics are more likely found among sales of product by the same supplier, than among sales by other suppliers.

Formula,

==================================================

Arm’s length price = Costs + (Cost x Cost plus mark-up)

* *Cost plus mark-up = (Sales price – Costs)/ Cost

Note: *Cost plus mark-up must be comparable to mark-ups earned by independent parties performing comparable functions, bearing similar risks and using similar assets.

==================================================

Cost Structure Consideration

The method used in determining costs and the accounting policies should be consistent and comparable. Where structure is generally segregated into:-

i.            Direct costs

ii.            Indirect costs

iii.            overhead costs

Adjustments must be made to eliminate the differences in these costs. Differences may consider are:-

i.            Cost plus mark-up may be required for the functional difference

ii.            Amount to the provision of services for additional functions

iii.            General and administrative expenses merely reflect efficiencies or inefficiencies of an enterprise, adjustments to the gross margin may be inappropriate