A Market-Based Approach to Determining Transfer Prices for Tangible Property

Tax Management

In the March 16, 2005, edition of Tax Management’s Transfer Pricing report, Dr. George Korenko, along with co-authors Emily Bishko and Richard Rozek, published the article “A Market-Based Approach for Tangible Property Transfer Pricing.”

The article focuses on determining an appropriate price for tangible property transferred to marketing entities that bear costs and risks. In particular, if a taxpayer has negotiated marketing agreements with third parties, it may be possible to use these agreements to determine an arm’s length price under the resale price method (“RPM”). Adjustments for differences between the nature and scope of the functions performed and risks borne under the controlled and uncontrolled transactions can often be made using financial analyses prepared contemporaneous to the signing of the third-party agreements. The resulting gross profit margin provides an arm’s length return for the marketing entity based on the taxpayer’s own behavior in transactions with third parties.



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