Transfer Pricing

The Cost Plus Method

The Cost Plus Method compares gross profits to the cost of sales.

Under the Cost Plus Method, the first step is to determine the costs incurred by the supplier in a controlled transaction for products transferred to an associated purchaser. Secondly, an appropriate mark-up has to be added to this cost, to make an appropriate profit in light of the functions performed. After adding this (market-based) mark-up to these costs, a price can be considered at arm’s length.

The application of the Cost Plus Method requires the identification of a mark-up on costs applied for comparable transactions between independent enterprises. An arm’s length mark-up can be determined based on the mark-up applied on comparable transactions among independent enterprises.

The Cost Plus Method is one of the 5 common transfer pricing methods provided by the OECD Guidelines. The Cost Plus Method is a traditional transaction method.

The Cost Plus Method compares gross profits to the cost of sales. Firstly, you determine the costs incurred by the supplier in a controlled transaction. An appropriate mark-up has to be added to this cost to achieve the correct transfer price.

The Cost Plus Method is often applied to low-risk routine-like activities such as manufacturing. In practice, it is often difficult to find information on sufficiently comparable transactions.

 

Hi Nagabhushana, The Mark up is required to be decided by considering various aspect such as FAR analysis, scientific search, comparability analysis and benchmarking of comparables. Further it is advisable to earn markup on line with median of comparables. For more information reach us on 9022579441. You can also refer safe harbor, which provides 17 -18% depending on turnover.