A company that sells goods to its own foreign distributor must price that related party transaction at arm’s length. Set the price too high or too low, and tax authorities in either country can challenge your profit split and impose adjustments. The resale price method (RPM) solves this for distributors. It works backward from the price your distributor charges independent customers to find a defensible intercompany price.
This post gives you the formula, a worked calculation, how RPM compares to the other transfer pricing methods, and the documentation tax authorities expect. The method sits inside the framework set by the OECD Transfer Pricing Guidelines, which the Organisation for Economic Co-operation and Development (OECD) last updated in January 2022.
What Is the Resale Price Method in Transfer Pricing?
The resale price method starts with the price a related party reseller charges an independent customer, then subtracts an arm’s length gross margin to find the arm’s length purchase price for the intercompany transaction. The OECD Transfer Pricing Guidelines 2022 define it this way in Chapter II, paragraph 2.27. It is also called the resale minus method.
RPM is one of five transfer pricing methods the OECD recognizes. The guidelines group them into three traditional transaction methods (comparable uncontrolled price, resale price, and cost plus) and two transactional profit methods (transactional net margin method and profit split), per OECD Transfer Pricing Guidelines 2022, Chapter II. In the United States, the method is codified at 26 CFR §1.482-3(c), which lists it among six methods for transfers of tangible property.
RPM applies to tangible property. Under 26 CFR §1.482-3(c), it is ordinarily used where the reseller has not added substantial value by physically altering the goods before resale. Packaging, repackaging, labeling, or minor assembly do not count as physical alteration. This builds on the arm’s length principle, the legal foundation every method must satisfy.
What Is the Resale Price Method Formula?
The formula is Arm’s Length Price = Resale Price × (1 − Gross Margin %). You take the price your distributor charges independent customers, then strip out a gross margin derived from comparable uncontrolled distributors. The US regulation at 26 CFR §1.482-3(c) states the same equation as applicable resale price minus appropriate gross profit.
| Variable | Definition | Source |
|---|---|---|
| Arm’s Length Price | Resale Price × (1 − Gross Margin %) | OECD TPG 2022, Ch. II, para. 2.27; 26 CFR §1.482-3(c) |
| Gross Margin % | Gross Profit ÷ Net Sales | 26 CFR §1.482-3(c)(2)(iii) |
| Gross Profit | Net Sales − Cost of Goods Sold (COGS) | 26 CFR §1.482-3(c) |
| Appropriate Gross Profit | Applicable Resale Price × comparable gross margin % | 26 CFR §1.482-3(c)(2)(iii) |
Note that gross margin is gross profit divided by net sales. It is not a markup on cost. A markup on cost is the cost plus method.
How Does the Resale Price Method Work?
RPM works in three steps. First, find the resale price your controlled distributor charges an independent customer. Second, derive the arm’s length gross margin from comparable uncontrolled distributors. Third, subtract that margin from the resale price to get the price the distributor should have paid its related supplier. The OECD Transfer Pricing Guidelines 2022, Chapter II, describe this sequence.
The gross margin must compensate the distributor for what it actually does. OECD TPG 2022, Chapter II, paragraph 2.27, ties the margin to the functions performed, assets used, and risks assumed, such as marketing, warehousing, inventory risk, and credit risk. A full-function distributor warrants a higher margin than a limited-risk one.
You can source the margin two ways. An internal comparable uses the same distributor’s dealings with unrelated suppliers. An external comparable uses independent distributors. Both are valid under the OECD’s internal-versus-external comparable distinction in Chapter II. A benchmarking study establishes the arm’s length range, usually expressed as an interquartile range of comparable margins.
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What Is a Resale Price Method Example?
A German distributor resells units to independent European Union retailers at EUR 1,000 each. Comparable independent distributors in the same market earn a 25% gross margin, so the arm’s length intercompany price its US parent should charge is EUR 750. The EUR 250 difference covers the distributor’s selling and operating costs plus a reasonable profit, consistent with OECD TPG 2022, Chapter II.
| Step | Figure | Basis or source |
|---|---|---|
| Resale price to independent retailers | EUR 1,000 | Transaction data |
| Comparable distributor gross margin | 25% | Benchmarking study of comparables |
| Gross margin amount | EUR 250 | EUR 1,000 × 25% |
| Arm’s length intercompany price | EUR 750 | EUR 1,000 × (1 − 0.25) |
| What EUR 250 covers | Operating costs plus profit | OECD TPG 2022, Ch. II, para. 2.27 |
For a real-world illustration, Valentiam’s resale price example applies a 70% comparable gross margin to a EUR 200 running-shoe cost to derive a EUR 140 arm’s length profit benchmark.
When Should You Use the Resale Price Method?
Use RPM when the related party is a distributor or reseller that adds limited value and comparable distributor margins exist. It fits companies that buy finished tangible goods from a related party and resell them without manufacturing, research and development, or significant intangibles. The OECD Transfer Pricing Guidelines 2022, Chapter II, note the method is most useful when applied to marketing and distribution operations.
RPM is the strongest traditional method for routine distributors and resellers when reliable gross-margin comparables exist. It is a poor fit when:
- The distributor adds substantial value or owns marketing intangibles.
- A long lag or further processing sits between purchase and resale.
- Accounting inconsistencies make gross margin unreliable (then practitioners often fall back to the transactional net margin method).
What comparability factors matter for the resale price method?
RPM tolerates greater product differences than the comparable uncontrolled price method because gross margins are less price-sensitive to product characteristics, but it is highly sensitive to functional comparability. OECD TPG 2022, Chapter II, paragraphs 2.27 to 2.44, prioritize comparability of functions, assets, and risks over strict product similarity. Accounting consistency matters too, because classifying a cost as COGS versus operating expense shifts the gross margin.
The OECD’s Chapter I, paragraph 1.36, lists five comparability factors: contractual terms, functional analysis (assets used and risks assumed), the characteristics of property or services, economic circumstances, and business strategies. The US regulation at 26 CFR §1.482-3(c)(3) adds inventory risk, warranty and credit terms, marketing activity, market level (wholesale versus retail), and foreign currency risk.
What Are the Advantages and Disadvantages of the Resale Price Method?
RPM is simple and data-light for distributors, but it depends heavily on comparable gross margin data and breaks down when the reseller adds significant value. It uses a market-driven reference point, the resale price, which makes it defensible for routine distribution. Its weakness is sensitivity to comparable availability and accounting consistency.
| Advantages | Disadvantages |
|---|---|
| Simple to apply when resale prices are observable | Depends on scarce comparable gross margin data |
| Lower data burden than the comparable uncontrolled price method | Gross margin determination can be subjective |
| Natural fit for routine distribution businesses | Highly sensitive to COGS versus operating expense classification |
| Based on a market reference point (the resale price) | Not applicable where the distributor adds significant value or owns intangibles |
| Tolerates product differences | Limited to tangible goods; breaks down with long purchase-to-resale lags |
Source: OECD TPG 2022, Chapter II; 26 CFR §1.482-3(c).
How Does the Resale Price Method Compare to Other Transfer Pricing Methods?
The comparable uncontrolled price (CUP) method compares prices directly, cost plus works upstream from the manufacturer’s costs, RPM works downstream from the resale price, and the transactional net margin method (TNMM) tests net margins when gross-margin data is unreliable. The OECD prefers a traditional transaction method over a transactional profit method when both apply with equal reliability, per OECD TPG 2022, Chapter II, paragraphs 2.3 to 2.4.
| Method | What it compares | Best-fit tested party | Data needed | Source |
|---|---|---|---|---|
| Comparable uncontrolled price (CUP) | Actual transaction prices | Either, with near-identical products | Close product price comparables | OECD TPG 2022, Ch. II |
| Resale price (RPM) | Gross margins | Distributor or reseller | Comparable distributor gross margins | OECD TPG 2022, Ch. II, para. 2.27 |
| Cost plus | Gross markups on cost | Manufacturer or service provider | Supplier cost base plus comparable markups | OECD TPG 2022, Ch. II |
| Transactional net margin (TNMM) | Net operating margins | Routine party of either side | Net margin comparables | OECD TPG 2022, Ch. III |
| Profit split | Split of combined profit | Parties with unique intangibles | Combined profit and contribution data | OECD TPG 2022, Ch. III |
Resale price method vs. CUP method
The comparable uncontrolled price method compares actual transaction prices and demands near-identical products. RPM compares gross margins and forgives product differences but demands functional comparability. Use the comparable uncontrolled price method when a close price comparable exists. Use RPM when the related party is a distributor and no direct price comparable exists.
Resale price method vs. cost plus method
Cost plus and RPM are mirror images. Cost plus starts from the supplier’s costs and adds an arm’s length markup, so it suits manufacturers and service providers on the seller side. RPM starts from the resale price and subtracts a margin, so it suits distributors on the buyer side. The OECD classifies both as traditional transaction methods in Chapter II of its 2022 Guidelines.
What Documentation Supports the Resale Price Method?
Tax authorities expect a functional analysis identifying the tested party, a benchmarking study supporting the gross margin, and master file plus local file documentation under OECD TPG Chapter V. US taxpayers also meet the requirements of 26 CFR §1.482-3, and the method must survive the best method rule at 26 CFR §1.482-1(c). The distributor is typically the tested party under RPM because it is the simpler, routine entity whose margin can be benchmarked.
The OECD’s BEPS Action 13 final report set the three-tiered standard: a master file, a local file, and a Country-by-Country Report (CbCR). CbCR applies to multinational groups with annual consolidated revenue at or above EUR 750 million, effective for fiscal years beginning on or after 1 January 2016, per BEPS Action 13 (2015). If your tested party’s margin falls outside the benchmarked range, a transfer pricing adjustment is required.
How We Help With Resale Price Method Transfer Pricing
Commenda’s transfer pricing software tells you what you have to file, when it is due, and confirms it got done for your intercompany transactions across jurisdictions. It runs the benchmarking study that sets your distributor’s arm’s length gross margin, builds the functional analysis and local file that defend it, and flags when a margin falls outside the range so you can make a clean transfer pricing adjustment. Pair it with a compliance calendar so no filing deadline slips.
Book a demo to get a benchmarking review of your distributor’s gross margin and proof your intercompany pricing holds up under audit.
About the author
Shrey
GM of Transfer Pricing, Commenda
Shrey is GM of Transfer Pricing at Commenda, where he leads the transfer pricing business. He works with finance and tax teams at multinational companies on intercompany pricing, documentation and benchmarking across the countries they operate in.
Disclaimer: Commenda and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
