Transfer Pricing Using Cost Plus (October 13th, 2009)
1.1The "Corporation” is resident in the Netherlands having
been incorporated therein. The Corporation does not derive any Israeli sourced
1.2In order to finance its foreign activities the
Corporation issued debentures and listed them for trade on the Tel-Aviv Stock
1.3The Corporation has a wholly owned Israeli incorporated
and resident subsidiary which provides it administrative, financial and similar
1.4The Corporation pays the subsidiary for the services
provided to it, in accordance with common transfer pricing principles: the cost
of the services and an additional x% mark up.
What is the mark up due to the
subsidiary from the Corporation, in accordance with the cost plus method in
order to meet the applicable transfer pricing standards.
The opinion begins with a statement
that it cannot determine that a x% mark up does indeed reflect market
conditions and meets the criteria of the regulations determinative thereof.
However, the opinion goes on to say that in taking into consideration the
attributes of the Corporation, the profit margin may be sufficient in light of
·The fact that the services are acquired from third
parties, at prevailing market prices justifies a small profit margin.
·The costs of the subsidiary include fixed and
determinable amounts and any extraordinary charges, will be borne by the
Corporation for the profit is based on the expenses suffered, thereby
justifying a low profit margin.
·The relationship with the subsidiary in lieu of a direct
relationship with the actual suppliers is economically beneficial only if the
profit margin is kept low.
The opinion concludes that the
Corporation be best served by an economic analysis of a competent expert in
order to meet the requirements of the transfer pricing regulations.