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            Transfer Pricing Using Cost Plus (October 13th, 2009)

            1.Factual Background

            1.1The "Corporation” is resident in the Netherlands having been incorporated therein. The Corporation does not derive any Israeli sourced income.

            1.2In order to finance its foreign activities the Corporation issued debentures and listed them for trade on the Tel-Aviv Stock Exchange.

            1.3The Corporation has a wholly owned Israeli incorporated and resident subsidiary which provides it administrative, financial and similar services.

            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.

            2.Question Posed

            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 following:

            ·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.

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