Resale Price Method: Strategy and Application in Transfer Pricing

In the international tax landscape, the selection of the right transfer pricing method is key to proving that affiliated transactions have met the Principle of Fairness and Business Prevalence (PKKU) or the Arm's Length Principle. One traditional method that is a mainstay, especially for companies engaged in distribution, is the Resale Price Method (RPM). Unlike the CUP method which compares prices directly, RPM compares the level of gross profit margin (gross profit margin).

Definition and Basic Concept of RPM

The Resale Price Method (RPM) is a transfer pricing determination method carried out by deducting the resale price of goods (to independent parties) by a fair gross margin (gross margin) obtained by comparable distributors in comparable conditions.

Philosophy of RPM

RPM looks at transaction fairness from the side of the buyer (distributor) who resells the goods. The logic is that the purchase price of goods from an affiliated party should be the resale price to a third party minus the distributor's operating costs and minus a fair profit again. The remaining value is considered the "Fair Purchase Price" or Arm's Length Price.

In MoF Regulation (PMK) 172 of 2023, RPM is defined as a method carried out by deducting a fair gross profit for a distributor or reseller against the resale price.

Calculation Mechanism

To apply RPM, the analysis focus lies on the Resale Price Margin. The basic formula is:

Where the Fair Gross Profit Margin is obtained from:

• Internal Comparable: Merchandise purchase transactions carried out by the Taxpayer from independent parties for resale.
• External Comparable: Sales and purchase transactions carried out by other comparable independent distributors.

The OECD Guidelines affirm that compensation (margin) for distributors must be sufficient to cover sales costs and general operating expenses (SG&A) and provide a reasonable profit according to the functions and risks assumed.

Usage Criteria: When is RPM Most Appropriate?

Not all transactions are suitable for using RPM. Based on Article 9 paragraph (4) of PMK 172/2023 and OECD TPG 2022 Para 2.29, RPM is the most appropriate method if it meets the following characteristics:

1. Transaction Characteristics

The transaction involves a distributor or reseller reselling goods to an independent party.

2. Functional Characteristics

• The distributor does not provide significant value-added to the goods transacted (e.g., does not change the physical form of goods through a manufacturing process).
• The distributor does not possess unique and valuable contributions (such as self-developed intangible property).
• The distributor does not bear extraordinarily significant business risks (usually suitable for limited or medium risk distributors).

If the distributor performs substantial processing that changes the identity of the goods, or adds unique value through very strong marketing intangibles, RPM becomes difficult to apply because it is hard to find comparables with the same complexity.

Comparability Analysis in RPM

One of the main advantages of RPM compared to the CUP method is its tolerance for product differences.

A. Focus on Function, Not Product

In RPM, functional comparability is more important than product comparability. OECD TPG 2022 Para 2.33 explains that in a free market, distributors selling different products (e.g., toasters vs blenders) tend to get similar gross profit margins, provided they perform the same functions (e.g., both are wholesale distributors), use the same assets, and bear the same risks. Conversely, distributors selling the same product but with different functions will have very different gross profit margins.

B. Accounting Consistency

This is the biggest technical challenge of RPM. OECD TPG 2022 Para 2.35 and UN Manual 2021 Para 4.3.2.2 emphasize that gross profit margins are heavily influenced by how companies record costs.

Case Study and Application

The following is an illustration of RPM application:

Case Conclusion: The actual purchase price (Rp 850,000) is more expensive than the fair purchase price (Rp 700,000). Profit reduction occurred in Indonesia. DGT has the right to make a positive correction of Rp 150,000 per unit.

Conclusion

The Resale Price Method (RPM) is a very effective method for testing the fairness of distributor transactions, especially when price comparable data (CUP) is unavailable. Its advantage lies in its focus on functional comparability. However, Taxpayers must be very careful regarding accounting standard consistency to avoid analysis rejection by tax authorities.

References

• Ministry of Finance of the Republic of Indonesia. (2023). Regulation of the Minister of Finance Number 172 of 2023.
• OECD. (2022). OECD Transfer Pricing Guidelines 2022.
• United Nations. (2021). Practical Manual on Transfer Pricing 2021.
• Directorate General of Taxes. (2013). Regulation Number PER-22/PJ/2013.