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).
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.
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.
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:
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.
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:
The transaction involves a distributor or reseller reselling goods to an independent party.
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.
One of the main advantages of RPM compared to the CUP method is its tolerance for product differences.
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.
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.
The following is an illustration of RPM application:
Margin Adjustment:
Adjusted Fair Margin = $25\% + 5\% = 30\%$.
Fair Price Calculation (ALP):
Fair Gross Profit: $30\% \times \text{Rp 1,000,000} = \text{Rp 300,000}$
Fair Purchase Price: $\text{Rp 1,000,000} - \text{Rp 300,000} = \text{Rp 700,000}$
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.
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.
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