Alp Method

Methods Establishing Arm’s Length

1. Comparable Uncontrolled Price Method (CUP)

The CUP methods is applicable only if the comparable data is available, this method compare price for property or services transferred in a controlled transaction to the price charge for property and services transferred in a comparable uncontrolled transaction in comparable circumstance.

This methods is useful for goods that sell base on commodity market and also manufactured goods that do not depends for their value on special brand names. This method is basically only comparing price.

Example:

A Corp, is corporation that incorporated in X country (High tax country) A Corp products the goods at cost 110 and sells them for 160 to B Corp an independent company, at the same time A Corp also sells the goods to C Corp an associated company located in low taxing company. C Corp sells the goods 180. If the conditions of the sales A Corp to B Corp are significant equivalent, the sales price in independent transaction (160) may need to be substituted for sales price in associated transaction (150). A Corp would have arm’s length profit of 50 (160-110) and C Corp would have an arm’s length profit of 20 (180-160).

2. Cost-Plus Method

This method is established by adding an appropriated gross margin to the cost production, this method is useful semi-finished goods are sold between associated enterprise and associated enterprises. The problem is how to determine the gross margin that will be added to the cost.

Example:

A Corp product the goods at cost 110 sell the goods to C Corp without brand and then C Corp will added the brand and sell again with price 180, there are no comparable price between independent enterprise and the gross margin is 40%, so arm’s length under cost-plus is (110 + (110x40%) =154, A Corp will have arm’s length profit (154-110) = 44 and then C Corp will have arm’s length profit (180-154) = 26...