How does the resale price method actually work?
It starts at the price the reseller charges its own customers and works back. From that resale price you deduct a gross margin that a comparable independent reseller earns, and the result is the price the related supplier should have charged. The margin has to cover the reseller's selling costs and leave it a return appropriate to what it does and the risks it takes. So the method tests the reseller rather than the supplier or the product, and it suits a distributor that buys goods and sells them on without transforming them.
Why does it matter which line a cost sits on?
Because the method tests a gross margin, and a gross margin is the figure above operating costs. If your company treats inbound freight, warehousing or warranty provisions as cost of sales while the comparable companies report them below the gross line, the two margins are not measuring the same thing and the comparison is wrong before any analysis begins. This is a common failure in practice, and it is invisible unless someone reads the accounting policies of the comparables rather than just their ratios. Either restate to a common basis or use a method that tests operating profit instead.
Can I use it if my distributor also runs marketing?
It becomes harder as the reseller does more. The method assumes the gross margin rewards a fairly contained set of distribution functions. A reseller that builds the local brand, invests in customer acquisition and bears the risk of that spending is earning a return on something more than resale, and comparable independent resellers with the same profile are difficult to find. Where the additional activity is substantial, the usual course is to test operating profit instead, so that the marketing spend sits inside the tested result rather than distorting the margin above it.
Does it work for a distributor that only re-invoices?
If goods never come into the company's hands and it takes no inventory or credit risk, it is closer to an agent than a reseller, and there may be no resale margin to test at all. The right analysis then looks at the service performed — finding customers, handling paperwork — and prices that, rather than deducting a distribution margin from a resale price. Getting this wrong in either direction is expensive: an agent tested as a distributor is usually over-rewarded, and a full-risk distributor tested as an agent is under-rewarded and will show unexplained profit somewhere.
What if my comparables report under different accounting standards?
Then the gross margins may not be comparable, and often cannot be made so from published information. Different frameworks and different national practices put costs in different places, and the disclosure in a set of accounts is rarely detailed enough to restate them reliably. Where restatement is possible you do it and record it. Where it is not, the honest conclusion is that a gross-margin comparison is not available on this evidence, and an operating-margin method carries the position instead. Operating margin is less sensitive to classification, which is precisely why it is used when this problem appears.
Is the resale price method used for services?
It is designed for the resale of goods and it fits awkwardly elsewhere. The logic depends on there being a purchase price, a resale price and a margin between them that pays for the distribution function. A service provider generally has no purchased good to resell, so there is no gross margin of that kind to test, and a cost-based or operating-margin approach describes the economics better. The exception worth noting is the onward supply of a bought-in service with little added to it, where the same reasoning can apply.
How do I actually stop being taxed twice?
In this order. Fix your residence under each country's own rules, and if both claim you, apply the treaty tie-breaker. Identify where each type of income is sourced. Read the article that covers that income type, because it decides who taxes and at what maximum rate. Then claim the relief on the residence-country return, with proof of the foreign tax. Most of the tax people lose to double taxation is lost at the last step, not the first. See how double taxation is relieved.
What is cross-border tax?
Cross-border tax is what applies when income, assets or people touch more than one tax system at once — someone living in one country and earning in another, a company selling or hiring abroad, a family holding property in a second country. The work is rarely one country's rules applied harder; it is reconciling two sets of rules and claiming the relief that stops the same income being taxed twice at full rates. See what we do.
