Tipi Tips #11: What is the costplus method?

Today’s topic is the costplus method.

One of the transfer pricing methods is the costplus method. We will use a seller of apples as a common example for each method. When a seller sells apples to a related party, we have to check whether the transfer pricing is ok. We want to see whether the price is the same as what a third party would pay.

The costplus method looks at the costs the supplier incurs per product, and simply adds a markup. What that markup should be depends on the markup an independent seller would apply. If a 5% profit margin per apple is appropriate for a third-party seller of similar apples, then we can simply add this 5% to our input costs, and have an arm’s length transaction.

And that is how the costplus method works.

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