LIMITATIONS WHEN IMPLEMENTING BENCHMARKING IN REPORT ON TRANSFER PRICES OF ASSOCIATED PARTIES

First is the comparison price method, or more commonly known as the CUP method (“comparable uncontrolled price” method), which is arguably the best method for assessing whether the price in an associated transaction (“GDLK”) follows the Market Price principle, i.e., within or above the Quartile Margin or not. In this section, VNC would like to present about External CUP, i.e., comparing prices with Similar Models outside the market (Internal CUP is considered the best comparison method to apply in Transfer Price reports. Price which will be discussed in the next post).

For instance, when performing Benchmarking for 1 GDLK, for example, Company A assembles and sells a complete line of scooters with the brand “@” to its brother company, Company A’, for distribution to the market. The selection of other similar scooter models to apply the External CUP method, i.e., comparing (Benchmark) with the Quartile Margin from these Models, to give the results of evaluating the nature of the Market Price of GDLK is relatively unbalance. Because whether rival companies in the country assemble scooters to sell to distributors or sell directly to the consumer market, the cost structure in the final selling price to consumers is very different. Here, we assume that companies, whether selling to distributor C or distributing themselves, all pay or enjoy an equal share of the profit on the selling price to consumers, for example 15% of the price to consumers.

Branding in the cost structure of each company is different. Or the nature and extent of the warranty and accordingly the expenses incurred by the warranty provisioning will be reflected in the selling price very differently. Or like the strategy of acquiring market share and thereby accepting small profits or losses will make the scooter selling price very different. The level of advertising appearing on the media and accordingly the structure of advertising costs will vary greatly from year to year, each campaign in the year will affect the selling price a lot, etc.

Therefore, the use of few comparison samples, for example 5 models according to Circular, also limits the Benchmarking, and makes the assessment of the marketability of GDLK can give only approximate results. The fact that 1 Model, out of 5 Selected Models, of a company pursuing a loss-making strategy to gain market share, will drag the Quartile Margin down. But if this Model is removed due to loss-making or selling at a loss, then the Margin will increase and be reduced to 4 Models. And this is also the second limitation. Since it is necessary to choose the whole company pursuing a loss strategy to get this market share, it will reflect the full nature of a complete scooter market (assuming there are only 5 scooter manufacturers left in the market). If the remaining market is 10 manufacturers of consumer scooters, then all types of scooter models of these 10 companies should be selected to form a complete statistical population, representing for the most comprehensive market to Benchmark, no matter how different the strategies or accounting or cost structures etc.

We can take any other industry, for example, tobacco, carbonated drinks, instant noodles, audit services, etc. check and see the same limitations when applying the External CUP method. And therefore, External CUP is often unreliable to apply Benchmarking and replaces it with Internal CUP, i.e., taking the exact price Company A sells scooters “@” to Associated Company A’ and comparing it with the selling price of “@” scooters of the same category to one or more independent customers. The application of Internal CUP will become less complicated when analyzing to quantify, eliminate differences in the selling price of these “@” brand scooters, such as differences in trade discounts, payments, terms of support, sale indirectly or directly to consumers, etc. However, Internal CUP also has its limitations and will cause disputes of opinion with tax authorities and businesses in the Transfer Pricing inspection.

(To be continued – profit comparison methods and other methods)