Cost plus method
Description of the method: the cost plus method (formerly the reasonable margin method) consists in setting the price for the sale of goods and rights and the provision of services in a transaction between a given party and a related party at the level of the sum of the cost base and a profit mark-up, comparable to the cost base and profit mark-up agreed between independent parties, taking into account comparable functions, risks assumed and assets engaged.
The cost base in the cost plus method
The cost base in this method means the sum of the costs directly connected with, or the sum of the costs directly or indirectly connected with, producing in house or acquiring the subject of the controlled transaction (the rules in force until 31 December 2021 required general administrative costs, that is the costs of managing the entity, to be excluded from the cost base). Under this method the profit mark-up is calculated on the cost base.
The profit mark-up in the cost plus method
The profit mark-up on the defined cost base is determined by reference to the level of profit that the same party applies in comparable transactions with independent parties (internal comparison), or to the profit applied in comparable transactions by independent parties (external comparison).
Calculating a transfer price under the cost plus method
In order to calculate the transfer price (the sale price to a related party) under the cost plus method, it is necessary to identify:
- the costs incurred in connection with the controlled transaction,
- the profitability (measured by the mark-up on costs) of the uncontrolled transaction.
Comparability of transactions: required by Chapter 2, Examination of the comparability of transactions, in conjunction with Chapter 3, Transfer pricing methods, of the Regulation of the Minister of Finance of 21 December 2018 on transfer pricing for corporate income tax purposes.
Mathematical formula for the cost plus method
Mathematical formula: TP = (DC + IC) * (1 + n) where:
TP is the transfer price, DC are the direct costs relating to the subject of the transaction, IC are the indirect costs (until 31 December 2018 excluding general administrative costs) allocated to the subject of the transaction by means of allocation keys, n is the level of the profit mark-up