Plain English
The Berry ratio asks: does the gross profit a company earns cover its operating expenses and leave a reasonable return? It is useful for distributors or service providers where sales value is distorted by pass-through costs or principal-owned inventory.
Technical definition
The Berry ratio is the ratio of gross profit to operating expenses. It measures the relationship between the gross profit earned and the operating expenses incurred in generating that profit. It is sometimes used as a profit level indicator under the transactional net margin method for limited-risk distributors or commissionaires.
Why it matters
Sales-based indicators can be misleading when a distributor's revenue includes large pass-through amounts or when inventory is consigned. The Berry ratio focuses on the gross profit generated per unit of operating expense.
How it works in practice
- 01Calculate gross profit (revenue less cost of goods sold).
- 02Identify operating expenses, usually limited to those related to the controlled activity.
- 03Divide gross profit by operating expenses.
- 04Compare to independent companies performing similar functions.
- 05Adjust for differences in expense classification and activity levels.
Worked example
Commissionaire structure
A commissionaire records third-party sales of EUR 200m but only earns a small commission. Its gross profit is EUR 4m and operating expenses are EUR 2m, giving a Berry ratio of 2.0. Comparable independent commission agents have Berry ratios of 1.8 to 2.3, supporting the arm's length outcome.
Common mistakes
- Using the Berry ratio for full-fledged distributors.
- Including operating expenses unrelated to the controlled activity.
- Ignoring differences in expense classification across accounting standards.
- Applying it where gross margin is negative.
Audit red flags
- Berry ratio is far outside the comparable range.
- Operating expenses include large allocations that distort the ratio.
- The ratio is used without explaining why sales-based indicators are unreliable.
Documentation & data
Documents to hold
- Gross profit and operating expense reconciliation.
- Functional analysis justifying the use of the Berry ratio.
- Comparable Berry ratio study.
- Working papers for adjustments.
Data you need
- Gross profit.
- Operating expenses by activity.
- Comparable Berry ratios.
- Accounting policy notes.
Who owns this internally: Transfer pricing economists.
Jurisdiction notes
- OECD
- The OECD Guidelines discuss profit indicators generally; the Berry ratio is one possible PLI where appropriate.
- United States
- The Berry ratio was developed in US transfer pricing case law and is recognised in Reg. §1.482-5.
Notes by role
Advisors & consultants
Use the Berry ratio only when you can explain why sales or cost-based indicators are less reliable.
Frequently asked
- When should I use the Berry ratio instead of operating margin?
- When the sales figure is distorted by pass-through amounts, consignment inventory, or principal-controlled pricing, and operating expenses better reflect the value of the functions performed.
Sources & status
- Primary source
OECD Transfer Pricing Guidelines, Chapter II
OECD, 2022
- Secondary source
Regulations under Section 1.482-5
IRS, 1994
Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.
Careers
How this shows up in the job
The Berry ratio is a niche indicator. Interviewers may ask when it is appropriate — know the pass-through and consignment examples.
Careers in transfer pricing