Is gross margin the same as mark-up on cost?

No. Gross margin is gross profit divided by revenue. Mark-up on cost is gross profit divided by cost of goods sold. They are mathematically related but not identical.

Gross margin — Definition, Example & Sources

Key facts about Gross margin
Term	Gross margin
Also called	Gross profit margin
Primary authority	OECD Transfer Pricing Guidelines, Chapter II (OECD, 2022)
Source status	Primary source
Topics	Pricing methods
Most relevant to	In-house tax teams; Advisors & consultants; CFOs & finance leaders; Students & job seekers
Most common audit trigger	Gross margin is negative or near zero.
Who owns it internally	Finance provides the data; transfer pricing team interprets comparability.
Last reviewed	2026-06-30

Plain English

Gross margin shows how much profit a company keeps after direct costs of sales. In transfer pricing, it is the building block of the resale price and cost plus methods.

Technical definition

Gross margin is the ratio of gross profit to revenue, where gross profit equals revenue less cost of goods sold. It is used in the resale price method to determine the arm's length purchase price and in the cost plus method to determine the appropriate gross mark-up on costs.

Why it matters

Gross margin is widely understood by finance and tax authorities, but accounting differences in cost of goods sold can make cross-company comparison tricky.

How it works in practice

01Calculate revenue and cost of goods sold under consistent accounting policies.
02Compute gross profit as revenue less cost of goods sold.
03Express gross margin as gross profit divided by revenue.
04Compare to independent companies with similar functions and accounting policies.
05Adjust for material differences in functions, risks and accounting classification.

Worked example

Distributor benchmark

A distributor has revenue of USD 50m and cost of goods sold of USD 38m. Gross profit is USD 12m and gross margin is 24%. Comparable independent distributors report gross margins of 22% to 28%, so the controlled result appears arm's length.

Common mistakes

Comparing gross margins across different accounting standards without reconciliation.
Including non-COGS costs in the gross margin calculation.
Ignoring freight, warranty and duty differences.
Using gross margin for entities with very different risk profiles.

Audit red flags

Gross margin is negative or near zero.
Gross margin is far outside the industry range.
COGS includes large related-party charges that have not been tested.

Documentation & data

Documents to hold

Revenue and COGS reconciliation.
Accounting policy note.
Comparable gross margin analysis.
Working papers for adjustments.

Data you need

Revenue by product and customer.
Cost of goods sold detail.
Comparable gross margin data.
Accounting standard notes.

Who owns this internally: Finance provides the data; transfer pricing team interprets comparability.

Jurisdiction notes

OECD: Gross margin is central to the traditional transaction methods in Chapter II.

Notes by role

CFOs & finance leaders

Gross margin is a standard management metric, which makes it easy to explain — but make sure the TP definition matches the statutory one.

Frequently asked

Is gross margin the same as mark-up on cost?: No. Gross margin is gross profit divided by revenue. Mark-up on cost is gross profit divided by cost of goods sold. They are mathematically related but not identical.

Related terms

Resale price method: A transactional method that tests a controlled purchase price by reference to the gross margin a comparable reseller earns on resale to independent customers.
Cost plus method: A transactional method that tests the arm's length nature of a controlled price by reference to the costs incurred by the supplier, plus an appropriate gross mark-up.
Operating margin: Operating profit divided by revenue, used as the most common net profit indicator under the TNMM.
Net profit indicator: A ratio of net profit to an appropriate base, used in the transactional net margin method to test arm's length outcomes.

Sources & status

Primary source
OECD Transfer Pricing Guidelines, Chapter II
OECD, 2022

Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.

Careers

How this shows up in the job

Be ready to convert between gross margin and mark-up on cost. A 25% gross margin equals a 33.3% mark-up on cost.

Careers in transfer pricing

Gross margin in Transfer Pricing

Key facts