Plain English
If a distributor buys from a related party and sells to third parties, the resale price method works backwards from the third-party sale price and says: an independent distributor would keep a gross margin for its work. What is left is the arm's length purchase price.
Technical definition
The resale price method starts with the price at which property purchased in a controlled transaction is resold to an independent enterprise, then reduces that price by an appropriate gross margin representing the amount out of which the reseller would seek to cover its operating expenses and earn an appropriate profit.
Why it matters
It is the standard method for distribution and sales entities that do not own valuable intangibles or assume significant risks beyond routine sales activities.
How it works in practice
- 01Identify the resale price to independent customers.
- 02Determine an arm's length gross margin from comparable independent distributors.
- 03Adjust for differences in functions, risks, assets and accounting practices.
- 04Subtract the adjusted gross margin from the resale price to arrive at the arm's length purchase price.
- 05Test the result against the controlled price.
Worked example
Limited-risk distributor
A Swiss distributor buys goods from a related US principal for CHF 80m and resells to European customers for CHF 100m. Comparable limited-risk distributors earn gross margins of 18% to 24%. Applying a 21% gross margin leaves CHF 79m as the arm's length purchase price, close to the actual CHF 80m.
Common mistakes
- Applying the method to a full-fledged distributor that owns local intangibles.
- Using net margins instead of gross margins.
- Ignoring accounting differences between cost of goods sold definitions.
- Failing to adjust for exclusive distribution rights or warranty terms.
Audit red flags
- Gross margin that does not cover operating costs.
- Resale price adjustments made only at year end.
- Distributor bearing inventory risk but receiving a fixed margin.
Documentation & data
Documents to hold
- Sales and purchase agreements.
- Functional analysis of the distributor.
- Comparable gross margin study.
- Reconciliation of accounting gross margin to TP gross margin.
Data you need
- Third-party resale prices and volumes.
- Comparable distributor gross margins.
- Cost of goods sold detail.
- Operating expense split by activity.
Who owns this internally: Transfer pricing team; commercial finance validates resale data.
Jurisdiction notes
- OECD
- Recognised under Chapter II of the OECD Transfer Pricing Guidelines.
- United States
- Reg. §1.482-3(c) provides detailed resale price method rules.
Notes by role
CFOs & finance leaders
This method is intuitive for finance because it mirrors how distribution businesses are managed.
Frequently asked
- Can I use RPM for a distributor that develops local brands?
- Only if you can reliably value and strip out the local marketing intangibles. Otherwise a profit split or TNMM may be more appropriate.
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
A classic interview question: compare RPM and TNMM. RPM uses gross margin; TNMM uses net margin. RPM is more direct but needs comparable gross margin data.
Careers in transfer pricing