Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm's-Length Transfer Pricing
The Resale Price Method set forth hereof shall refer to the situation where the Arm's-length price would be the price computed by the resale price of the assets involved in the Controlled Transactions at which the profit-seeking enterprise undertaking Controlled Transactions resells the assets involved in such Controlled Transactions to Unrelated Parties, subtracting the gross profit calculated in accordance with the gross profit margin realized in comparable Uncontrolled Transactions. The formula is set forth as below:
Arm's-length Price = Resale Price to Unrelated Parties × (1- Gross Profit Margin realized in a comparable Uncontrolled Transaction)
Gross Profit Margin = Gross Profit / Net Sales Revenue
The applicable resale price as referred to in the preceding Paragraph is the price at which the Tangible Assets involved in the Controlled Transaction is resold to the Unrelated Parties. If such resale price is not available, the applicable resale price is equal to the price at which contemporaneous, previous or subsequent resale(s) of the same assets are made, provided, however, that appropriate adjustments shall be made pursuant to Paragraph 2 of Article 8 based on the factors as described in Paragraph 1 of Article 8 that may affect the price or profit.
The gross profit margin of the comparable Uncontrolled Transaction referred to in the first Paragraph shall be the gross profit margin earned by the profit-seeking enterprise undertaking the Controlled Transactions from reselling Tangible Assets of the same category which are purchased from Unrelated Parties to other Unrelated Parties. If such gross profit margin is not available, the gross profit margin can be determined based on the gross profit margin of other profit-seeking enterprises, with similar functions, risks and contractual terms, that purchases Tangible Assets of the same category from Unrelated Parties and resells to other Unrelated Parties.
In order to evaluate the applicability of the resale price method, the factors described in Paragraph 1 of Article 8 shall be considered, particularly the following factors which may affect the gross profit margin:
1. Functions performed, such as sales, marketing, advertising program, and services.
2. Risks assumed, such as inventory levels and turnover rates, and corresponding risks.
3. Contractual terms, such as scope and terms of warranties provided, sales or purchase volume, credit terms and delivery terms.
4. Market conditions, such as the level of the markets, such as wholesale or retail market.
5. Whether or not Intangible Assets are involved in the transaction.
6. Cost structures, such as the age of machinery and equipments.
7. Business experience, such as whether or not the business is in a start-up or mature phase.
8. Management efficiency.
9. Consistency in accounting practices, such as the evaluation method of costs and inventory.
If there are any differences of the factors prescribed in the preceding Paragraph between the profit-seeking enterprise and its Controlled Transactions and comparables, appropriate adjustments shall be made to eliminate the impacts on the gross profit margins. In the event that the impacts of such differences on the margins are unable to be eliminated by appropriate adjustments, other Arm's-length Methods as set forth hereunder shall apply.