Transfer Pricing Cost-Plus

How to use it

A service entity charges its group a markup on the costs it incurs. Enter the cost base, separate out anything recharged at cost, apply the markup, and compare the result against the benchmark range from your comparables study.

Where the number comes from

• The cost base is direct plus indirect costs — the costs the entity incurs in performing the service.
• Pass-through costs are recharged at cost and excluded from the markup base, because no value is added to them.
• Profit retained is the cost base multiplied by the markup.
• The intercompany charge is the cost base, plus that profit, plus the pass-through amounts.
• The net cost-plus margin is profit over the cost base; the operating margin is profit over total revenue including pass-throughs, which is always lower.

What goes wrong

The part most calculators leave out.

• This is cost-plus, one method among several. Whether it is the right method depends on the functions performed, assets used and risks borne by each entity — a routine service provider fits it, an entity owning valuable intangibles does not.
• Which costs belong in the base is where most disputes arise. Shareholder activities, duplicative work and costs relating to other group members are commonly challenged and often wrongly included.
• The benchmark range must come from a genuine comparables study using appropriate comparables in the right market. Using a rate someone quoted, or last year’s number, is not documentation.
• Sitting outside the interquartile range invites an adjustment to the median, which is usually worse than pricing there voluntarily.
• Documentation requirements are separate from getting the number right. Many jurisdictions require contemporaneous local files and master files, with penalties for absence regardless of whether the pricing was correct.
• This is a modelling tool, not transfer pricing advice. Method selection, comparables and documentation all require a specialist, and the consequences of getting them wrong are assessed years later with interest.

Questions

What markup is typical for intra-group services?

Routine low-value-adding services often sit in a single-digit range, and some jurisdictions accept a simplified safe-harbour approach. Anything beyond routine needs a comparables study rather than a rule of thumb.

Should pass-through costs be marked up?

Generally not, where the entity is simply arranging a third-party cost without adding value or bearing risk. Marking them up inflates the charge and the profit, and is a common point of challenge.

What happens if my markup is outside the benchmark range?

A tax authority may adjust your pricing, typically to the median of the range rather than the nearest edge, and assess tax and interest on the difference. Being outside the range is not automatically wrong, but it requires a documented reason.

Does anything I type get sent anywhere?

No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.