When an intercompany transaction is tested using financial ratios based on operating profit, consideration should be given to the possible differences in the composition of operating expenses between controlled and uncontrolled transactions. In this article from Tax Management Transfer Pricing Report, NERA Vice President Dr. Vladimir Starkov argues that profitability ratios based on operating profit obtained from data on uncontrolled transactions may have to be adjusted to reflect lower intensity of certain operating costs—such as sales and marketing expenses—often associated with intercompany transactions. Dr. Starkov explains that the need for such adjustment arises because operating profit observed in uncontrolled transactions incorporates the return on certain activities that may have only minor presence in intercompany transactions.

Reproduced with permission from the August 2008 issue of BNA International's Tax Planning International Transfer Pricing. Copyright 2008 by the Bureau of National Affairs, Inc. (800-372-1033). This article first appeared in BNA International's Tax Management Transfer Pricing Report, Vol. 17, No. 6, 07/17/2008.