Blog

The EdgarStat Blog explores issues in transfer pricing and application of the transactional net margin method (TNMM or CPM in the US) and other enterprise profit-based methods. Blog writings reflect the position of the authors and are not the opinion of EdgarStat.

U.S. Corporate Long-Run Operating Profit Markup, 1950-2022
March 07, 2024 by Ednaldo Silva

Microeconomics are detached from the reality of corporate profits behavior. Here, I explore the operating profits (before depreciation and amortization) of a major group of U.S. corporations (consolidated entities) that make up a large fraction of U.S. gross domestic product.

Topics: US Transfer Pricing Profit Indicators Corporate Profits Oligopoly

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Theory of Profit Markup in Transfer Pricing
February 19, 2024 by Ednaldo Silva

The operating profit margin (OMBD or OMAD) can be derived from the profit markup by indirect least squares (ILS). This is the most theoretically defensible and reliable operating profit indicator that can be obtained from comparable data.

Topics: Transfer Pricing TNMM/CPM Operating Profit Markup Profit Indicators

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Operating Profit Margin is More Reliable than Return on Assets
February 07, 2024 by Ednaldo Silva

U.S. 26 CFR 1.482-5(b)(4)(i-ii) claim that the “return on capital employed” (return on assets) is less sensitive to “functional differences” than the operating profit margin or the operating profit markup. This claim is based on the unrealistic premise that “capital flows” to equalize profit rates (return on assets) among companies in the same (or in different) industries by some "invisible hand."

Topics: Return on Assets TNMM/CPM Profit Indicators

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Operating Profit Margin of U.S. Big Oil
December 11, 2023 by Ednaldo Silva

Data suggest that “big oil” forms an oligopoly industry. Noise about oil and gas prices being determined by supply and demand is suspect.

Topics: US Transfer Pricing Oil and Gas Transfer Pricing Profit Indicators

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Two-Equations Profit Indicators
August 31, 2023 by Ednaldo Silva

Determining an arm’s length profit indicator (profit ratio) requires two equations, and not one equation, as prescribed in financial statement analysis textbooks. E.g., Bernstein (1993), Drake & Fabozzi (2012). An accounting critique of univariate profit ratios is found in Whittington (1986).

Topics: TNMM/CPM Profit Indicators

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Tutorial: Power Functions in Transfer Pricing
February 18, 2022 by Ednaldo Silva

Regression analysis yields more reliable profit indicators than the linear equation without intercept specified in US and OECD transfer pricing guidelines.

Topics: Tax Controversy Transfer Pricing Profit Indicators

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Tutorial: Asset Adjustment to ROA is Unviable
August 17, 2021 by Ednaldo Silva

Dr. Ednaldo Silva illustrates why asset intensity adjustments to the Return on Assets profit indicator are redundant and unviable.

Topics: Asset Intensity Adjustment Return on Assets Profit Indicators

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Mechanical Applications of the Comparable Profits Method are Unreliable
July 15, 2021 by Harold McClure

Applied properly, the Comparable Profits Method (CPM) can be a useful approach for well-defined transfer pricing issues, such as the appropriate profitability of a sales affiliate. Unfortunately, CPM is often applied mechanically without regard for economic principles and functional comparability.

Topics: Benchmarking Tax Policy State Transfer Pricing TNMM/CPM Profit Indicators

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Cameco v. The Queen: Prologue and Round II Preview
May 03, 2021 by Harold McClure

In February 2021, the Supreme Court of Canada declined to hear the Canadian Revenue Agency's (CRA) appeal in its case against uranium multinational Cameco Corporation. However, this only marked the end of Round 1, as the courts only ruled on 8 of 14 years under review.

Topics: Mining and Extractives Canadian Revenue Agency Tax Controversy TNMM/CPM Profit Indicators

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Tutorial: Reliability of Return on Assets as a Profit Indicator
March 09, 2021 by Ednaldo Silva

Notwithstanding its acceptance in Coca Cola Co. v. Commissioner of the IRS, Return on Assets is a controversial profit indicator to use in transfer pricing. At the very least it must be subject to economic analysis to corroborate a relationship between operating profit and operating assets.

Topics: Tutorial Return on Assets Tax Controversy Profit Indicators

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Misapplication of the Resale Price Method: LATAM Petroleum Distributor
February 24, 2021 by Harold McClure

Selecting alleged comparable companies with different functions than the tested party is known to open Pandora's Box in transfer pricing controversy, and is often exacerbated by a failure to adjust for material differences between the tested party and the selected comparables.

Topics: Comparability Limited Risk Distributor Tax Controversy Profit Indicators

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Tutorial: Using Regression Analysis to Adjust Profit Indicators
February 19, 2021 by Ednaldo Silva

Ad hoc adjustments are a risky endeavor in transfer pricing. Using regression analysis, we can test if asset intensity is relevant to explain the behavior of the operating profit markup or profit margin and calculate a reliable adjustment to the profit indicator.

Topics: Tutorial Asset Intensity Adjustment TNMM/CPM Profit Indicators

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Tutorial: Using Regression Analysis in TNMM Transfer Pricing
February 16, 2021 by Ednaldo Silva

The prevalent use of quartiles to determine profit indicators often results in a wide (unreliable range) and ad hoc assets adjustments. These problems can be solved by using regression analysis, which produces more defensible statistical ranges of the profit indicator resistant to audit scrutiny.

Topics: Tutorial TNMM/CPM Profit Indicators

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Comparability Issues Are a Slippery Slope in Transfer Pricing
December 15, 2020 by Harold McClure

Comparability is a key issue in transfer pricing that is often not fully appreciated. However, comparability issues are hardly uncommon in transfer pricing controversies and can create a trickle-down effect that leads to major taxation issues.

Topics: Comparability Limited Risk Distributor TNMM/CPM Profit Indicators

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