Blog

It’s All About That (Cost) Base

By Chad Martin
May 5, 2025
shipping container ship
In designing, implementing, and monitoring your transfer pricing policies, pay more attention to the base. We often get hung up on whether a given margin or markup percentage falls within the arm’s-length range, but often your true risk lies in the calculation of the cost and revenue base on which that markup is applied. This is reflected in the increased focus by administrations on obtaining and analyzing underlying financial data to compare to the tax return’s assertions.

Think about it: say your captive service provider entity has a 5% markup policy, and that is applied to a $100 cost base for $5 of income. If a tax authority adjusts that markup to 7%, you now have an income deficiency of $2. If, however, that tax authority accepts the 5% markup as arm’s-length, but assesses the applicable cost base to be $200, your potential income adjustment is $5.

What’s more, the base can be highly subjective and challengeable, given that many transfer pricing methods require full loading of indirect costs and overheads, as well as appropriate allocation metrics.

It’s a good reason to take a close look at the accuracy and reproducibility of your transfer pricing adjustment calculations today.

 

Chad Martin directs Eide Bailly's Transfer Pricing Services practice.

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About the Author(s)

Chad Martin

Chad Martin

Principal/Transfer Pricing Services
Chad helps his clients navigate the complexities of today's global transfer pricing rules, regulations and opportunities. He helps companies structure and defend their intercompany transactions with an 'in-house' mindset.

Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. This is meant for educational purposes only. Information presented should not be considered investment advice or a recommendation to take a particular course of action. Always consult with a financial professional regarding your personal situation before making any financial decisions.