RoyaltyStat Blog

You better stop the things you do. Jay Hawkins (1929-2000), “I Put a Spell on You.”

US-listed retailers data show that a simple formula can be used to provide reliable estimates of a controlled retailer’s operating profits for transfer pricing purposes.

To enhance tax certainty, I recommend that US state tax authorities allow retailers to use the profit margin based on this formula as a transfer pricing safe harbor.

The regression method proposed here can be applied to any industry, including to provide safe harbors for inbound controlled wholesale distributors or to provide safe harbors for outbound controlled suppliers or for outbound controlled service providers.

Después de tanto soportar la pena de sentir tu olvido.

Cenizas sung by Toña La Negra. Bolero lyrics by Wello Rivas (1913-1990).

Major U.S. retailers (considered to be comparables to an inbound “tested party”) are claimed to have operating profit margins that vary from 0.5% to 1.5% of their net sales. This interquartile range (IQR) varying from 0.5% to 1.5% does not reflect the reported operating profit margins of the purported comparables, but instead is obtained by unreliable asset intensity adjustments. Unreliable because the proposed asset adjustments are not supported by economic principles, and the statistical significance of the relevant parameters is not ascertained.

In physics, we benefit from the historical development of simple formulae describing basic phenomena, including Newton’s (1687) three laws of motion and the law of universal gravitation. Even the posterior extension of Newton’s second law of motion to accommodate particles moving at high velocities (comparable to the speed of light) has a simple formula. Newton's second law of motion can be interpreted to be a mathematical implementation of an earlier idea attributed to Buridan (1295-1363) that momentum (impetus) is proportional to a particle mass multiplied by its velocity. Buridan's simple definition of momentum finds many analogues in economics, such as the principle that price is proportional to cost, profit is proportional to investment, and royalties are proportional to the revenue of the licensee.