CUP Method Question 1 (A): Internal CUP Bayer Limited (A German Company) sold 500 vaccine to its subsidiary Bayer BD Limited (Bangladeshi Company) for $200 cach on CIF (Cost, Insurance & Freight) basis. It sells the vaccine to Beximco Pharma in Bangladesh also at $190 dollar each on FOB basis. ‘Transportation cost from Germany to Chittagong port is $3.5 for each vaccine, Insurance cost for the transportation is $2500 for all 500 vaccines. The subsidiary in Bangladesh incur additional cost of $5.5 for packaging of the vaccine while the parent takes the responsibility for packaging to other subsidiaries for which the cost is $15 for each vaccine, Please compute the Arm's Length price for the vaccine in Bangladesh and the required adjustment required Solution 1 (A): Arm's length price determination for transaction between Parent and Subsidiary Particulars ‘Amount Unit price charged to Bayer BD Limited (AE) $200.00 Unit price charged to Independent Customer (Third party) $190.00 ‘Add: Cost of Transportation $3.50 ‘Add: Cost of Insurance $5.00 ‘Adjusted unit price™ $198.50 ‘Ann's length price per unit using internal CUP $198.50 ‘Transfer pricing adjustment in US$ (500*($200-$198.50)) $750.00 Transfer pricing adjustment in BDT (1 USS = 85 Taka) ‘BDT 63,750 Question 1 (B): External CUP ‘The German entity sells the same vaccine to other subsidiaries at the following price: Market | Selling Price (Vaccines) USA, $225.00 China $215.00 Brazil $210.00)Solution 1 (B): Arm's length price determination for transaction between Parent and Subsidiary There is no specific guidance on how to determine External CUP using external price when multiple prices are available. Common practice is using average of selling prices. Using average selling price of the above three market: Particulars Amount ‘Average price per unit using external CUP $216.67, Packing cost incurred by parent $15.00 ‘Arm's length price per unit using external CUP (Average Price) $201.67, Unit price charged to Bayer BD Limited (AB) $200.00 Less: Packaging Cost (B) $5.50 ‘Adjusted unit price charged to Bayer BD Limited by AE (A-B) $194.50 Transfer Pricing adjustment is not required because AE charged lower price than the external selling prices of the same product to other subsidiaries.Resale Price Method (RPM) Question 2: Flora Bangladesh Limited trades IT related product only. Flora purchases all its laptop from Dell Limited (A related Party). It also purchases its laptop from HP Limited but without warranty. Warranty cost for laptop is BDT 1,500, Particulars Dell Limited (AE) | HP Limited Purchase price of Flora 19,000 Selling price of Ryan 26,000 Other expenses 1,500 Calculate the arm's length price of each laptop it procures from the related party. Solution 2: Details of the Gross Profit Margin is as follows Particulars Dell Limited (AE) [HP Limited Selling price of Ryan 18,000 26,000 Less: Purchase price of Flora 15,000 19,000 Less: Other expenses 1,000) 1,500 Gross Margin 2,000 5,500 Gross Margin on Sales 1% 21% Calculation of ALP is as follow: Particulars Amount ) Selling price of Ryan 18,000 Less: Other expenses 1,000 Less: Arm's length resale margin @21% 3,780 Add: Warranty Cost 1,500 Adjusted Arm's Length Price 14,720 Price Paid to AE 15,000 ‘Adjustment per product 230Cost Plus Method (CPM Question 3: Eccenture Cover Limited (ECL) manufactures I-phone cases for its associated enterprise. I-phone cases are manufactured by several other companies including Candy Casing Limited (CCL). Both CCL & ECL manufactures the same product Details of the transactions of both the parties are given below: Particulars ECL [CCL Selling price 12,000 [13,000 ‘Manufacturing cost 8,000 [8,250 Cost of packagin, = 250) ECL manufactures 15,000 I-phone cases for its AE during the year. Please calculate the arm's length price of each I-phone cases and required adjustment. Details of the Gross Profit Margin are as follows: Particulars ECL_[CcL Selling price 12,000 | 13,000 Less: Manufacturing cost 8,000 8,250 Less: Cost of packaging Nil 250) Gross Margin 4,000 | 4,500 Total Cost 8,000 | 8,500 Mark up on cost 50% | 53% Calculation of ALP is as follow: Particulars ECL Total Cost 8,000 ‘Add: Arm's length Mark Up @53% 4,240 Adjusted Arm's Length Price 12,240 Selling Price to AE 12,000 ‘Adjustment per I-phone Case 240 Total Transfer Pricing adjustment | 3,600,000Profit Split Method Question 4: Kaiden Private Limited of India sells all of its manufactured goods to Kaiden Private Bangladesh Limited (AE of KPL India) and after further processing KPL (Bangladesh) sells those products to the customers all over Bangladesh Profit & Loss Statement of KPL (India) and KPL (Bangladesh) Particulars KPL | KPL (india) _| (Bangladesh) Sales $55 $100 Purchase $(10) 363) Manufacturing costs $15) $20) Gross Profit $30 $25 Research & Development S05) $10) Operating expenses $10) $10) Operating Profit 35 $5 It is established, for both jurisdictions, that third-party comparable manufacturers without unique and valuable intangibles eam a return on manufacturing costs (excluding purchases) of 10% (ratio of net profit to the direct and indirect costs of manufacturing). Recalculate Arm's length profit of KPL (India) and KPL (Bangladesh) using profit split method. Solution 4: Calculation of residual profit: KPL KPL Particulars (india) _| Bangladesh) Total Total operating profit earned by KPL Undia & Bangladesh) $500] $ 5.00| $10.00 Less: Return on manufacturing costs (Manufacturing cost X 10%) $_1s0|_s 200] $3.50 Residual profit $350. $ 3.00[ $650 Proportion of R & D Cost sis, S$ 10[ $25.00 Percentage of Proportion of R & D Expenses (R & D expense / Total R & D Expense X 100%) 60% 40% Calculation of Residual Profit (Operating Profit) s 540 § 4.60 (Return on Manufacturing cost + Proportion of R & D Expense X Total Residual Profit)Adjusted Profit & Loss Statement of KPL (India) and KPL (Bangladesh) Particulars KPL (india) [ KPL (Bangladesh) Sales $55.40, $100.00 Purchase $10.00) $65.40) Manufacturing costs $15.00) S$ (20.00) Gross Profit $30.40 $24.60 R&D $ (15.00 $010.00) Operating expenses $ (10.00 $10.00) Operating Profit $5.40 $ 4.60‘Transaction Net Margin Method (TNMM): Question 5: Titan IT Bangladesh Limited (TIL-BD) procures software (Data X) ftom Gameloft Singapore Limited at BDT 1,500. The company incurs promotional expense of BDT 600 and sells the software to its customer at BDT 3,000. Titan IT Bangladesh Limited (TIL-BD) also procures its software (Foto Z) from Titan IT UK Limited (TIL-UK) at BDT 700. The company incurs promotional expense of BDT 200 per software and sells the software at BDT 1,200 to its customer. Please find the arm's length price for the software assuming the difference in product is immaterial. Solution ‘Computation of Net Profit Margin Particulars Data X Sales Price BDT 3,000 Less: Purchase price BDT 1,500 ‘Less: Promotional Expense BDT600 ‘Net Profit BDT 900 ‘Net Profit Margin Ration (% of sale) 30% Calculation of ALP is as follow: Particulars ‘Amount Sales price of Foto Z (A) BDT 1,200 Net Profit Margin Ratio 30% Net Profit Margin (B) [A X Net Profit Margin Ratio] BDT 360 Total Cost (A-B) BDT 840 Less: Promotional Expense BDT 200 ‘Adjusted Arm's Length Price per software BDT 640 Price Paid to AE BDT 700 Transfer pricing adjustment per software BDT 60Question 6: A company (DEF Ltd) has received interest free loan of BDT 15,000,000 from its parent (XYZ. Ltd) as working capital on 10 December 2019. The company repaid the loan on 01 May 2020. The financial year of the company is from July 2019 to Tune 2020. Now, the group CFO is in the view that, the TP return is not required to file as the there is no closing balance in the Financial statements. He approached your tax partner for opinion on whether this need to be file or not. You are required to prepare a memorandum for the tax partner for the above queries. Solution: To, ‘Tax Partner. DEF & Co. Chartered Accountants Subject: Memorandum on filling of Statement of International Transactions under Section 107 EE Dear Sir, As per Section 107A (5), international transaction means in the nature of Purchase, Sale, Lease of tangible or intangible property, provision of services, lending money, borrowing of money between associated enterprises. As the DEF Limited (subsidiary) received interest free loan from XYZ limited (Parent) it falls ‘under international transaction for which TP return must be filed as per section 107EE. Though there is no closing Balance but as the transaction incurred during this year, it must be reported ‘under Part-II Interest Free loan, advances and investments. However, as the transaction for the year is less than BDT 30,000,000, so no certificate from a qualified chartered accountant is required. Also, there is no need to mention transfer pricing method rather it can be considered only as disclosure,Question 7: ‘A German based research institute developed a vaccine for protecting the children from harmful seasonal flue which was not developed by any other entity in the world, The German based institute will supply the vaccine to Bangladesh at fixed value of USD 250, the rate is the same for the supply to other country by the institute. Now, the entity wants to open a subsidiary in Bangladesh and approaches your firm for the transfer pricing implication and method, You are required to prepare a memorandum for the tax partner for the above queries. Solution: To, Tax Partner. DEF & Co. Chartered Accountants Subject: Memorandum on Transfer Pricing Method and Implication for newly developed vaccine Dear Sir, As per section 107BE, the subsidiary need to file the ‘TP return for purchasing the vaccine from its parent based in Germany. Incase of determining the transfer pricing method, we need to take into the fact that, this is a very unusual product (Vaccine) and the vaccine is being sold by the institute to all other countries at a fixed price. As the subsidiary will act as only as a distributor and resale the product, the Transfer pricing method would be “Comparable uncontrolled Price” TPM code: 01”. Also, as the vaccine is supplied to all the countries of the world at the same rate ($250), there will not be any transfer pricing adjustment.