Amicus Transfer Pricing Alert – When Should A Company Opt For Cost Plus?

It is not uncommon for corporates to relate Transfer Pricing as the 'cost plus' question – how much margin is appropriate given the nature of transaction? Would a cost plus margin in the range of 10 – 15 percent be sufficient or is a higher mark-up warranted? While finalizing these decisions what must not be overlooked is the functional profile of the taxpayer. Before the margin question, a fundamental question needs answering – what is the taxpayer's characterization and risk profiling?

The 'cost plus' model can only be used if the service provider does not own significant intangibles and undertakes routine functions/ activity calling for a low/ reasonable return on the cost. The 'plus' or 'mark-up' on cost is benchmarked with reference to comparables providing similar services.