Transfer Pricing PracticalCasesPharmaceutical SectorEvelyn Cooban – Head of Transfer PricingJosé Galindez – Transfer Pricing AdvisorIADB – MEFAgenda1.Transfer Pricing Rules2.Case 1. Resale Price Method3.Case 2. Transactional Net Margin Methods4.Questions1

2.Case 1. Resale Price MethodArm’s nsesThe 5ComparabilityFactorsCase 1. Resale Price MethodComparable UncontrolledPrice MethodCost Plus MethodMethodsResale Price MethodProfit Split MethodTransactional NetMargin Method2

2.Case 1. Resale Price MethodTransfer PricingObligations Transactional Statement–Form 930 Transfer Pricing Study TP Group Policy Documentation2.Case 1. Resale Price MethodCase: Pharmaceutical Product Distributor3

2.Case 1. Resale Price MethodFacts: Goods purchases to related parties. Goods sold to related parties.2.Case 1. Resale Price MethodFact: TNMM (used by the tax payer).4

2.Case 1. Resale Price MethodParent EuropeCase 1. Resale Price MethodPharma ABCIndependentThird partyIndependentPanamaLatin-AmericaFree ZonePharma ABCPanama5

2.Case 1. Resale Price MethodTax payer TNMM analysisComparablePrestige Brands HoldingsMckesson Corp.Cardinal Health Inc.Amerisourcebergen Corp.Tax Payer OMPercentile 75MedianPercentile 252.Adjusted Operating Margin30.5%1.9%1.7%1.5%2.6%9.0%1.8%1.6%Case 1. Resale Price Method”Use of internal comparable”6

2.Case 1. Resale Price MethodFinancial Statement Extract 0,841.00Other Cost2,200,246.20Gross Profit32,859,250.80Gross Margin35%Transfer Pricing ,283.8012,536,267.2016%Adjusted 92,883.3035%23,871,846.93Case 1. Resale Price MethodConclusions: TNMM rejection. Used of internal comparable. Application of the resale price method.7

3.Case 2. Transactional Net Margin MethodCase: Pharmaceutical Product Manufacturing3.Case 2. Transactional Net Margin MethodFacts: Raw material purchase to a related party forlocal manufacturing. Goods sold to related parties.8

3.Case 2. Transactional Net Margin MethodFact: Use of the Transactional Net Margin Method.3.Case 2. Transactional Net Margin MethodEuro ZoneParent CompanyRest of the worldGroup SubsidiariesGroup SubsidiariesLocal SubsidiaryLocal SubsidiaryPanamaSpecial Tax RegimeFree Zone9

3.Case 2. Transactional Net Margin MethodTax Payer comparable setGross Margin on Total CostComparable3.Average201220112010American Pacifc Corp9.2 %17.1%7.3%3.9%Atrium Innovation Inc24.4 %21.5%25.0%27.6%Balchen Corp24.0 %23.9%23.9%24.2%Fitlife Brands Inc-1.9 %11.6%3.9%-27.6%Hawkins Inc11.9 %11.5%11.4%12.9%Heska Corp2.7 %3.1%4.4%0.5%Integrated Ted Biopharma Inc1.0 %3.4%-1.4%1.3%Natural Alternatives5.9%3.6%9.3%4.3%Natures Sunshine Prods Inc8.0%10.2%10.5%3.3%RBC Life Sciences Inc0.1%-3.5%-0.2%3.9%Reliv International Inc3.0%2.6%2.4%4.1%Case 2. Transactional Net Margin MethodRejected comparable (different functions, assets andrisks): Integrated Bio Pharma, Inc.FitLife Brands, Inc.Derma Sciences, Inc.RBC Life Sciences, Inc.Nature’s Sunshine, Inc.10

3.Case 2. Transactional Net Margin MethodExtraordonary AdjustmentFinancial Statement ExtractRevenues19.624.144Cost of goods sold22.606.038Extraordinary adjustment(cost)6.852.077Gross Profit3.870.183Operating expenses4.586.011Net Profit-715.828MOTC3.-3.52%Case 2. Transactional Net Margin ProfitArm’s Length RangeMOTCComparableAverageAmerican Pacifc Corp11.40 %Atrium Innovation Inc20.24 %Balchen Corp23.97 %Hawkins Inc11.9 %Heska Corp2.7 %Natural Alternatives5.9%Reliv International IncTax payer MOTC3.0%-27.83%First Quartile4.71%Median10.27%Third Quartile15.97%TP Adjustment38.7%11

3.Case 2. Transactional Net Margin MethodConclusions Comparable rejection because of losses resultingfrom irregular situations. Comparable rejection because of different functions,assets and risks. Non-acceptance of the extraordinary adjustmentpropose by the tax payer. Turndown the use of multiple years financialinformation.4.QuestionsQuestions ?12