RPM (Resale Price Method): Definition and the Distributor Fit
The RPM defined: the resale price minus the routine mark-up — the method that works backwards from the reseller’s price to the reseller’s purchase, the distributor’s method.
Definition
The RPM — the resale price method — determines the arm’s length price by working backwards from the reseller’s resale price: the reseller’s resale price to the unrelated third party, minus the routine mark-up (the gross margin the unrelated reseller needs for its functions, assets and risks — the operating costs plus the routine return), is the arm’s length purchase price the reseller should have paid the supplier (the related party). It is the method of the limited-risk reseller / distributor — the tested party is the reseller, and the price determined is the inbound price (what the reseller pays), not the outbound.
Arm’s length purchase price (the supplier’s price)
= the reseller’s resale price (to the unrelated third party)
− the routine mark-up (the reseller’s operating costs + the routine
return, on the reseller’s FAR)| The element | The content |
|---|---|
| The tested party | The reseller / distributor (the limited-risk buyer who resells to the unrelated third party) — the tested party is the reseller, the price determined is the purchase |
| The starting point | The resale price — the reseller’s actual resale to the unrelated third party (the real, uncontrolled price) — the method’s anchor |
| The routine mark-up | The reseller’s operating costs plus the routine return (the gross margin covering the reseller’s functions, assets, risks) — the mark-up the unrelated reseller needs, on the reseller’s FAR |
| The result | The arm’s length purchase price — the supplier’s (the related party’s) price; the supplier’s margin is the residual (the resale price minus the routine mark-up), not the tested measure |
The working distinction (the RPM guide and the methods overview): the RPM is the direct price method applied in reverse — the uncontrolled price (the resale) is the anchor, and the arm’s length price is derived from it (minus the routine mark-up), as against TNMM (the margin benchmarked against the pool) and cost plus (the supplier’s cost plus the mark-up, the outbound price determined). The RPM’s fit is the distributor who resells the product unchanged (no material transformation — the transformation moves the method to the cost-plus / the TNMM on the manufacturer); the best method rule weighs the fit on the comparability facts.
Example
The Indian distributor (the limited-risk reseller) buys the group’s product and resells it in India to unrelated retailers at ₹100 (the resale price, the real uncontrolled price). The distributor’s operating costs are ₹70, and the routine return (the gross margin the unrelated reseller needs, on the distributor’s FAR — the distribution function, the inventory risk, the limited assets) is ₹15. The routine mark-up is ₹70 + ₹15 = ₹85; the arm’s length purchase price is ₹100 − ₹85 = ₹15. The group supplier’s price is tested at ₹15 — the purchase the distributor should have paid; the supplier’s margin (the resale price minus the routine mark-up) is the residual, the supplier’s return on the product, not the tested measure.
See also
FAQ
RPM or TNMM for the distributor? The RPM where the resale price is the reliable anchor (the reseller’s resale to the unrelated third party, the real uncontrolled price, the product unchanged) and the routine mark-up is determinable (the reseller’s FAR, the routine return) — the direct price method, the comparability on the reseller’s resale. The TNMM (the OP/S benchmarked against the pool) where the resale price is not the reliable anchor (the resale to a limited set of related parties, the product’s resale price not comparable) or the routine mark-up is not determinable. The best method rule weighs the fit; the RPM guide has the worked comparison.
What is the routine mark-up, exactly? The reseller’s operating costs plus the routine return — the gross margin the unrelated reseller needs to cover its functions, assets and risks (the distribution function, the inventory it carries, the receivables, the limited risk). The mark-up is on the reseller’s FAR (the tested party’s profile) — the routine return is the reseller’s, not the supplier’s. The distributor guide has the mark-up’s determination (the FAR, the return, the documentation).
Does the RPM apply to the services reseller? The RPM’s fit is the product reseller (the resale price, the product unchanged) — the services reseller (the service bought and resold) is the buy-sell / the limited-risk service context, where the TNMM (the OP/OC) is usually the method (the service’s resale price is not the reliable anchor the way the product’s is). The method’s fit is on the comparability of the resale price — the product’s resale is the anchor, the service’s is not, usually.
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Related docs
Resale Price Method (RPM): When It Fits and When It Fails
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