Resale Price Method (RPM) — The resale price method (RPM) is a transfer pricing method that starts with the price at which a related party reseller sells goods to an independent customer, then subtracts an arm's length gross resale margin to determine the arm's length purchase price...
The resale price method (RPM) is a transfer pricing method that starts with the price at which a related-party reseller sells goods to an independent customer, then subtracts an arm's length gross resale margin to determine the arm's length purchase price from the related supplier.
RPM is a traditional transaction method focused on the reseller's gross margin. It is most useful for buy-sell distributors that resell goods without significant transformation or unique value creation.
Basic formula:
Arm's length transfer price = Resale price - Arm's length resale margin - other relevant resale costs
OECD/Regulatory Reference
The OECD Transfer Pricing Guidelines (2022) describe RPM in Chapter II at . The Guidelines explain that RPM begins with the resale price charged to an independent party and reduces that price by an appropriate gross margin for the reseller's functions, assets, and risks.
The OECD notes that RPM is generally most useful for marketing operations and resellers, particularly where the reseller does not add substantial value to the product before resale.
US Treasury Regulations Section 1.482-3(c) describe the resale price method for transfers of tangible property.
In Practice
RPM is a distributor-side method. It asks how much gross margin an independent distributor would retain for performing comparable distribution functions under comparable conditions.
RPM often fits when:
the tested entity buys goods from an affiliate and resells them to independent customers
the goods are not materially transformed before resale
the reseller does not own valuable marketing intangibles
reliable gross margin comparables are available
product mix, channel, and accounting classifications are comparable
RPM is often weak when:
the reseller performs manufacturing or significant customization
the reseller provides bundled services that materially affect gross margin
COGS and operating expenses are classified inconsistently across comparables
the reseller owns valuable local brand or customer intangibles
Internal comparables can be especially useful for RPM. If the same distributor buys similar products from unrelated suppliers and resells them under comparable conditions, those gross margins may provide stronger evidence than broad external distributor searches.
Example
Scenario: SpainCo buys finished goods from its related manufacturer and resells them to independent retailers. SpainCo performs routine warehousing, logistics, and sales support but does not modify the products.
Metric
Amount
Third-party resale revenue
EUR 10,000,000
Arm's length gross margin
25.0%
Gross margin amount
EUR 2,500,000
Implied arm's length purchase price
EUR 7,500,000
Calculation:
Transfer price = EUR 10,000,000 - (EUR 10,000,000 x 25.0%) = EUR 7,500,000
If comparable independent distributors earn gross margins of 22.0% to 28.0%, SpainCo's 25.0% gross margin supports an arm's length result.
RPM vs. TNMM
Issue
Resale Price Method
TNMM
Profit level
Gross margin
Net operating margin
Tested party
Usually the reseller
Usually the less complex party
Data sensitivity
Sensitive to COGS/OPEX classification
More tolerant of gross-level accounting differences
Best fit
Reliable distributor gross margins exist
Gross margin comparability is weak but net margins are reliable
RPM can be more direct than TNMM when gross margins are reliable. TNMM is often more defensible where accounting differences, channel differences, or product mix make gross margin comparisons noisy.
RPM is most appropriate for routine distributors that buy goods from related suppliers and resell them to third parties without significant transformation. The method is strongest when reliable gross margin comparables exist.
What does RPM test?
RPM tests the reseller's gross margin. It asks whether the reseller retained enough gross profit to cover its selling and operating expenses and earn an arm's length profit for its functions, assets, and risks.
Why is RPM difficult in practice?
RPM is sensitive to gross-level accounting differences. If one company classifies freight, warranty, rebates, or support costs in COGS and another classifies them in operating expenses, their gross margins may not be comparable.
Is RPM better than TNMM for distributors?
Not automatically. RPM may be better when reliable gross margin data exists and the distribution functions are closely comparable. TNMM may be better when gross margin data is unreliable but net operating margins can be benchmarked.
Can RPM apply when the reseller adds value?
It can apply only if the added value does not materially undermine comparability or can be reliably adjusted. Significant manufacturing, customization, marketing intangibles, or bundled services often make RPM less reliable.