Scenario: the Vietnamese subsidiary of a European home-appliance group does one thing: import vacuum cleaners from its parent and resell them to electronics supermarkets. Year-end gross margin: 12%, while independent Vietnamese appliance distributors typically earn 18–25%. The tax authority asks: is the parent’s import price “eating” margin that belongs in Vietnam? The resale price method exists to answer exactly this.
How RPM works
The core formula: arm’s length purchase price = resale price to independents − (resale price × arm’s length gross margin). Starting from the observable market resale price (hard to manipulate), subtract the gross margin an equivalent independent distributor would earn; the remainder is the “right” purchase price from the related party. RPM is one-sided: it tests only one party (the distributor — the simpler-function party).
When is RPM the right choice?
- The distributor adds little value: no R&D, no brand ownership, no product transformation — pure buy-and-sell with ordinary distribution marketing;
- Gross margin data for comparable independent distributors exists (same product sector, same market level: wholesale vs retail);
- The resale price to independents is reliable (not distorted by complex internal rebates).
Where do comparable margins come from — and what is “normal”?
Sources: financials of independent distributors (commercial databases — recognised by Circular 95/2026/TT-BTC), internal data if the company distributes both related and independent goods. There is no universal “normal”: pharma, appliance and food distribution margins differ widely. A common error is borrowing another sector’s margin — auditors reject it for functional differences. Comparables must share the same sector and distribution model (pure wholesale differs from retail with after-sales service).
Adjustments decide success or failure
Material differences to adjust: warranty scope (does the distributor bear warranty?), return policies, who funds marketing, customer credit terms, territorial exclusivity. Example: if comparables self-fund a 2-year warranty while your warranty is parent-funded, the comparables’ margins must be adjusted down before application — otherwise the “arm’s length” margin is inflated and your purchase price gets unfairly pushed down.
When RPM does not fit
Distributors performing valuable special functions: building the brand locally with heavy marketing spend (marketing intangibles — see EXP-2210), repackaging/assembly, complex technical services. The distributor is then no longer “simple” and RPM distorts — switch to TNMM or profit split.
FAQs
Distributor sells both related and independent goods?
Ideal for internal comparables: carve out the independent-goods distribution figures as the benchmark. Allocate shared costs (warehousing, staff) reasonably between segments — arbitrary allocation corrupts both margins.
Margin below the comparable range — how adjusted?
The authority typically adjusts the purchase price to the median of the interquartile margin range, recomputes taxable income and collects arrears. Taxpayers may explain low margins (market penetration, obsolete stock) before the reassessment decision issues.
RPM vs TNMM?
RPM benchmarks gross margins — sensitive to cost-of-goods classification; TNMM benchmarks net margins — less sensitive to accounting differences. RPM demands high functional similarity; TNMM is more forgiving and more used in practice.
Can RPM apply to services?
Rarely. RPM is designed for tangible-goods distribution with observable resale prices. For services the “resale price” usually does not exist meaningfully — use cost plus or TNMM.
This article has been quality-reviewed by the FLAW AI Legal Council
