EXERCISE FOR TRANSFER PRICING

PT.ABC is a company that produces fashion with domestic and foreign sales. For its exporting
sales, the company owns 100% of subsidiary company, XYZ Ltd., domiciled in Philipine..

This year, PT ABC planned on producing 200 containers of clothes (100 containers will be
sold for domestic sales, and 100 other containers will be sold for foreign sales)

Additional Information:
Indonesia (Tax tariff= 25%)
Philipine (Tax tariff= 15%)

Determine how PT.ABC should do their tax management using transfer pricing!

RESALE PRICE METHOD

Price per container datas (in million)
1. Production cost Rp 5.000
2. Domestic selling price (third party) Rp 7.500
3. Similar goods selling price in Philipine’s market Rp 9.000 (including 20% margin)
4. Other similar goods sellers in Philipine usually gain 20% o6
Calculation of PPh Badan Konsolidasi obligated using RPM method:

Indonesia Philipine

Sales (domestic) 750.000 900.000

Sales (export) 900.000 - (20% x 900.000) 0

=720.000

COGS 1.000.000 720.000

Gross profit 180.000

470.000

Income Tax 117.500 27.000

Income Tax consolidated 144.500

COST PLUS METHOD

Price per container datas (in million)
 1. Production cost Rp 5.000
2. Domestic selling price (third party) Rp 7.500
3. Similar goods selling price in Philipine’s market Rp 9.000
4. The profit margin of other sellers selling to the Philippines is 20% of the production cost

Calculation of PPh Badan Konsolidasi obligated using CPM method:

Indonesia Philipine

Sales (domestic) 750.000 900.000

Sales (export) 500.000 + (20% x 500.000) = 0

600.000

COGS 1.000.000 600.000

Gross profit 350.000 300.000

Income Tax 87.500 45.000

Income Tax consolidated 132.500

PROFIT SPLIT METHOD

Price per container datas (in million)
1. Production cost in Indonesia Rp 5.000
2. Domestic selling price (third party) Rp 7.500
3. Similar goods selling price in Philipine’s market Rp 9.000

Based on workload analysis, for every 1 clothes container sales in Philipine, the
comparison of PT ABC with XYZ Ltd.’s asset usage is 70:30

Based on experiences, every 1 container’s sales, whether its PT ABC or XYZ Ltd., each
gains “routine” profit of Rp 1.000

Calculation of PPh Badan Konsolidasi obligated using PSM method:

1. Contribution Split

Per container
Production Cost 5.000 Margin allocated to Indonesia 2.800

Sales (Philipine) 9.000 Margin allocated to Philipine 1.200

Total Margin 4.000

 Indonesia Philipine

Sales (domestic) 750.000 900.000

Sales (export) 780.000 0

(Cogs + Margin allocated)

COGS 1.000.000 780.000

Gross profit 530.000 120.000

Income Tax 132.500 18.000

Income Tax consolidated 150.500

2. Residual Split
Based on experiences, every 1 container’s sales, whether its PT ABC or XYZ Ltd., each
gains “routine” profit of Rp 1.000

Based on workload analysis, for every 1 clothes container sales in Philipine, the
comparison of PT ABC with XYZ Ltd.’s asset usage is 70:30

Cost 5.000 “Routine” margin allocated to 100.000

Indonesia

Sales 9.000 “Routine” margin allocated to 100.000

(Philipine) Philipine

Total Margin 4.000 Residual margin (Total margin- 200.000

whole routine margin) (4000x100 - the total
routine margin)

Residual margin allocated to 140.000

Indonesia (residual margin x its
contribution)

Residual margin allocated to 60.000

Philipine

Confused? Here, lemme give you an easy explanation.

Company Profit “Routine” profit Residual Adjusted profit

Reported Allocation (RP + RA)
 ABC 100 x 1000= 70% x 200.000= 100.000+
100.000 140.000 140.000 =
240.000

XYZ 100 x 1000= 30% x 200.000= 100.000+ 60.000

100.000 60.000 = 160.000

Total .400.000 200.000 400.000- 400.000

200.000=
200.000

Price per container datas (in million)

4. Production cost in Indonesia Rp 5.000
5. Domestic selling price (third party) Rp 7.500
6. Similar goods selling price in Philipine’s market Rp 9.000

Adjusted profit (RP + RA)

100.000+ 140.000 = 240.000 (PT ABC)

100.000+ 60.000 = 160.000 (XYZ Ltd.)

400.000

Indonesia Philipine

Sales (domestic) 750.000 900.000

Sales (export) 740.000 0

Cogs + adjusted profit

COGS 1.000.000 740.000

Gross profit 490.000 160.000

Income Tax 122.500 24.000

Income Tax consolidated 146.500

TRANSACTIONAL NET MARGIN METHOD

Price per container datas (in million)
1. Production price in Indonesia Rp 5.000
2. Domestic selling price (third party) Rp 7.500
3. Similar goods selling price in Philipine’s market Rp 9.000
4. Similar company in Indonesia usually gain 40% of gross profit margin

Additional Information:
Gross profit margin 40% obtained from total sales of …….
COGS = 500.000 x 2 = 1.000.000
Gross profit = 40%
Sales= 1.400.000
(sales for domestic and export)
→ Domestic + export = 1.400.000
Therefore, Sales Export is determined at the amount of ……
650.000
→ 1.400.000-750.000= sales export

Calculation of PPh Badan Konsolidasi obligated using TNM method:

Indonesia Philipine

Sales (domestic) 750.000 900.000

Sales (export) 650.000 0

COGS 1.000.000 650.000

Gross profit 400.000 250.000

Income Tax 100.000 37.500

Income Tax consolidated 137.500

CONCLUSION
Cost plus method
→ keep in mind: only for this exercise