Two related companies trade with each other. Does the price they agreed on hold up to the standard an independent buyer and seller would have reached? That question sits at the heart of transfer pricing, and ICAG’s July 2024 Advanced Taxation paper tested it directly — with a specific twist that caught out a lot of well-prepared candidates. This post walks through the real question, the full marking scheme, and the exact worked examples the examiner wanted to see.
The Question, In Full
Part (a) asked candidates to explain the Resale Price method and the Cost-Plus method for pricing related-party transactions, state when each is most appropriate, and illustrate each with an example (10 marks). Part (b) asked candidates to explain the economically significant circumstances — the comparability factors — that determine whether Zanku Ltd’s intragroup loans to its subsidiary Chamez Ltd are priced at arm’s length (10 marks).
The Worked Solution
The Resale Price method works backward from the price a related-party product is resold for, subtracting a comparable resale margin to find the arm’s length purchase price — if a Ghanaian reseller sold clothing for GH¢2,000,000 and an independent comparable earns a 40% margin, the arm’s length purchase price from its related supplier is GH¢1,200,000. The Cost-Plus method works forward instead: take the supplier’s cost and add a comparable mark-up — GH¢200 of cost plus a 10% mark-up gives an arm’s length price of GH¢220.
For the intragroup loan, the marking scheme rewarded candidates who worked through six specific comparability factors and tied each one to Zanku Ltd’s facts: the loan’s contractual terms; the functions, assets, and risks of borrower and lender; the group’s own credit policies and each subsidiary’s credit standing; the loan’s characteristics (tenor, amount, currency, security); the economic circumstances of the relevant market; and the group’s business strategy, including what an independent lender would actually require and whether cheaper external financing exists — itself a red flag if it does.
EXAM TIP: A definition without a worked example is an incomplete Advanced-level answer on a pricing-method question. And listing comparability factors without connecting each one to the facts in the scenario — what the examiner calls “the nexus” — earns a fraction of the marks a properly applied answer would.
Conclusion
Transfer pricing theory and transfer pricing application are two different skills, and this question tested both in one sitting. Knowing that the Cost-Plus method “adds a mark-up to cost” is not the same as being able to show GH¢200 plus 10% equals GH¢220 — and knowing the six comparability factors by name is not the same as applying every one of them to Zanku Ltd specifically. Both gaps cost real marks on a real paper.
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