pricing is $300 million. This amount would be determined on the actual records of
the business. The income subject to transfer pricing analysis is the deemed total in-
come of $600 million, less the income of transactions not subject to transfer pricing
of $300 million, or $300 million in total.
The return on investment data for Location B would appear as follows:
Transactions Not Subject Transactions Subject
To Transfer Pricing To Transfer Pricing Total
Income $300 million $300 million $600 million
Assets $3 billion $1 billion $4 billion
Return 10% 30% 15%(c) Recombining the Transfer Pricing Transactions
Location A Location B Total
Income $100 million $300 million $400 million
Assets $1 billion $1 billion $2 billion
Return 10% 30% 20%(d) Making Economic Adjustments. The final step in the FEC transfer pricing
method would be to make economic adjustments, including accounts receivable, ac-
counts payable, inventories, risks, currency adjustments, life-cycle analysis, market
intangibles, technology licensing rates, and so forth. Here, the transfer pricing econ-
omist would begin with the differences in rate of return in Location A and in Loca-
tion B and would contrast functions and risks between these two locations. Finally,
the transfer pricing economist should ascertain whether the functions employed
method is in fact the best transfer pricing method in this situation.
29.18 USING TOTAL OPERATING EXPENSES. We suggest the total operating ex-
pense method as an alternative to the return on assets method. Under this approach,
total operating expenses for each branch, segment, division, or subsidiary would be
determined. These total operating expense amounts would be allocated, and would
serve as the denominator of an apportionment fraction. The numerator of the fraction
would be the total operating expenses of that branch, segment, division, or sub-
sidiary.
Total operating expenses are the denominator of the Berry ratio, gross profit di-
vided by total operating expenses.^20 The second step in this process would be to sever
transfer pricing transactions from nontransfer pricing transactions. The third step in
this process would be to make economic adjustments.
(a) Gross Operating Expense Computations. The first step in the transfer pricing
process would be to combine the gross operating expense amounts to the branches,
segments, divisions, or subsidiaries. Assume that a corporation has two divisions, Di-
vision C and Division D.
29.18 USING TOTAL OPERATING EXPENSES 29 • 25(^20) Charles H. Berry, “Berry Ratios,”Transfer Pricing Handbook#1, 3rd ed., edited by R. Fein-
schreiber (New York: John Wiley & Sons, 2001): Section 20.1.