The Berry Ratio: Why it Should Rarely be Used in Transfer Pricing

Originally published in the April 30, 2012 - Volume 16, Number 8 edition of WTE Practical International Tax Strategies.

Transfer pricing economists must consider various transfer pricing methodologies when assigning intercompany profits to related parties. Given the difficulty in applying the Comparable Uncontrolled Price (CUP) and gross margin methods (due to high level of comparability requirements), the Transactional Net Margin Method (TNMM), though considered, until recently, a method of last resort by the Organization for Economic Co-operation and Development (OECD), is often employed. In my experience, I have witnessed many economists electing to apply a Berry Ratio as a transfer pricing methodology without fully understanding the theory behind such an approach. Nothing seems to elicit a stronger response from taxpayers and tax authorities alike than having the Berry Ratio employed to assign profits to related parties operating in different jurisdictions. The Berry Ratio must be used with caution and sound theoretical arguments. Since the Berry Ratio assigns a mark-up based solely on Selling, General and Administration (SG&A) expenses, its application is often contested by those that argue that such an approach assigns too little profits to the parties in question. This article discusses the limited number of cases where the Berry Ratio should be applied, further supporting Dr. Charles Berry’s premise that the ratio should be applied as an exception and not as a rule.