Executive answer
The resale price method begins with the price at which property bought from a related party is resold to an independent customer. It subtracts a comparable gross margin that rewards distribution functions and, after relevant associated adjustments, derives an arm’s length purchase price. It is particularly relevant to distributors that do not materially transform the product or contribute unique intangibles.
Article 180, section II, of the Mexican Income Tax Law recognizes the method. Its apparent simplicity hides two requirements: functional comparability and accounting consistency. Classification of freight, warranty, discounts, marketing or depreciation can change gross margin without changing economics. A TNMM company set does not automatically become a gross-margin set.
Before applying resale price, assess CUP, delineation, FAR, channel, product, agreements and segmented data. The method works when resale price is observable, the distributor performs comparable functions and reliable gross margins exist. If accounting does not permit that comparison, a net method may be stronger, but the limitation should be demonstrated.
Method logic
In simplified form: third-party resale price less an arm’s length gross margin and relevant adjustments equals the related purchase price. Gross margin is commonly stated over net sales, but define the formula, components and treatment of returns, rebates and taxes.
Illustration: a distributor resells for 100. A comparable gross margin of 25 implies cost of goods of 75 before other defined adjustments. If the controlled purchase price booked is 80, potential difference is 5. This arithmetic does not authorize an invoice. First validate sample, accounting, segment and adjustment rule.
The gross margin rewards inventory, selling, routine marketing, credit, warehousing, warranties and other functions actually performed. The more unique the contribution, the more difficult the comparison.
Suitable profile
The method is commonly viable when the distributor buys finished products, makes no material modification, resells within a reasonable period, owns no unique commercial intangible, does not bundle complex services and has gross-margin data by transaction or line.
Packaging, logistics or marketing do not automatically disqualify it. Assess materiality and adjustment. Risk increases with manufacturing, material assembly, brand development, a unique network, complex regulation or proprietary customer relationships.
Time between purchase and resale matters. Long inventory periods incorporate financing, obsolescence and market risk. Identify who decides volume, markdowns and liquidation.
Internal comparable
A distributor buying similar products from independents or reselling under comparable conditions may offer an internal margin. Compare supplier, product, channel, customer, territory, volume, exclusivity and function.
A reference may also exist where the related supplier sells to independent distributors. Counterparty data should be available and verified. Do not select one favorable transaction.
The internal may be more reliable than public companies because terms and classifications are visible. However, third-party and controlled lines can share costs; prepare segmentation and consistent allocation keys.
External comparable
An external search requires functionally comparable distributors without material manufacturing or unique intangibles. Public accounts often lack comparable gross margins or classify costs differently. Review notes, policies and activities.
One company may include logistics in cost of sales while the tested party records it as operating expense. Recalculate only where data exist. Do not assume reclassifications.
Compare product and channel, but functional similarity may matter more where the method tolerates some product differences. Market, inventory, credit and marketing differences remain relevant.
Accounting bridge
| Component | Question | Control |
|---|---|---|
| Gross sales | Do they include taxes or intercompany sales? | Reconcile invoices |
| Returns | Same period and classification? | Credit notes |
| Discounts | Reduce revenue or become expense? | Policy and agreements |
| Product cost | Includes freight, duty or insurance? | Inventory bridge |
| Inventory change | Consistent valuation and obsolescence? | Stock ledger and reserves |
| Warranty | Cost of sales or operating? | Claims and policies |
| Marketing | Routine or intangible-building? | Budget and FAR |
| Gross margin | Same formula? | Recalculate |
Reconcile the segment to statements and returns. Maintain one definition for the tested party and comparables.
If gross margin depends on undocumented manual reclassifications, build the accounting bridge before applying resale price.
Distributor functional analysis
Document who selects products, negotiates customers, sets prices, approves discounts, plans inventory, funds credit, conducts marketing, manages returns and bears warranty. A limited-risk label does not replace decisions.
Identify warehouses, systems, sales force, licenses, data, relationships and working capital. Assess market, inventory, credit, currency and regulatory risks. Compare those elements with independents.
If Mexico develops the market or brand in a unique way, a routine gross margin may not reward it. Consider an adjustment, net method or another analysis.
Selecting the margin
The comparable margin may come from internal dealings, external companies or transaction-specific information. Apply the period and statistical rule under Article 180. Document range, median and adjustments.
Do not combine gross margins calculated over different bases. Verify net sales, cost and extraordinary items. A higher margin does not necessarily reflect more functions if purchase pricing or classification differs.
Test sensitivity to freight, discounts and warranty. If small reclassifications change the conclusion, reliability is limited.
Comparability adjustments
Potential adjustments address inventory, credit, volume, market, logistics or accounting differences. They require data and should improve reliability. Do not adjust away a real function that deserves remuneration.
A working-capital adjustment may address inventory and receivables, but resale margin already reflects some effects. Avoid double counting and explain the link between adjustment and formula.
Where external information does not permit gross adjustment, assess whether TNMM better tolerates the differences without assuming it does.
Applied case
Mexico buys appliances from a related party and sells to retailers. It warehouses, sells and provides routine warranty. A comparable line bought from third parties earns 22% gross margin but has shorter credit, no cooperative marketing and lower volume.
Build a line segment. Adjust credit if rate and term are reliable; identify marketing cost and product benefit; analyze volume through observed data. Compare the adjusted 22% with an external corroborative range.
If the analysis indicates an excessive purchase price, model the adjustment and effects. Review customs because goods are imported. Coordinate the counterparty, inventory and documentation.
Relationship with TNMM
Resale price tests gross margin; TNMM tests net margin. The former may isolate distribution remuneration before operating expenses, but requires high consistency. The latter may tolerate some gross classification differences, although operating expenses and functions can also distort it.
Do not select TNMM merely because databases provide net results. Document why gross margins are unreliable. Do not use resale price when speculative reclassifications dominate.
One method may be primary and another corroborative. Do not average their outcomes.
In-year operation
Translate target margin into purchase price or discount. Budget sales, cost, inventory and functions. Monitor margin by line monthly or quarterly.
Separate deviations caused by supplier price, mix, discount, currency, freight, obsolescence and warranty. Identify who controls each risk and correct process before year-end.
Set thresholds and approvals. Reconcile true-ups with customs, VAT, invoicing and the counterparty where relevant.
Common errors
- Applying the method to a distributor that materially transforms product.
- Selecting companies with manufacturing.
- Comparing gross margins with different classifications.
- Ignoring returns and discounts.
- Failing to segment controlled and uncontrolled lines.
- Treating unique marketing as routine.
- Using a net margin as though it were gross.
- Reclassifying public accounts without data.
- Skipping CUP review.
- Executing a true-up without customs analysis.
File and control
The Distributor Method Review includes FAR, product and channel, CUP, segments, accounting bridge, comparables, adjustments, range, calculation and execution. Retain formulas and sources.
A second reviewer recalculates sales, cost and margin, validates classifications and sample, and compares agreement with conduct. Operations approves functions; accounting the bridge; tax the method; customs the effects.
Diagnosing a gross-margin decline
A decline does not prove the purchase price is wrong. Separate unit, mix, resale price, discount, return, controlled cost, freight, duty, currency, inventory reserve and warranty variances. Compare budget, prior period and comparables. Link every material variance to a decision and risk.
If the local distributor chose discounts or accumulated inventory against policy, moving the entire difference to the supplier may contradict FAR. If the supplier changed price without a market or product change, the controlled charge may need correction. Document cause before the true-up.
Review new functions as well. Campaigns, technical personnel, installation or after-sales support may turn a routine profile into a more complex one. Merely increasing the historical margin is not enough; refresh characterization and method.
Designing the purchase-pricing policy
Translate the target into a clear formula: expected net sales, gross margin, included costs, frequency and adjustment mechanism. Define who updates lists, which exchange rate applies and how promotions, returns and obsolescence are treated.
The policy should avoid a circular process in which the purchase price is reset at year-end for any outcome. Establish ex-ante assumptions, monitoring bands and exceptions. Strategy changes need approval and evidence.
Stress-test high volume, devaluation, discount and low-demand scenarios. Confirm that the distributor retains resources for its functions and the supplier does not absorb risks it cannot control. Reconcile every update to invoicing, inventory and customs.
Related topics
- PT-017 through PT-019: FAR, comparability and method.
- PT-025: TNMM.
- PT-062: retail.
- PT-079: limited-risk distributor.
Comparable gross-margin bridge
Prepare a segmented statement from net sales to gross margin by product, channel and counterparty. Document discounts, returns, freight, warranties, promotions, inventory and cost classification. Compare accounting policies with each comparable; a distribution cost below gross margin in one company may sit in cost of sales at another.
Then connect the margin to actual functions: marketing, inventory, credit, warranty and market risk. Adjust only quantifiable differences. Test periods and sensitivity to reclassifications. If comparable gross data is inconsistent, acknowledge the limitation and evaluate another method.
The closing file retains the ledger, segmentation, allocation rules, comparable statements, adjustments and review. Operations confirms that the analysis describes the commercial model. This bridge avoids defending a statistically precise margin built on incompatible accounting classifications.
Sources and verification date
Before conclusion, reconcile gross profit by month and explain major movements caused by promotions, product mix, write-downs or launches. This temporal view tests whether the annual result masks inconsistent classification or a real business event. Record who validated each explanation and retain the supporting operational report.
- Mexican Income Tax Law, current text, Articles 179 and 180.
- OECD Mexico Transfer Pricing Country Profile.
- OECD Transfer Pricing Guidelines.
Sources checked on August 2, 2026. Application depends on FAR, comparability, gross data and accounting consistency.
Revalidate the analysis whenever the distributor changes channel, assumes a new commercial function or materially modifies its accounting classification.
Request a Distributor Method Review to validate profile, gross margin, accounting classification, comparables and translation into purchase price.