We have several international subsidiaries setup to serve as sales offices. In setting these up we evaluated whether to set them up as resellers (they purchase the product from us and sell to customers) or as cost-plus entities (they are basically a service entity and get a fixed margin).
In the end we decided to set these up as cost-plus entities because we were not sure they could generate a profit as resellers which would cause a problem with the foreign tax authorities.
When a large company does this they will do a transfer pricing study (or have an accounting firm do one) to determine the right cost-plus structure to use but we don't want to go to that expense so we constantly worry about whether the "plus" we're using is ok. In some countries it seems like 5% is OK in others we're using 7% and it raises concerns with our accountants.
Does anyone have experience creating their own rationale for justifying their cost-plus basis? Or, does anyone have a sample transfer pricing study for software?
It depends on how competitive the markets are... The US market for example is more competitive then the European market which means that higher prices can be charged over seas...
Also, these terms are to be negotiated with your subs... If both sides agree to a price, then by definition it is a fair price.
If you have more of the product then you can sell locally, or that your margins abroad are better then the local ones, then it makes sense to use subs and sell internationally. You should sell where it is most profitable once you take into consideration the strategic value of selling to other markets. By strategic value I mean that there is an added value to selling in some markets. If for example you managed to sell electronics in Japan, then advertising that you can sell to the Japanese is valuable, since they are known for being very demanding customers for electronics and that it is very hard for foreigners to sell there. If you managed to do that, it could increase your local sales as well.
Why are the accountants concerned?
According to tax treaties, having a sales man on site is not enough to be considered a permanent presence for income tax purposes. Just make sure there is a tax treaty between your country and the country your sales person is in. Why do you not consider the foreign site as an all loss expenditure. And all sales are made from the main office and exported to the country of sale.