In this method, the total price of intangible incurred by the tested parties in transferring products and services to Associated Enterprises is measured and the sum of gross profit spot used by similar enterprises in comparable transactions with self-determining associated enterprises is determined. The sum of gross spot arrived at is used to take into account functional and other variation to determine ALP. The extra similarities in the functions, risks and property, the extra likely it is that the cost plus method will create an suitable estimation of an arm's length result. This method is generally used where semi finished products are transferred.
In common, for reason of apply a cost-based method, costs are divided into three categories:
Direct costs:- raw materials;
Indirect costs:- repair and maintenance which may be allot among several goods.
Operating expenses:- selling, general, and organizational expenses.
The cost plus method uses limits calculated after direct and indirect costs of goods. Correctly shaping cost under the cost plus method is important. Cost is typically calculated in agreement with accounting values that are usually accepted for that exacting industry in the region where the products are produced.
The cost base of the deal of the associated parties to which a mark-up is to be applied be calculated in the same way and returns comparable functions, risks, and properties as the cost base of the similar transactions. Where cost is not exactly resolute in the same way, both the mark-up and the transfer will be used.