USA Chinese parent and US subsidiary Transfer Pricing Question

[jodiebobobo]

I have a client in US who is a subsidiary (S)of Chinese Parent(P) . Parents owns 100% of Subsidiary.

The subsidiary(S) wholesale inventory to US retailers. All the sale contracts are signed between the subsidiary and US retailers. But the subsidiary do not have any warehouses nor has any inventory on hand. All the inventory are all shipped directly from Chinese Parent to US retailers. They are actually act like a middle agent.

So my question is that when we file return for US subsidiary, The sale amount is no problem, but for the COGS, what profit margin is appropriate for this kind of company structure? The subsidiary has over $10,000,000 sales per year but the small office in US do not actually has much expense. The taxes if use usual arm length method is way too much.

In other words, literally they purchase inventory from parent, and sell to US retailer, should the parents sell inventory to them at a very high price so that they do not have too much net income in US? What is the appropriate accounting method to deal with this situation?

 

[jodiebobobo]

Usually people will ask why they create a company in US like this instead of direct sell from China to US retailer, the answer is that many US retailer only want to do business with US company instead of Chinese company.