INTM463020 - Transfer Pricing: OECD and methodologies

Comparable uncontrolled price

The comparable uncontrolled price ('CUP') is the simplest and most accurate of the OECD methods, if it is possible to apply it. The CUP method simply compares the price in the controlled transaction with the price in a comparable uncontrolled transaction. If there is a difference, then the commercial and financial relationship between the associated parties may mean the price is not at arm's length. The price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction.

An uncontrolled transaction can be said to be comparable to an controlled transaction if:

• There are no differences between the transactions being compared or between the enterprises entering into the transactions which could materially affect the price charged in the open market

• Where there are differences, reasonably accurate adjustments could be made to eliminate their effect.

Where you can find comparable uncontrolled transactions, then the CUP method is very reliable and is the preferred method of applying the arm's length principle.

Look for instances where the controlled party transacts in the same goods or services under the same circumstances and conditions with both a connected party and a third party: i.e. where the transactions are comparable. If the degree of comparability is acceptable and if the price to or from the controlled party is different, there may well be a transfer pricing problem.

See OECD Transfer Pricing Guidelines from Para 2.6 - 2.13.