To CUP or Not To CUP: A Transfer Pricing Dilemma

The Comparable Uncontrolled Price (CUP) method has traditionally been a preferred transfer pricing method because it is considered by tax authorities and the OECD[1] as the most direct and reliable way to apply the arm’s length principle and price an intercompany transaction. In fact, many transfer pricing practitioners believe that CUP is king, where available and provided that it ticks all the comparability conditions.

For those unfamiliar with the CUP method, in a nutshell, this method compares the price for property or services in an intercompany transaction to the price of transactions entered between independent parties under comparable circumstances. The main difference between the CUP and other transfer pricing methods is that the later focus on the margins earned on a particular transaction rather than the price.

There are two ways of applying the CUP method, using internal of external data.

Internal CUP

Internal CUP requires comparable independent transactions entered by either party in the transaction under review with independent parties. For example, ACo purchases tyres from its parent company BCo. The Internal CUP method can be applied if the following data is available:

  1. ACo purchases similar tyres from other independent suppliers under comparable circumstances (i.e. similar contractual terms and market condition), or
  2. BCo supplies similar tyres to other independent customers under comparable circumstances (i.e. similar contractual terms and market condition)

More frequent than not, taxpayers overlooked the possibility of finding Internal CUP data and assumed that external CUP data using a database is the only option for applying the CUP method. However, the application of the Internal CUP method has its perks as it requires a detailed analysis of the comparability factors including strict similarity in the terms and conditions of the transactions being compared.

External CUP

External CUP requires independent transactions entered by independent parties (unrelated parties) in similar conditions to the intercompany transaction that is under review. External CUP data is generally sourced using specialised databases.

The external CUP is commonly used to price intercompany loans and transactions involving royalty payments. However, searching for external CUP data has its own challenges including the ability to find sufficient data that ‘ticks’ all the boxes in relation to comparability requirements.

Using the CUP method



If available, is the most direct and reliable way of applying the arm’s length principle.

It requires strict comparability as any difference between the tested transaction, and comparable transaction can affect the price (e.g. volumes, raw materials of the product, economic market).

It is a strong case in front of Tax Authorities if it ‘ticks’ all the comparability factors with a detailed comparability analysis.

It requires close monitoring and review of the prices and conditions of the tested transaction and comparable transaction to ensure that changes from one year to another do not affect the comparability analysis.

If Internal CUP data is available, it could be a more cost-effective option as the benchmarking analysis will not require performing a search using a database.

Finding data that can tick all the comparability requirements is a challenge, and it requires close investigation and analysis of the details of the transaction under review and the comparable transaction.

Recommended for testing intercompany loans and transactions involving royalty payments.

Availability of data is thin, especially when searching for external CUP data e.g. finding local comparables (for example sufficient loan data in Australia or South-East Asia), detailed data about the contracts.

Recently recommended by the OECD for transactions involving the transfer of commodities.

Key takeaways

The CUP method has a special place in any transfer pricing expert’s heart because, when applied correctly, it is a strong case, hard for tax authorities to challenge. If the analysis is performed properly, you can be certain that your transfer pricing risks are managed and minimised.

However, the application of the CUP method has a number of challenges that should be addressed when performing the transfer pricing analysis. Special attention should be paid to the comparability factors as any differences between the transaction under review, and the potential comparable data can affect the price. Also, close monitoring of the comparability factors is required from one year to another to ensure that the CUP analysis is appropriate over several years.

Despite the challenges, the CUP method (Internal or External) should be addressed and consider before jumping too quickly into other transfer pricing methods and overlooking potential CUPs that are worth investigating. Remember, when the CUP method is applied correctly, CUP is king.


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[1] Organisation for Economic Cooperation and Development