Transfer Pricing Methods Explained – The CUP method

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Transfer Pricing Methods Explained – The CUP method.

This article is a series of article that aims to provide a background on transfer pricing methods.

In the previous article we articulated the differences between transactional and traditional methods while in this article we talk about the Comparable Uncontrolled Price method (or known as the ‘CUP” method) in detail.

What is the CUP method?

The CUP method is a well-established traditional transfer pricing approach. This method is used to determine the arm's length price for transactions between related parties, also known as controlled transactions.

The CUP method operates by comparing the price charged in a controlled transaction to the price charged in similar transactions between unrelated parties (known as ‘comparable transactions’).

How to apply the CUP method

The application of the CUP method involves the following two steps:

Step

In summary

Description

Identifying comparable transactions

The first step is to determine there are transactions between unrelated parties that are similar to the controlled transaction in terms of factors such as:

the nature of the goods or services;
functional analysis;
contractual terms;
business strategies; and
market and economic conditions.

Comparison of prices

Once comparable transactions have been identified, the next step is to compare the price charged in the controlled transaction with the prices charged in the comparable transactions. If the price charged in the controlled transaction falls within the range of prices charged in the comparable transactions, the controlled transaction is considered to be at arm's length.

What else shall I consider in applying the CUP method

The CUP method is at an advantage compared to other transfer pricing methods as it is relatively straightforward and easy to implement when data is readily available.

However, where there are limited or no comparable transactions available or where the controlled transaction is significantly different from the comparable transactions (i.e. in terms of the comparability factors mentioned above) then the CUP method can not be implemented in an effective manner.

Example

We provide an example below on how a CUP method could be applied.

Co A (based in US) and Co. B (based in Singapore) are related parties. Co. A sells goods to Co. B. Co. A also sells the same goods to unrelated customers based in Asia Pacific.

Co. A sales good to its unrelated customers that range between USD 90 to USD 110.

A comparison of the comparability factors is carried out between the controlled transaction and comparable transactions to determine whether the transactions are comparable.

In this scenario the transactions are considered to be comparable.

If the price charged to Co. B is within the range of the comparable transactions (USD 90 to USD 110 in this case), it can be considered to be at arm's length.

This is just one example of how the CUP method could be applied, and the specific details of the method would vary depending on the specific circumstances of the transaction.

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