Comparable Uncontrolled Price Method
The Comparable Uncontrolled Price method compares the amounts charged in control-led transactions with amounts charged in comparable third party transactions. The CUP method provides the best evidence of an arm's length price. A CUP may arise where:
--the taxpayer or another member of the group sells the particular product, in similar quantities and under similar terms to arm's length parties in similar markets (an internal comparable);
--an arm's length party sells the particular product, in similar quantities and under similar terms to another arm's length party in similar markets (an external comparable);
--the taxpayer or another member of the group buys the particular product, in similar quantities and under similar terms from arm's length parties in similar markets (an internal comparable); or
--an arm's length party buys the particular product, in similar quantities and under similar terms from another arm's length party in similar markets (an external comparable).
Incidental sales of a product by a taxpayer to arm's length parties may not be indicative of an arm's length price for the same product transferred between non-arm's length parties, unless the non-arm's length sales are also incidental.
Transactions may serve as comparables despite the existence of differences between those transactions and non-arm's length transactions, if:
--the differences can be measured on a reasonable basis; and
--appropriate adjustments can be made to eliminate the effects of those differences.
Where differences exist between controlled and uncontrolled transactions, it may be difficult to determine the adjustments necessary to eliminate the effect on transfer prices. However, the difficulties that arise in making adjustments should not routinely preclude the potential application of the CUP method. Therefore, taxpayers should make reasonable efforts to adjust for differences. Adjustments likely to be required are for differences in:
--foreign currency risks;
The use of the CUP method precludes an additional allocation of related product development costs or overhead unless such charges are also made to arm's length parties. This prevents the double deduction of those costs-once as an element of the transfer price and once as an allocation.
For example, if CANCO manufactures and sells a product to USCO and a 3rd party, it should be sold at $10 each. If CANCO performs more activities for USCO than the 3rd party, CANCO should receive $11, a markup for the additional work done.
The above information comes from: