CUP – Comparable uncontrolled price

CUP stands for comparable uncontrolled price (“CUP”). The CUP method is one of the five methods suggested in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”) to calculate an arm’s length prices for a controlled transaction. The CUP is a traditional transaction method which means that it will compare uncontrolled transaction prices, or other less direct measures such as gross margins on uncontrolled transactions, with the same measures on the controlled transactions under review. A transactional profit method, on the other hand, examines the overall net operating profits that arise from intercompany transactions under review.

The OECD Guidelines prescribes that the CUP method is the preferred method to use for determining at arm’s length prices for controlled transactions in case it is equally reliable to apply in relation to other pricing methods.

There are two possibilities in applying the CUP method, through an internal CUP and an external CUP. The internal CUP compares the conditions of comparable transactions between the taxpayer itself and an unrelated party and the external CUP compares the conditions of comparable transactions between two unrelated parties. However, it should be noted that for the application of the CUP method in general, a high degree of comparability is needed between the transaction under review and the comparable uncontrolled transaction. In this respect, the OECD Guidelines have listed five comparability factors that should be taken into consideration when determining if uncontrolled transaction is comparable to a controlled transaction: characteristics of the product or service, functional analysis, contractual terms, economic circumstances and business strategies.