Transfer Pricing: Using the Comparable Uncontrolled Price Method

Abstract: The transfer price is the price set by two related parties when transferring products, services, etc between the parties. This thesis examines the Comparable Uncontrolled Price (CUP) method, one of the existing methods to price the transactions. The thesis is written from a Canadian perspective but because of the wide acceptance of the arm's length principle as the corner stone of transfer pricing, large parts of the content of the thesis should be applicable in other countries as well. The CUP method is the most accurate method to find a correct transfer price. OECD's transfer pricing guidelines, which are the number one transfer pricing source for the taxpayer, state that the transfer price should be set as if the parties were dealing at arm's length with the market forces deciding the price. The CUP method solves the pricing issue by finding a comparable transaction between unrelated parties and then using the price in that transaction as guidance on how to price the controlled transaction. There are two ways of finding comparables&semic 1) by examining another transaction of the same product made by one of the controlled corporations to an unrelated party (internal comparable) and 2) by examining a transaction between other independent parties (external comparable). Because of the complexity of international business the compared transactions rarely are exactly the same. For every existing economical relevant difference between the controlled and the comparable transaction adjustments are needed. The guidelines provide five categories of differences when adjustments are needed&semic functional, characteristics of the property, contractual terms, economical circumstances and business strategy. As the examined case law demonstrates it can be extremely complicated to make adjustments for differences between the transactions. If the differences are significant the accuracy of the comparison is jeopardized. Obviously the more and the bigger differences that exist the more difficult it becomes to apply the method. No particular guidance is provided in the guidelines on how to handle the differences and how far a taxpayer is supposed to go to be able to use the CUP method. The examined case law provides some patterns on when the method could be used. The best chance to use the CUP method is when it is a simple product transferred. It is fairly easy to find potential comparables, both internal and external. The taxpayer has therefore a better opportunity to use exactly the same product as in the comparable transaction which is crucial. If it is a complex product there is a large risk that no other transactions made by other parties exist and that the taxpayer is thus principally only left with the possibility to use internal comparables. In many cases no such comparables exist.