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HMRC internal manual

International Manual

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Transfer pricing: Methodologies: OECD Guidelines: Comparable uncontrolled price

Use of CUP method

Although no absolute hierarchy now exists within the OECD Transfer Pricing Guidelines, traditional transactional methods (see INTM421010) are regarded as the most direct way of establishing whether conditions between associated enterprises are arm’s length. The Guidelines say that where the comparable uncontrolled price (‘CUP’) and another pricing method can be applied in an equally reliable way, the CUP method should be preferred (paragraph 2.3 of the Guidelines).

The CUP method is the simplest and most accurate of the OECD methods, if it’s possible to apply it. It simply compares the price in the controlled transaction with the price in a comparable uncontrolled transaction. If there is a difference, then the commercial and financial relationship between the associated parties may mean the price is not at arm’s length. The price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction.

An uncontrolled transaction can be said to be comparable to a controlled transaction if:

  • there are no differences between the transactions being compared or between the enterprises entering into the transactions which could materially affect the price charged in the open market,

and, where there are differences,

  • reasonably accurate adjustments can be made to eliminate their effect.

Where comparable uncontrolled transactions can be found, such that the CUP method can be applied in a greater or equally reliable manner as other methods, CUP is the preferred method of applying the arm’s length principle: see the OECD Transfer Pricing Guidelines at paragraph 2.3. However, identifying good, reliable comparable uncontrolled transactions can sometimes be difficult in practice, as was demonstrated in the particular circumstances in DSG Retail Ltd and others v HMRC (TC00001) - see INTM421040.

Look for instances where the controlled party transacts in the same goods or services under the same circumstances and conditions with both a connected party and a comparable third party: i.e. where the transactions are comparable. If the degree of comparability is acceptable but the price to or from the controlled party is different, there may well be a transfer pricing problem.

See the OECD Guidelines from paragraphs 2.13 to 2.20.