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HMRC internal manual

International Manual

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Transfer pricing: Methodologies: OECD Guidelines: Comparable uncontrolled price: Commodity Transactions

CUP method for transfers of “commodities”

 

The OECD Transfer Pricing Guidelines include, at paragraphs 2.16A to 2.16E, particular guidance on the use of the CUP method for establishing the arm’s length price for the transfer of commodities between associated enterprises.

 

“Commodities” in this context means physical products for which a quoted price is used as a reference to set prices in uncontrolled transactions.

 

“Quoted price” refers to the price of the commodity obtained from a commodity exchange market, recognised price reporting or statistical agency or governmental price-setting agency.

 

Economically relevant characteristics

 

Consideration of the economically relevant characteristics of the controlled transaction and those of the transaction(s) from which a quoted price is obtained is as important as with any other potential comparable (see guidance from INTM485022 onwards)

 

Some of the factors that may be particularly relevant with regard to quoted prices for commodity transactions are:

 

  • physical features and quality of the commodity
  • volumes being traded
  • period of the arrangements between the parties
  • timing and terms of delivery (see also ‘Pricing date’ below)
  • timing and terms of delivery, transportation, insurance, foreign currency exchange fluctuations etc

 

Other entities within the supply chain

 

It is important that other associated enterprises within the supply chain from the enterprise carrying out the extraction of the commodity to that supplying the commodity to an independent party are appropriately remunerated for the functions performed, assets used and risks assumed by them.

 

Pricing date

 

A particularly relevant comparability factor for commodity transactions is the pricing date; that is the specific time, date or time period (where an average is used) of the quoted prices used as a basis to determine the price of the transaction.