When is the Comparable Uncontrolled Price Method most ideal?
As the UAE is now governed by corporate tax law, companies need to ensure that the goods and services sold between its divisions in a cross-border transaction are priced the same way they would be between unrelated companies. It means the prices should be at arm’s length in line with OECD’s transfer pricing guidelines. Companies need to choose the most appropriate transfer pricing method to prove that the prices are at arm’s length.
There are five transfer pricing methods that fall into two categories: traditional transaction methods and transactional profit methods. The traditional transaction method includes Comparable Uncontrolled Price (CUP) Method, Resale Price Method and the Cost Plus Method. The transactional profit methods include the Transactional Net Margin Method (TNMM) and Traditional Profit Split Method (TPSM).
In this blog, we will walk you through the complex nuances of the CUP method, specifically focusing on the transfer pricing circumstances that warrant the use of the CUP method. Once you have a general idea, the best transfer pricing advisers in Dubai can help you conduct an assessment. Let us dive in:
(You can get to know about all the five transfer-pricing methods in our previous blog and we will create a separate blog for the other TP methods subsequently).
What is the Comparable Uncontrolled Price method?
The CUP method, as per the OECD definition, compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable (similar) circumstances. If there is any difference between the two prices, this may indicate that the conditions of the commercial and financial relations of the associated enterprises are not at arm’s length and that the price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction. The CUP method is a particularly reliable method where an independent enterprise sells the same product as is sold between two associated enterprises.
Applicability of the CUP Method
OECD provides the following example to illustrate the use of the CUP method. Consider the case of an enterprise selling unbranded Colombian coffee beans of a similar type, quality, and quantity as those sold between two associated enterprises, assuming that the controlled and uncontrolled transactions occur at about the same time, at the same stage in the production/distribution chain, and under similar conditions.
If the only available uncontrolled transaction involved unbranded Brazilian coffee beans, it would be appropriate to inquire whether the difference in the coffee beans has a material effect on the price. For example, it could be asked whether the source of coffee beans commands a premium or requires a discount generally in the open market. Such information may be obtainable from commodity markets or may be deduced from dealer prices. If this difference does have a material effect on price, some adjustments would be appropriate. If a reasonably accurate adjustment cannot be made, the reliability of the CUP method would be reduced, and it might be necessary to select another less direct method instead.
When should MNEs choose the CUP method?
Companies may use the CUP method if they have access to reliable comparable data for uncontrolled transactions. The CUP method is well-suited for transactions involving commodities like raw materials, minerals, and agricultural products. These transactions often have established market prices, making it easier to identify comparable uncontrolled prices. Scenarios, where the CUP method makes sense, are listed below. Transfer pricing consultants in Dubai can help you further.
Standardized Products: The CUP method is particularly effective when dealing with standardized products that are widely traded in the open market. In such cases, identifying comparable transactions is relatively straightforward, and the method’s reliability is higher.
Services with Clear Benchmarks: When dealing with services that have well-defined industry benchmarks, such as routine IT services or administrative services, the CUP method can be effectively employed. Comparable service fees from independent transactions can serve as reliable benchmarks.
Commodity Transactions: The CUP method is well-suited for transactions involving commodities like raw materials, minerals, and agricultural products. These transactions often have established market prices, making it easier to identify comparable uncontrolled prices.
Existing Intellectual Property Licenses: In cases where an MNE is licensing existing intangible property, such as patents or copyrights, and comparable licenses for the same or similar intangibles are available, the CUP method can provide a clear basis for determining an arm’s length royalty rate.
Advantages of the CUP Method
Businesses need to analyse their circumstances while choosing the most appropriate transfer pricing method. Consultants providing transfer pricing services in Dubai can help you select the ideal transfer pricing method. The following are the pros of choosing the CUP method for determining the transfer price:
- CUP is the most direct method for finding arm’s length conditions, as it uses the market price.
- Most ideal where comparables date is available
- Highly suitable for commodity transactions, as these are often highly comparable and it’s relatively easy to find reliable comparables data.
- The CUP method provides you with a lot of evidence to present to tax authorities
Disadvantages of the CUP Method
Apart from its advantages, the CUP method bears some cons as well. Some of them are:
- In some cases, it may be difficult to find comparable uncontrolled transactions that meet the strict comparability criteria of the CUP method
- Making adjustments can minimise the reliability and accuracy of your analysis using the CUP method.
Hire the Best Transfer Pricing Consultants in Dubai, UAE
While the CUP method offers exclusive benefits in certain scenarios, it is crucial to get expert advice from corporate tax consultants in Dubai before choosing it. Tax Gian is one of the best companies offering bespoke transfer pricing services in Dubai, UAE. Our tax experts can analyse the circumstances and help you choose the best transfer pricing method.
Tax Gian’s team of tax experts in Dubai offers top-notch corporate tax advice for all businesses. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including tax solutions in Dubai, UAE to its clients globally. Contact us today for invaluable advice on any transfer pricing issue concerning your company.