3.2 Comparable Uncontrolled Price Method (CUP)

3.2 Comparable Uncontrolled Price Method (CUP)

The CUP method is the most direct way of ascertaining an arm's length price. It compares the price charged for a property or services transferred in a controlled transaction to the price charged for a property or services transferred in a comparable uncontrolled transaction, in comparable circumstances. A difference between the two prices may be an indication that the conditions of the commercial and financial relations of the associated persons are not arm's length, and that the price in the uncontrolled transaction may need to substitute for the price in the controlled transaction.

The method is ideal only if comparable products are available or if reasonably accurate adjustments can be made to eliminate material product differences. Other methods will have to be considered if material product differences cannot be adjusted to give a reliable measure of an arm's length price

A MNE using the CUP method to determine its transfer price must first identify all the differences between its product and that of an independent person. The MNE must then determine whether these differences have a material effect on the price, and adjust the price of products sold by the independent person to reflect these differences to arrive at an arm's length price.

A comparability analysis under the CUP method should consider amongst others the following:

  1. Product characteristics such as physical features and quality.
  2. If the product is in the form of services, the nature and extent of such services provided.
  3. Whether the goods sold are compared at the same points in the production chain.
  4. Product differentiation in the form of patented features such as trademarks, design, etc.
  5. Volume of sales if it has an effect on price.
  6. Timing of sale if it is affected by seasonal fluctuations or other changes in market conditions.
  7. Whether costs of transport, packaging, marketing, advertising, and warranty are included in the deal.
  8. Whether the products are sold in places where the economic conditions are the same.

Example 1

Taxpayer A, a MNE, sells 60% of its product to an associated company B, at a price of RM100 per unit. At the same time, the remaining 40% of that product is sold to an independent enterprise C at RM150 per unit


The products sold to B and C are the same, and the transaction between A and C may be considered as a comparable uncontrolled transaction. However, a functional analysis of B and C must first be carried out to determine any differences. If there are differences, adjustments must be made to account for these differences. Adjustments must also be made to account for product quantity discounts since volume of sales to B and C are different. Assuming there are no material differences that require adjustments to be made, the CUP method may be applied using the unit price of RM150 as a comparable arm's length price.

Example 2


Manufacturer A exports its product to associate company B. Manufacturer X exports the same product, in similar quantities and under similar terms to company Z, an independent party operating in similar markets as B. The uncontrolled sales price is a delivered price whereas the controlled sales are made FOB factory. These differences in terms of transportation and duties have an effect on price. Therefore, adjustments should be made on the uncontrolled transaction to eliminate the differences.

Selling price X to Z   RM 150
Adjustment for freight RM 10  
Adjustment for duties
RM 5
Total adjustments   (15)
Arm's length price A to B   RM 135