Transfer Pricing Methods: What is the CUP Method?

Businesses often face lengthy audits, fines, and operational issues when they cannot demonstrate that their prices align with market standards. When products or services are directly comparable, there is one method that brings clarity with less debate, i.e., the Comparable Uncontrolled Price (CUP) Method. It focuses on comparing the price of a controlled deal with the price of a similar deal between independent parties. If both match, the transaction is accepted as fair. If not, adjustments must be made.

Tax Gian allows you to choose the best TP method and ensure TP compliance with the expertise of our corporate tax agents in the UAE. 

What is the CUP Method?

The CUP method compares the price charged in a controlled transaction with the price in an uncontrolled transaction carried out under similar conditions.

• Controlled transactionmeans dealings between related companies, such as a parent and its subsidiary.
• Uncontrolled transactionmeans dealings between independent parties with no connection.

If the prices are the same or close, the transaction is considered at arm’s length. If there is a major difference, the controlled price should be adjusted to match the independent one.

This method is often seen as one of the most direct ways to test if transfer prices are fair.

Internal vs External CUP

There are two ways to apply the CUP method:

1. Internal CUP

This compares the controlled transaction with another transaction made by the same entity with an independent party.
Example: If a company sells the same product to both its subsidiary as well to an unrelated customer, the price to the unrelated customer can be used as an internal CUP (i.e. benchmark).

2. External CUP
   This compares the controlled transaction with a similar deal between two independent companies.
   Example:A market price published on a stock exchange may serve as an external reference.

For a deeper understanding of this method, you can also consult corporate tax agents in the UAE.

Importance of Comparability

For a price comparison to be valid, the following factors should be checked:

• Product similarity:Products should be identical or very close in nature and quality.
• Contract terms:Timing, credit, delivery, and volume should align.
• Economic conditions:Market level, location, and competition affect prices.
• Business functions:What role does each party play in the transaction?
• Risks taken:Who bears financial or operational risks?

If differences exist, adjustments must be made to bring the transactions closer together before comparing.

When CUP Works Best

The CUP method works well when:

• The product traded is standardized or listed, like commodities or securities.
• Market price data is publicly available.
• Companies sell identical products to both group entities and third parties.
• Reliable third-party data can be obtained from exchanges, databases, or industry reports.

This makes it highly effective in industries like oil, gas, metals, agriculture, and financial services. You can also get advice from corporate tax agents in Dubai.

Example of CUP Application

Consider a multinational headquartered in the UAE, Company S, which trades in listed securities.

• It sells securities worth AED 50 million (market value) to its subsidiary Company Tin another country for AED 22 million.
• The selling price is much lower than the market rate.

Using the external CUP method, the transaction is tested against the market value quoted on the UAE stock exchange. The arm’s length price should be AED 50 million.

The difference of AED 28 million is added back to Company S’ taxable income.

Limitations of the CUP Method

• Difficult to apply when products are customized.
• Adjustments may be complex if differences in terms or conditions exist.
• Data on third-party prices is not always available.

Because of these challenges, CUP is considered a strong method, but only where comparables are clear and accessible.

Why Businesses Should Care

For multinational groups, transfer pricing audits are becoming increasingly stringent worldwide. Authorities prefer methods that are backed by real market data. CUP stands out in this regard, since it relies on actual prices in open markets.

Using CUP wherever possible not only reduces disputes but also shows a taxpayer’s commitment to compliance. It provides a strong shield against claims of profit shifting. Talk to your corporate tax agents in Dubai today about employing the CUP method.

How can Tax Gian help?

The CUP method is one of the most practical ways to prove fair pricing in related party transactions. By comparing controlled deals with real market transactions, businesses can defend their positions with clarity. Tax Gian simplifies these concepts for businesses, enabling them to make informed decisions and comply more effectively with tax laws.