The Comparable Uncontrolled Price "CUP" method compares the price charged for goods or services transferred in a controlled transaction with the price charged for goods or services in an uncontrolled transaction between comparable independent parties in similar circumstances. The CUP method is also sometimes used to determine reasonable royalties for the use of intangible assets. A CUP can use internal comparable transactions or external transactions.

Comparable Uncontrolled Price Method for Transfer Pricing

According to the Regulation of the Director General of Taxes Number 43, the right conditions for applying the comparable uncontrolled price (CUP) method are:

  1. The goods or services being transacted have identical characteristics in comparable conditions; or

  2. Conditions of a controlled transaction with an uncontrolled transaction with a high level of comparability or where accurate adjustments can be made to eliminate the effects of different factors in conditions.

The following is an illustration for transfer pricing transactions using the CUP method.

  1. The transfer pricing transaction is PT Pabrik Indonesia sell a set of brake pad model x500 to Global Manufacture Co Ltd (the parent company of PT Pabrik Indonesia). The brake pad model x500 manufactured by Global Manufacture Co company. 

  2. Global Manufacture also sells the x500 brake pad to PT MJCO.

  3. PT Internasional sells the x500 brake pad to PT Pabrik Indonesia.

  4. PT Internasional sells the x500 brake pad to PT TGS Nasional.

From the transactions above, the transaction that can be used as a comparable using the CUP Method for transfer pricing transactions of PT Pabrik Indonesia and the Global Manufacture Co, are as follows:

  1. Internal Comparable (Transaction number 2 - Global Manufacture with PT MJCO and Transaction number 3 - PT Internasional and PT Pabrik Indonesia)

  2. External Comparable (Transaction number 4, namely between PT International and PT TGS Nasional)

In the application of the CUP method, it is important to ensure that the products are comparable (i.e. in the case of the x500 brake pad), companies need to apply a more detailed comparison of transactions where transfer pricing transactions and transactions between independent parties are compared based on five comparison factors in a comparability analysis.

When applying the CUP Method, an independent party transaction is considered comparable to a controlled transaction if:

  1. There is no difference that will materially affect the prices in the transactions being compared; or

  2. Sufficiently accurate adjustments can be made to account for material differences between controlled and uncontrolled transactions.

In carrying out the comparability analysis, transactions between related parties and uncontrolled transactions should be compared based on comparability factors in the comparability analysis. The CUP method requires a transaction to find products and make adjustments to comparative transactions (paying attention to the aspects mentioned above.

The right conditions for the CUP method

The suitable conditions for the CUP method are as follows:

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  1. In cases where comparable uncontrolled transactions can be found, the CUP Method becomes a very reliable method to use in determining that a transfer pricing transaction has been carried out at an arm's length price. Companies should consider whether it is possible to find acceptable internal comparable and external comparable.

  2. External comparable may be difficult to find in practice unless the transaction involves a fairly general and homogeneous product or service.

The CUP method will be most useful if:

One of the related companies involved in the transaction is involved in a transaction between an independent party that is comparable to the independent company (i.e., internal comparable are available). In such a case, all relevant information about uncontrolled transactions is available and therefore it is likely that all material differences between controlled and uncontrolled transactions will be identified; and Transactions involve a commodity type product, but the differences between these products are small.

Director General of Taxes Regulation No. 32 of 2011 stipulates that internal comparators for incidental transactions (rare event) can only be used for comparison of transfer pricing transactions which are also incidental in nature.

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