Comparable Uncontrolled Price Method

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

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

• 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.

Ilustration

• 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. 

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

• PT International sells the x500 brake pad to PT Pabrik Indonesia.

• PT International 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:

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

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

The right condition for CUP Method

• 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.

• 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.