Comparable Uncontrolled Price Method

Simple Method for Transfer Pricing of Tangible Goods Where Unrelated Party Transactions Are Available for Comparison

The comparable uncontrolled price method is perhaps the simpliest way of determining the arm's-length price for the sale of tangible goods between related parties, but it requires that there be similar transactions between unrelated parties to use for comparison. The method simply requires that the goods in question be standard enough to be sold on an open market. For this reason, patented products, or those containing trade secrets or other unique characteristics are not well-suited to this method, which is described in 26CFR 1.482-3(b) of the transfer pricing regulations:

(b) Comparable uncontrolled price method
(1) In general
The comparable uncontrolled price method evaluates whether the amount charged in a controlled transaction is arm's length by reference to the amount charged in a comparable uncontrolled transaction.
(2) Comparability and reliability considerations
(i) In general
Whether results derived from applications of this method are the most reliable measure of the arm's length result must be determined using the factors described under the best method rule in section 1.482-1(c). The application of these factors under the comparable uncontrolled price method is discussed in paragraph (b)(2)(ii) and (iii) of this section.
(ii) Comparability
(A) In general
The degree of comparability between controlled and uncontrolled transactions is determined by applying the provisions of section 1.482-1(d). Although all of the factors described in section 1.482-1(d)(3) must be considered, similarity of products generally will have the greatest effect on comparability under this method. In addition, because even minor differences in contractual terms or economic conditions could materially affect the amount charged in an uncontrolled transaction, comparability under this method depends on close similarity with respect to these factors, or adjustments to account for any differences. The results derived from applying the comparable uncontrolled price method generally will be the most direct and reliable measure of an arm's length price for the controlled transaction if an uncontrolled transaction has no differences with the controlled transaction that would affect the price, or if there are only minor differences that have a definite and reasonably ascertainable effect on price and for which appropriate adjustments are made. If such adjustments cannot be made, or if there are more than minor differences between the controlled and uncontrolled transactions, the comparable uncontrolled price method may be used, but the reliability of the results as a measure of the arm's length price will be reduced. Further, if there are material product differences for which reliable adjustments cannot be made, this method ordinarily will not provide a reliable measure of an arm's length result.
(B) Adjustments for differences between controlled and uncontrolled transactions
If there are differences between the controlled and uncontrolled transactions that would affect price, adjustments should be made to the price of the uncontrolled transaction according to the comparability provisions of section 1.482-1(d)(2). Specific examples of the factors that may be particularly relevant to this method include--
(1) Quality of the product;
(2) Contractual terms, (e.g., scope and terms of warranties provided, sales or purchase volume, credit terms, transport terms);
(3) Level of the market (i.e., wholesale, retail, etc.);
(4) Geographic market in which the transaction takes place;
(5) Date of the transaction;
(6) Intangible property associated with the sale;
(7) Foreign currency risks; and
(8) Alternatives realistically available to the buyer and seller.
(iii) Data and assumptions
The reliability of the results derived from the comparable uncontrolled price method is affected by the completeness and accuracy of the data used and the reliability of the assumptions made to apply the method. See section 1.482-1(c) (Best method rule).
(3) Arm's length range
See section 1.482-1(e)(2) for the determination of an arm's length range.
(4) Examples
The principles of this paragraph (b) are illustrated by the following examples.
Example 1 -- Comparable sales of same product
USM, a U.S. manufacturer, sells the same product to both controlled and uncontrolled distributors. The circumstances surrounding the controlled and uncontrolled transactions are substantially the same, except that the controlled sales price is a delivered price and the uncontrolled sales are made f.o.b. USM's factory. Differences in the contractual terms of transportation and insurance generally have a definite and reasonably ascertainable effect on price, and adjustments are made to the results of the uncontrolled transaction to account for such differences. No other material difference has been identified between the controlled and uncontrolled transactions. Because USM sells in both the controlled and uncontrolled transactions, it is likely that all material differences between the two transactions have been identified. In addition, because the comparable uncontrolled price method is applied to an uncontrolled comparable with no product differences, and there are only minor contractual differences that have a definite and reasonably ascertainable effect on price, the results of this application of the comparable uncontrolled price method will provide the most direct and reliable measure of an arm's length result. See section 1.482-3(b)(2)(ii)(A).
Example 2 -- Effect of trademark
The facts are the same as in Example 1, except that USM affixes its valuable trademark to the property sold in the controlled transactions, but does not affix its trademark to the property sold in the uncontrolled transactions. Under the facts of this case, the effect on price of the trademark is material and cannot be reliably estimated. Because there are material product differences for which reliable adjustments cannot be made, the comparable uncontrolled price method is unlikely to provide a reliable measure of the arm's length result. See section 1.482-3(b)(2)(ii)(A).
Example 3 -- Minor product differences
The facts are the same as in Example 1, except that USM, which manufactures business machines, makes minor modifications to the physical properties of the machines to satisfy specific requirements of a customer in controlled sales, but does not make these modifications in uncontrolled sales. If the minor physical differences in the product have a material affect on prices, adjustments to account for these differences must be made to the results of the uncontrolled transactions according to the provisions of section 1.482-1(d)(2), and such adjusted results maybe used as a measure of the arm's length result.
Example 4 -- Effect of geographic differences
FM, a foreign specialty radio manufacturer, sells its radios to a controlled U.S. distributor, AM, that serves the West Coast of the United States. FM sells its radios to uncontrolled distributors to serve other regions in the United States. The product in the controlled and uncontrolled transactions is the same, and all other circumstances surrounding the controlled and uncontrolled transactions are substantially the same, other than the geographic differences. If the geographic differences are unlikely to have a material effect on price, or they have definite and reasonably ascertainable effects for which adjustments are made, then the adjusted results of the uncontrolled sales may be used under the comparable uncontrolled price method to establish an arm's length range pursuant to section 1.482-1(e)(2)(iii)(A). If the effects of the geographic differences would be material but cannot be reliably ascertained, then the reliability of the results will be diminished. However, the comparable uncontrolled price method may still provide the most reliable measure of an arm's length result, pursuant to the best method rule of section 1.482-1(c), and, if so, an arm's length range may be established pursuant to section 1.482-1(e)(2)(iii)(B).
(5) Indirect evidence of comparable uncontrolled transactions
(i) In general
A comparable uncontrolled price may be derived from data from public exchanges or quotation media, but only if the following requirements are met--
(A) The data is widely and routinely used in the ordinary course of business in the industry to negotiate prices for uncontrolled sales;
(B) The data derived from public exchanges or quotation media is used to set prices in the controlled transaction in the same way it is used by uncontrolled taxpayers in the industry; and
(C) The amount charged in the controlled transaction is adjusted to reflect differences in product quality and quantity, contractual terms, transportation costs, market conditions, risks borne, and other factors that affect the price that would be agreed to by uncontrolled taxpayers.
(ii) Limitation
Use of data from public exchanges or quotation media may not be appropriate under extraordinary market conditions.
(iii) Examples
The following examples illustrate this paragraph (b)(5).
Example 1 -- Use of quotation medium
(i) On June 1, USOil, a United States corporation, enters into a contract to purchase crude oil from its foreign subsidiary, FS, in Country z. USOil and FS agree to base their sales price on the average of the prices published for that crude in a quotation medium in the five days before August 1, the date set for delivery. USOil and FS agree to adjust the price for the particular circumstances of their transactions, including the quantity of the crude sold, contractual terms, transportation costs, risks borne, and other factors that affect the price.
(ii) The quotation medium used by USOil and FS is widely and routinely used in the ordinary course of business in the industry to establish prices for uncontrolled sales. Because USOil and FS use the data to set their sales price in the same way that unrelated parties use the data from the quotation medium to set their sales prices, and appropriate adjustments were made to account for differences, the price derived from the quotation medium used by USOil and FS to set their transfer prices will be considered evidence of a comparable uncontrolled price.
Example 2 -- Extraordinary market conditions
The facts are the same as in Example 1, except that before USOil and FS enter into their contract, war breaks out in Countries X and Y, major oil producing countries, causing significant instability in world petroleum markets. As a result, given the significant instability in the price of oil, the prices listed on the quotation medium may not reflect a reliable measure of an arm's length result. See section 1.482-3(b)(5)(ii).

Here is a pdf of the complete regulations: 26 CFR 1.482.

The comparable uncontrolled price method — including when it is the best method — its further discussed in the following articles:

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