Which method is commonly used to establish arm's length transfer pricing?

• A. Comparable Uncontrolled Price (CUP) method
• B. Random internal pricing
• C. Cost-plus method only
• D. Look-through method

Answer: (A)

Comparing prices in independent market transactions is the principle behind arm’s length transfer pricing. The Comparable Uncontrolled Price method uses the actual price charged in a comparable transaction between unrelated parties under similar terms and conditions, and uses that price as the benchmark for the related-party transaction. It’s the most direct and objective approach because it reflects what independent buyers would pay in the open market, provided suitable comparables exist. When you can find a close match—same product or service, similar contract terms, geography, and risk profile—the resulting price is a strong, credible indicator of arm’s length value. Of course, data gaps require careful adjustments for differences, but the method is widely favored for its reliance on actual market data.

Generic internal pricing has no external benchmark and doesn’t demonstrate arm’s length behavior. The cost-plus method, while useful in certain situations, depends on production costs plus a markup and isn’t the default, universally preferred method when good comparables are available. The look-through approach isn’t the standard method for establishing transfer prices in most regimes; it’s used in more specialized analyses rather than as the primary pricing method.