The Uncontrolled Comparable Price Method

December 21, 2023

Transfer pricing, according to the Organisation for Economic Co-operation and Development – OECD Guidelines of July 2017, is: prices agreed for transactions between related companies both within the same country and between companies in different jurisdictions, transactions with companies in low or no taxation and non-cooperative jurisdictions are also considered within the scope of transfer pricing. These prices are important because they can affect the distribution of profits among the various divisions of a multinational company and, consequently, the taxes that each country can collect from that company.

Analyzing the agreed prices requires the selection of a methodology, among which are the Uncontrolled Comparable Price (NCCP), Incremental Cost Measure (C+), Resale Price Method (RP), Profit Sharing Method (MPU) and the Transactional Net Margin Method (NTM).

The PCNC Approach is to compare the price charged for goods or services transferred or rendered in a related-party transaction with the price charged for goods or services transmitted or rendered in a comparable unaffiliated transaction in comparable circumstances.

Having defined the NCCP, we will now address its advantages and disadvantages.

Advantages and Disadvantages of the App

PCNC is considered one of the preferred methods because it is the most direct and most widely accepted by international tax authorities and regulators, especially when the conditions of comparability are met and the reliability of the data used to apply the PCNC is demonstrated.

The OECD guidelines emphasize that two conditions must be met:

  1. none of the differences (if any) between the transactions to be compared can materially affect the price on the open market,
  2. It must be possible to reasonably apply adjustments that are sufficiently precise to eliminate the material effects of such differences.

When the information and comparables required to be able to use the PCNC are available, it provides a solid and transparent basis for establishing transfer pricing between related parties, which contributes to the reduction of risks of tax disputes and ensures greater compliance with international tax regulations.

This method can also be used to determine arm’s-length royalty rates for the use of an intangible or to determine an arm’s-length interest rate on a loan.

On the other hand, the disadvantages of applying this method are:

  • Availability of comparable data: At times, it can be difficult to find comparable transactions between unrelated parties that are truly similar in terms of features, quantity, quality, and conditions, making it difficult to make a direct and accurate comparison
  • Limited or Confidential Information: Information about transactions between unrelated parties is generally not publicly available or may be confidential. This makes it difficult to obtain accurate and relevant data to use in the method.
  • Changes in the market: Prices can fluctuate due to changes in the market, supply, and demand, making it difficult to find exact comparables at the right time and place.
  • Complexity of products or services: If the goods or services are highly specialized or unique, it may be difficult to find exact comparables, limiting the applicability of the method.

Possible Scenarios for Determining the Use of the PCNC Method

  1. Company X sells 100 tonnes of a product to its related party at 40 CUs per tonne, while it sells the same 100 tonnes at the same price to a third party. In this case, under the premise that the products are the same and the conditions are similar in terms of volume, contractual terms, credit conditions, among others, and that internal comparables could be obtained; we could determine that the internal comparables are robust and, consequently, accept the PCNC as the most appropriate method for analyzing the transaction in question. Complying with the arm’s length principle.
  2. Considering the same cases of sale to the related party of the previous example, now considering a difference in terms of volume (50 MT) and agreed price (46 CU) for the sale of the same product to independent third parties, only that the third party is sold 50 tons and the price per ton is 46 CU. In contrast to the previous example, in this case it is necessary to assess whether the differences in volume justify the differences in price (6 CU). If necessary, adjust, with the aim of ensuring that the operation complies with the arm’s length principle. In the event that such differences cannot be justified, this method should be discarded due to lack of similarity at the time of use and another method should be sought that can analyze the information obtained.

From all of the above, we conclude that the PCNC method offers significant advantages in terms of accuracy, speed, error reduction and efficiency, which makes it a highly beneficial option in the analysis of Transfer Pricing services.


Source: OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. OECD July 2017.