An uncontrolled transaction refers to a commercial exchange between independent (unrelated and unassociated) enterprises, as opposed to a controlled transaction between affiliated companies.
Characteristics of Uncontrolled Transactions:
- Pricing and terms are determined through genuine bargaining of both parties at arm’s length.
- Comparability factors like functions performed, assets employed, and risks assumed can reliably be ascertained.
- Limited opportunities exist for related parties to artificially influence conditions to nonmarket outcomes.
Example:
Royalty payments agreed between unaffiliated software developers provided a useful comparable when benchmarking rates in a controlled transaction subject to audit.
Takeaways:
Uncontrolled transactions serve as valuable comparables for transfer pricing analyses due to their arm’s length reflections of commercial and economic realities. However, identifying suitable similarities remains challenging in specialized global industries.
