Spain releases note on arm’s length range and benchmarking.

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On 25 February 2021, a note was released by the Spanish Tax Agency on number of practical issues relating to application of the arm’s-length range.

The note – which is based on the OECD transfer Pricing Guidelines, guidance on benchmark studies issued by the Joint Transfer Pricing Forum, and relevant Spanish case laws – answers the following questions

 

– How is the range of values determined?

– Is it possible to determine a range of values in which the figures are relatively equally reliable?

– How to proceed if a range is determined in which all figures are not relatively equally reliable?

– When should statistical tools be used to narrow the range?

– What should be done if there is a wide dispersion in the range?

– Where in the range should the value of the linked transactions be selected?

– When can the administration adjust the values used by the taxpayer in its controlled transactions covered by a range of values?

 

The note concludes that

– Any transfer pricing adjustment requires justification that the value declared by the taxpayer does not comply with the arm’s length principle.

– While in some cases it will be possible to determine a single figure as a more reliable benchmark to establish whether a transaction is at arm’s length, in many cases the application of the most appropriate valuation method will lead to a range of figures.

– In determining a range of arm’s length values, those transactions with a lower degree of comparability should be eliminated. Also, to the extent that comparability can be improved and where possible, comparability adjustments should be made for those values that require them. However, it is common for a lack of information to prevent such adjustments from being made.

– A range of values with a wide dispersion is often indicative of comparability defects in the values that determine the range and should lead to a more detailed analysis.

– After such refinements, a range of values could be obtained in which all results are very reliable and relatively equal. In this case, any point in the range complies with the arm’s length principle and therefore no adjustment is appropriate if the value reported by the taxpayer is within the range. If it is outside the range, the adjustment will take the value of the controlled transaction to the value that is closest within the range.

– In practice, the range will usually not comprise very reliable and relatively equal results. In this case, once the least comparable results have been eliminated, if there are still defects in comparability that cannot be identified or quantified (and therefore cannot be adjusted for), statistical tools are commonly used which, while not eliminating these defects in comparability, improve the reliability of the analysis. This is achieved by narrowing the range by using only those values between the 1st and 3rd quartiles.

– In this case, if the value declared by the taxpayer is within the arm’s length range (whether declared by the taxpayer and accepted by the government or determined by the government), no adjustments should be made.

– If, on the other hand, the value declared by the taxpayer is outside the range, the adjustment should generally be made to the median. This is unless, as expressly stated in EU doctrine, after a thorough analysis of the facts and circumstances of the case, there is justification for choosing another particular point in the range, with the burden of proof falling on the person seeking to assert that other point.

 

Click here for English translation

 

Spain Feb 2021 nota_rango_valores





Related Guidelines

  1. TPG2022 Chapter III paragraph 3.63Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional...
  2. TPG2022 Chapter III paragraph 3.62In determining this point, where the range comprises results of relatively equal and high reliability, it could be argued that any point in the range satisfies the arm’s length principle. Where comparability defects remain as discussed at paragraph 3.57, it may be appropriate...
  3. TPG2022 Chapter III paragraph 3.60If the relevant condition of the controlled transaction (e.g. price or margin) is within the arm’s length range, no adjustment should be made....
  4. TPG2022 Chapter III paragraph 3.58A range of figures may also result when more than one method is applied to evaluate a controlled transaction. For example, two methods that attain similar degrees of comparability may be used to evaluate the arm’s length character of a controlled transaction. Each...
  5. TPG2022 Chapter III paragraph 3.57It may also be the case that, while every effort has been made to exclude points that have a lesser degree of comparability, what is arrived at is a range of figures for which it is considered, given the process used for selecting...
  6. TPG2022 Chapter II paragraph 2.110See in particular paragraphs 3.18-3.19 for guidance on the tested party, paragraphs 3.55-3.66 for guidance on the arm’s length range, and paragraphs 3.75-3.79 for guidance on multiple year data....
  7. TPG2022 Chapter III paragraph 3.55In some cases it will be possible to apply the arm’s length principle to arrive at a single figure (e.g. price or margin) that is the most reliable to establish whether the conditions of a transaction are arm’s length. However, because transfer pricing...
  8. TPG2022 Chapter III paragraph 3.59Where the application of the most appropriate method (or, in relevant circumstances, of more than one method, see paragraph 2.12), produces a range of figures, a substantial deviation among points in that range may indicate that the data used in establishing some of...
  1. 2018: ATO Taxpayer Alert on Mischaracterisation of activities or payments in connection with intangible assets (TA 2018/2)The ATO is currently reviewing international arrangements that mischaracterise intangible assets[1] and/or activities or conditions connected with intangible assets. The concerns include whether intangible assets have been appropriately recognised for Australian tax purposes and whether Australian royalty withholding tax obligations have been met. Arrangements...
  2. OECD Publishes Manual on Bilateral Advance Pricing ArrangementOn 28 September 2022 OECD published a new manual for entering bilateral advance pricing arrangement (APA’s) which has been approved by the Inclusive Framework on BEPS, as well as all members of the FTA, on 6 July 2022. The Bilateral Advance Pricing Arrangement...

Related Case Law

  1. Spain vs “Benchmark SA”, November 2021, TEAC, Case No Rec. 4881/2019The tax authorities excluded some of the entities selected by the taxpayer in a benchmark study, as it considered that they did not meet the necessary comparability requirements, and also included some of the excluded entities, as it considered that they were comparable....
  2. Spain vs “SGGE W T Spanish branch”, January 2023, TEAC, Case No Rec. 00/07503/2020/00/00SGGE W T is a Spanish branch of SGG that carries out distribution and marketing activities related to the information technology network products and services. SGG is part of the KF group which “is an international group that provides solutions and services in...
  3. France vs SASU Menarini Diagnostics France, November 2023, CAA de Paris, Case No. 21PA06233SASU Menarini Diagnostics France (a French subsidiary in the Italian Menarini Group) buys and resells diagnostic equipment and products for self-diagnosis and laboratories. Since its creation it had recurring operating losses, despite the profitability of each business line and irrespective of sales trends,...
  4. Romania vs “A. Median S.R.L.”, May 2022, High Court, Case No 2946/2022In this case “A. Median S.R.L.” had appealed a decision of the court of first instance where the income had been determined to the median value. According to the company the median is not the only value corresponding to the market value, when...