SGGE 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 the Information Technology (IT) sector, starting its activity in . .. as a distributor of access and communications networks”. The group “is the result of several corporate operations, mainly company acquisitions and mergers carried out to increase its share in world markets” and “is mainly organized in three divisions (SGG, QR and …) according to the IT areas (Technology, Integration and Consulting) in which they operate”. Following an audit of FY 2015 and 2016 the tax authorities issued assessments of additional income to the Spanish branch. One of the issues identified was SGGE’s remuneration for its sales and marketing activities. According to the tax authorities, the income of the Spanish branch was below the lower quartile of the range established under the TNMM. On this basis, the income was adjusted to the median. The tax authorities had also disallowed deductions for the cost of intra-group services. An appeal was filed by SGGE W T. Judgement of the Court The Court partially upheld and partially dismissed the appeal. Excerpt from the judgement concerning IQR and Median “Thus, this Court only appreciates, from the motivation of the Inspection, that there would be -according to the assessment- some defects of comparability that persist, unavoidable as a consequence of the selection process of comparable elements through databases, and of the limits of the available information, but it is not detailed what errors or circumstances concur in the selection of the comparable elements or what limits the available information has. It should be noted that when the Inspectorate, as transcribed above, refers to the fact that there are still defects in comparability, given that the resulting range does not include relatively equal results, it adds, paraphrasing the Guidelines, that these are defects that cannot be identified and quantified. Rule 3.57 of the OECD Guidelines – also transcribed above – refers to defects in comparability that cannot be identified or quantified and are therefore not susceptible to adjustment. Notwithstanding the foregoing, regardless of the possibility of identifying or quantifying such defects, the choice of the median, provided for in rule 3.62 of the OECD Guidelines, requires – as clearly stated by the Audiencia Nacional and this TEAC – that the Inspectorate must disclose the defects of comparability, and reasons must be given for the defect or defects of comparability that are found to persist and that cause the range not to include very reliable and relatively equal results. We have seen that when section 3.57 of the Guidelines refers to defects that cannot be identified or quantified, it immediately links it to the fact that this makes a specific adjustment impossible. This is perfectly logical, because if they could be concretely identified and quantified, the adjustment would be feasible. It is one thing if they cannot be identified in the sense of being precisely specified and quantified so that they can be adjusted or corrected, and another if elements or areas are detected which, due to their special circumstances or lack of documentation, allow us to conjecture that there is still a deficiency in comparability that cannot be corrected, for which reason there is no other recourse but to resort to the median. Therefore, the mere appeal to this generic reference cannot be considered sufficient; otherwise, the requirement to state reasons that the Audiencia Nacional and this TEAC maintain would be sterile. At the very least, it should be explained what errors or failures in the process of selecting comparables, or what limitations in the information available, determine, as a consequence, that there are such unidentifiable or unquantifiable defects in comparability. In the present case, the reasoning contained in the assessment notification -page 148- only talks about defects that are a consequence of the selection process and the limitations of the available information, but does not detail any aspects that could allow this reviewing body to assess which are the specific circumstances of the selection process that allow to consider that it will lead to unidentifiable or quantifiable defects of comparability; nor the specific circumstances of the available information from which it can be extracted that the limitations of the same (not identified by the Inspection in the aforementioned motivation) will lead to unidentifiable or quantifiable defects of comparability. Likewise, it is striking that the Inspection refers to defects derived from the process of selection of comparables when, in the Fourth Ground of Law of the agreement, in response to allegations, a table is drawn up in which five entities selected by the Inspection, which are the object of allegations by the taxpayer, are eliminated from the comparables, indicating that “the interquartile range derived from the remaining entities would not offer values very different from those resulting from the entities taken by the Inspection”. Also noteworthy is the statement made on page 209 of the contested resolution in which, in response to the allegation that the services of one of the comparable entities (…, S.A.) represent around 40% and 49% of the total income, in 2015 and 2016, respectively, it is stated that this “in no way implies that in all the other entities selected as comparable by the inspection this same circumstance is present”, indicating that in case it were so (that the percentage of 40% or 49% of the income from the provision of services were present in the other entities) “in no way would invalidate the sample of entities selected by the inspection since they are entities that carry out activities similar to those of the obligor and that constitute the best possible comparable”. It is striking that the Inspectorate states that the selected entities “constitute the best possible comparable” and that, nevertheless, the adjustment is based on the choice of the median “as the point in the range that ...

Section 1.482-1(e)(3), applied as modified by this paragraph (g)(2)(ix), determines when the Commissioner may make an adjustment to a PCT Payment due to the taxpayer’s results being outside the arm’s length range. Adjustment will be to the median, as defined in § 1.482-1(e)(3). Thus, the Commissioner is not required to establish an arm’s length range prior to making an allocation under section 482 ...

If there are two or more variable input parameters, then under the applicable method, the arm’s length range of PCT Payments is the interquartile range, as described in § 1.482-1(e)(2)(iii)(C), of the set of PCT Payment values calculated iteratively using every possible combination of permitted choices of values for the input parameters. For input parameters other than a variable input parameter, the only such permitted choice is the single most reliable value. For variable input parameters, such permitted choices include any value that is – (i) Based on one of the observations described in paragraph (g)(2)(ix)(C) of this section; and (ii) Within the interquartile range (as described in § 1.482-1(e)(2)(iii)(C)) of the set of all values so based ...

If there is exactly one variable input parameter, then under the applicable method, the arm’s length range of PCT Payments is the interquartile range, as described in § 1.482-1(e)(2)(iii)(C), of the set of PCT Payment values calculated by selecting – (i) Iteratively, the value of the variable input parameter that is based on each observation as described in paragraph (g)(2)(ix)(C) of this section; and (ii) The single most reliable values for each other input parameter ...

If there are no variable input parameters, the arm’s length PCT Payment is a single value determined by using the single most reliable value determined for each input parameter ...

For purposes of applying this paragraph (g)(2)(ix), each input parameter is assigned a single most reliable value, unless it is a variable input parameter as described in paragraph (g)(2)(ix)(C) of this section. The determination of the arm’s length payment depends on the number of variable input parameters ...

For some market-based input parameters (variable input parameters), the parameter’s value is most reliably determined by considering two or more observations of market data that have, or with adjustment can be brought to, a similar reliability and comparability, as described in § 1.482-1(e)(2)(ii) (for example, profit levels or stock betas of two or more companies). See paragraph (g)(2)(ix)(B) of this section ...

An applicable method may determine PCT Payments based on calculations involving two or more parameters whose values depend on the facts and circumstances of the case (input parameters). For some input parameters (market-based input parameters), the value is most reliably determined by reference to data that derives from uncontrolled transactions (market data). For example, the value of the return to a controlled participant’s routine contributions, as such term is defined in paragraph (j)(1)(i) of this section, to the CSA Activity (which value is used as an input parameter in the income method described in paragraph (g)(4) of this section) may in some cases be most reliably determined by reference to the profit level of a company with rights, resources, and capabilities comparable to those routine contributions. See § 1.482-5. As another example, the value for the discount rate that reflects the riskiness of a controlled participant’s role in the CSA (which value is used as an input parameter in the income method described in paragraph (g)(4) of this section) may in some cases be most reliably determined by reference to the stock beta of a company whose overall risk is comparable to the riskiness of the controlled participant’s role in the CSA ...

The guidance in § 1.482-1(e) regarding determination of an arm’s length range, as modified by this section, applies in evaluating the arm’s length amount charged in a PCT under a transfer pricing method provided in this section (applicable method). Section 1.482-1(e)(2)(i) provides that the arm’s length range is ordinarily determined by applying a single pricing method selected under the best method rule to two or more uncontrolled transactions of similar comparability and reliability although use of more than one method may be appropriate for the purposes described in § 1.482-1(c)(2)(iii). The rules provided in § 1.482-1(e) and this section for determining an arm’s length range shall not override the rules provided in paragraph (i)(6) of this section for periodic adjustments by the Commissioner. The provisions in paragraphs (g)(2)(ix)(C) and (D) of this section apply only to applicable methods that are based on two or more input parameters as described in paragraph (g)(2)(ix)(B) of this section. For an example of how the rules of this section for determining an arm’s length range of PCT Payments are applied, see paragraph (g)(4)(viii) of this section ...

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Arm’s length range consists of all the results. (i) The facts are the same as in Example 1. Applying the resale price method to the four uncontrolled comparables, and making adjustments to the uncontrolled comparables pursuant to § 1.482-1(d)(2), the district director derives the following results: Comparable Result (price) 1 $44.00 2 45.00 3 45.00 4 45.50 (ii) The district director determines that data regarding the four uncontrolled transactions is sufficiently complete and accurate so that it is likely that all material differences between the controlled and uncontrolled transactions have been identified, such differences have a definite and reasonably ascertainable effect, and appropriate adjustments were made for such differences. Accordingly, if the resale price method is determined to be the best method pursuant to § 1.482-1(c), the arm’s length range for the controlled transaction will consist of the results of all of the uncontrolled comparables, pursuant to paragraph (e)(2)(iii)(A) of this section. Thus, the arm’s length range in this case would be the range from $44 to $45.50 ...

On 24 May 2022, the Italian Tax Agency (Agenzia delle Entrate) released CIRCULAR NO. 16/E containing operational instructions on issues relating to application of the arm’s length range. The circular – which is based on the OECD transfer Pricing Guidelines, guidance on benchmark studies issued by the Joint Transfer Pricing Forum, and relevant Italian case laws – provides operational instructions regarding the correct interpretation of the notion of “arm’s length range”, as also specified in Article 6 of the Decree of 14 May 2018, when applying the provisions set forth in Article 110, paragraph 7, of the Consolidated Income Tax Act or of the provisions contained in the Double Taxation Treaties entered into by Italy in accordance with Article 9 of the OECD Model Convention. The operational instructions concludes as follows the correct application of the most appropriate transfer pricing method may, instead of a single value, lead to a range of values all complying with the arm’s length principle; in such cases, the full range of values within the arm’s length range may be used if all the transactions identified in the range are equally comparable; if, on the other hand, some of the transactions within the range show defects of comparability that cannot be reliably identified or quantified and, therefore adjusted, the use of ‘statistical tools’ (in order to strengthen their reliability) and a value within the narrow range is preferable. Recourse, on the other hand, to a value as central as possible within the range (also in order to minimise the risk of error due to the presence of such defects) must be limited to cases in which the range does not include values characterised by a sufficient degree of comparability even to consider reliable any point within the narrow range by means of statistical tools and must, in any case, be specifically justified; Therefore, it will be the responsibility of the Offices to resort to the “full range” for the purpose of identifying the arm’s length range only in those cases in which a perfect comparability of all the observations of the set with the “tested party” can be discerned. In conclusion, in recalling once again that according to the OECD Guidelines the identification of a set of values could be symptomatic of the fact that the application of the arm’s length principle allows in certain circumstances to reach only an approximation of the conditions that would have been established between independent enterprises, it is recommended that the adjustments involving the identification of the point that best satisfies the arm’s length principle within the range be argued in detail. Click here for English translation Click here for other translation Italy Circolare N. 16 del 2022 intervallo di libera concorrenza vers 20 05 2022_ ...

Promgas s.p.a. is 50% owned by the Italian company Eni s.p.a. and 50% owned by the Russian company Gazprom Export. It deals with the purchase and sale of natural gas of Russian origin destined for the Italian market. It sells the gas to a single Italian entity not belonging to the group, Edison spa, on the basis of a contract signed on 24 January 2000. In essence, Promgas s.p.a. performes intermediary function between the Russian company, Gazprom Export (exporter of the gas), and the Italian company, Edison s.p.a. (final purchaser of the gas). Following an audit for FY 2005/06, the tax authorities – based on the Transaction Net Margin Method – held that the operating margin obtained by Promgas s.p.a. (0.23% in 2025 and 0.06% in 2006) were not in line with the results that the company could have achieved at arm’s length. Applying an operating margin of l.39% resulted in a arm’s length profit of €4,227,438.07, for the year 2005, which was €3,426.803.00 higher than the profit declared by the company. Promgas s.p.a. appealed against the notice of assessment, which was upheld by the Provincial Tax Commission of Milan, with sentence no. 356/44/11, notified on 23/12/2011. The tax authorities then filed an appeal with the Regional Tax Commission of Lombardy which upheld the the tax authorities main appeal and rejected the company’s cross appeal. Promgas s.p.a. then filed an appeal with the Supreme Court Judgement of the Supreme Court The Supreme Court remanded the cast to the Regional Tax Commission of Lombardy Excerpts “…. 8.1. The failure to examine the facts put forward by the taxpayer company to oppose the set of comparables identified by the Revenue Agency resulted in a defect in the overall reasoning of the contested judgment, as denounced by the appellant company in its fifth and sixth grounds of complaint. 8.2. As is clear from the criteria indicated in the OECD Guidelines referred to above, in order for the application of the TNMM to be reliable, it is necessary to conduct an analysis of comparability that passes through the two moments of the choice of the tested party and the identification of the comparable companies, an identification that, under free market conditions (arm’s length principle), presupposes a “comparison” (internal or external) between the tested party and comparable companies that satisfies the five factors of comparability indicated by the OECD criteria (characteristics of goods and services functional analysis; contractual terms underlying the intra-group transaction; business strategies; economic conditions). It is through such a comparison that the factors that may significantly influence the net profit indicators (see paragraph 7.9 below) are identified on the basis of the facts and circumstances of the case. 8.3. Indeed, the reliability of such a method, according to the prevailing practice and interpretation, must pass through the following steps – selection of the tested party for the analysis; – determination of the financial results relating to the controlled transactions – selection of the investigation period; – identification of comparable companies; – accounting adjustments to the financial statements of the tested party and differences in accounting practices, provided that such adjustments are appropriate and possible; – assessment of whether adjustments are appropriate or necessary to take account of differences between the tested party and the identified comparable companies in terms of risks assumed or functions performed; – selection of a reliable profitability profit level indicator (so-called Profit Leverage/ Indicator, or PLI). 8.4. The CTR’s failure to verify the circumstances alleged by the taxpayer, resulted, in essence, in the pretermission of the comparability analysis for the selection of the TNMM applied to the case, and thus, of the procedure for the identification of comparable transactions and the use of relevant information to ensure the reliability of the analysis and the compliance of the PLI, or PLI, with the principle of free competition, or rather, the reliability of the selected TNMM. 9. The seventh ground of appeal – alleging breach of Article 6(1) of Legislative Decree 18/12/1997, no. The seventh ground of appeal – which alleges infringement of Article 6(1) of Legislative Decree No 472 of 18 December 1997, on the ground that the Regional Tax Commission held that the financial penalties applied by the Tax Office were lawful, erroneously excluding the existence of a ground of non-punishability, without specifically verifying the percentage of discrepancy between the amount declared by the company (0.23%) and the amount assessed by the Administration (1.39%) – is considered to be absorbed by the acceptance of the fifth and sixth grounds of appeal. 10. In conclusion, the appeal must be upheld limited to the fifth and sixth grounds of appeal, with absorption of the seventh and dismissal of the remainder. The judgement must be set aside in relation to the upheld grounds, with a reference back to the CTR, in a different composition, for a new examination of the merits of the dispute from the point of view of the standards of comparability relating to the method chosen and the penalty profile also in the light of the more favourable ius superveniens.” Click here for English translation Click here for other translation Italy-Sez-5-Num-15668-Anno-2022- ...

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis based on the resale price minus method. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low, and on that basis an assessment was issued. A complaint was filed by Avery Dennison with the Tax Tribunal and in March 2021 the Tribunal issued a decision in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” An appeal was then filed by the tax authorities. Judgement of the Court of Appeal The Court upheld the decision of the Tax Tribunal and set aside the assessment issued by the tax authorities. Excerpts “(…) Fourth: That the OECD regulations – while article 38 of the LIR was in force – should be understood as a guide with indications or suggestions for determining prices assigned between related parties with respect to those charged between independent parties. The aim is to eliminate distortions that may arise between companies with common ownership and to respect market rules. Notwithstanding the above recognition, Article 38 of the LIR regulated transfer prices and even though its normative content was minimal and insufficient to provide an adequate response on the matter, its text must be followed for the purposes of resolving the conflict in question, especially if one considers that the third paragraph of the provision states that when prices between related companies are not in line with the values charged between independent companies for similar transactions, “the Regional Directorate may challenge them, taking as a reference basis for such prices a reasonable profitability for the characteristics of the transaction, or the production costs plus a reasonable profit margin. The same rule shall apply with respect to prices paid or owed for goods or services provided by the parent company, its agencies or related companies, when such prices do not conform to normal market prices between unrelated parties, and may also consider the resale prices to third parties of goods acquired from an associated company, minus the profit margin observed in similar operations with or between independent companies”. The following paragraph adds that if the company does not carry out the same type of operations with independent companies, the Regional Directorate “may challenge the prices based on the values of the respective products or services on the international market (…) for this purpose (…) it shall request a report from the National Customs Service, the Central Bank of Chile or the bodies that have the required information”. It can be inferred from the transcribed rule that the use of external comparables is only authorised if the company does not carry out any type of transaction of goods and services with independent companies; that the challenge must be well-founded; and that the taxpayer and the SII are free to use the method that seems most appropriate to them as long as the legal requirements are met. It is also relevant to note that the domestic regulations at that date did not contemplate all the methods included in the OECD guidelines and it is inappropriate, under article 38 of the LIR, to resort directly to such guidelines in respect of situations not provided for in the domestic regulations, i.e., in relation to methods not included in the aforementioned provision. An interpretation contrary to the above would infringe the principle of legality of taxes or legal reserve, according to which only the law can impose, eliminate, reduce or condone taxes of any kind or nature, establish exemptions or modify existing ones and determine their form, proportionality or progress. Fifth: That the contested act shows that the method used by the SII for the entire period under review, business year 2012, corresponds to the so-called “Transactional Net Margin Method” for marketing operations, and the ” Comparable Uncontrolled Price Method” for financial operations, The Court therefore agrees with the findings of the lower court in grounds 22 to 25 of the judgment under review regarding the lack of the necessary grounds for the administrative act, in that the tax authority, although obliged to do so, omitted to analyse the transactions in accordance with the legislation in force at the date on which they were carried out…” Click here for English translation Click here for other translation Chile vs Avery Dennison Chile May 2022 ...

A Oy, the parent company of group A, had not charged a royalty (the so-called concept fee) to all local companies in the group. The tax authorities had determined the level of the local companies’ arm’s length results and thus the amounts of royalties not collected from them on the basis of the results of nine comparable companies. The comparable companies’ performance levels were -0,24 %, 0,60 %, 1,07 %, 2,90 %, 3,70 %, 5,30 %, 8,40 %, 12,30 % and 13,50 %. The interquartile range of the results had been 1.1-8.4% and the median 3.7%. The tax inspectors had set the routine rate of return for all local companies at 4,5 %, which was also used by A Ltd as the basis for the concept fee. A’s taxes had been adjusted accordingly to the detriment of the company. Before the Supreme Administrative Court, A Oy claimed that the adjustment point for taxable income should be the upper limit of the full range of 13,5 % in the first instance and the upper limit of the quartile range of 8,4 % in the second instance. The Supreme Administrative Court, taking into account the number of comparable companies, the dispersion of their results and the width of the overall range, as well as the fact that the results of five comparable companies had been below the 4.5% used in the A Ltd Concept Fee scheme, held that, in determining the level of the arm’s length results of the group’s local companies, the range could have been narrowed to the interquartile range of the results of the comparable companies within the meaning of paragraph 3.57 of the OECD Transfer Pricing Guidelines. The royalties charged to the local companies would have been at market rates if A Oy had charged the local companies a concept fee or other royalty so that the local companies’ results would have been within the interquartile range. In such a case, A Oy’s trading income would not have been lower than it would otherwise have been, within the meaning of Article 31(1) of the Tax Procedure Act, as a result of the non-arm’s length pricing. To the extent that the level of the results of the local companies had exceeded the quartile range, the amounts of the additions to the company’s taxable income should have been calculated by adjusting the results of the local companies to the arm’s length level, i.e. to the upper limit of the quartile range of 8,4 %. The Supreme Administrative Court therefore annulled the tax adjustments made to the detriment of the company and cancelled the increases in the company’s taxable income in so far as they were based on the local companies’ profit margins between 4,5 % and 8,4 % for the tax years 2010 to 2012. Click here for English translation Click here for other translation Finland vs A Oy Sep 2021 KHO-2021-127Org ...

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low. Judgement of the Tax Tribunal The Tribunal decided in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” Click here for English translation Click here for other translation CH vs Avery Dennison 16-9-0001493-0 ...

Auto Parts Ktf’s principal activity is the manufacture and sale of passenger cars and spare parts. Between 1 January 2013 and 31 December 2014, it sold its products to its affiliated undertakings and to unrelated parties. Auto Parts Ktf had prepared transfer pricing documentation, in which it determined the arm’s length price using the transaction net margin method (TNMM). Auto Parts Ktf identified 9 comparable companies for 2013 based on a benchmark using the Amadeus database version of 17 April 2014, and based on the financial documents of these companies for 2010-2012, it defined the interquartile range of the normal price range as the market price range between 2.13% and 9.78%. For 2014, it did not update its benchmark, but fixed the minimum-maximum range as in 2013 and considered this as the market price range. For both years, the applicant examined the total operating profit of the manufacturing activity on a consolidated basis, which showed a profit of 2,22 % in 2013 and 1,52 % in 2014. As this fell within the interquartile range for 2013 and 2014, it made no adjustment. The tax authority examined the applicant’s transfer pricing documentation during the course of its audit, and accepted that the sales of the two products should be treated as a single transaction and priced using the TNMM method. It did not accept, however, that Auto Parts Ktf had examined the arm’s length nature of its overall operating results. The tax authority found that Auto Parts Ktf made a loss of -0.92% on its related party transactions in 2013 and 0.84% in 2014. It recorded that the net profit margin realised on related party transactions was below the lower end of the market price band (lower quartile 2.10%) in both years. In view of this, it increased its corporate tax base by HUF 6,665,000,227 in 2013 and HUF 8,331,347,000 in 2014. It assessed a total of HUF 1,071,880,000 in corporate taxes against the applicant, on top of which it charged a tax penalty and a late payment penalty. The Administrative Court decided in favour or Auto Parts Ktf and an appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court. The Court dismissed the appeal of Auto Parts Ktf and remanded the case to the court of first instance. “[24] One of the main areas of international taxation is the determination of the appropriate price for tax purposes and the adjustment of the taxable amount in the light of this determination. The adjustment is essentially based on a comparison of the transfer price between related enterprises under Article 9 of the Model Convention (the price at which an enterprise supplies goods or intangible assets or services to its related enterprise) with the arm’s length price between unrelated parties. The purpose of the transfer pricing analysis is to review and analyse in detail whether the parties in the related party transaction have deviated from the terms and conditions that would also apply to unrelated parties and whether and to what extent this has had the effect of causing the taxable tax base of the taxpayer to differ from what it would have been had the terms and conditions not been different. By adjusting these differences, the effect of any distortions of the tax base due to related party transactions is neutralised. The Court of First Instance erred in accepting the applicant’s method of calculation, namely that the operating result and, in that context, the statement of profit margin were calculated for the company as a whole, for the total operating result, and not examined separately. In doing so, it ignored the essence of transfer pricing, namely that the profit rate in related party transactions must be calculated separately from the profit rate in unrelated party transactions. A calculation which works out the profit rate on the basis of total operating profit is wrong and cannot lead to an appropriate result for transfer pricing purposes. [25] The aggregated approach relied on by the applicant does not provide guidance as to the basis for the calculation, namely the operating result, but defines the cases in which it is possible to depart from the main rule of a transaction-by-transaction analysis and when they can be treated as a whole. The Curia fully agrees with the defendant’s position in this respect, which is set out in detail in paragraph 4 of page 14 of the defendant’s decision. The method of calculation can be followed precisely on page 43 of the decision of the first instance, and the statement of profit margins for affiliated undertakings is substantiated and correct. [26] In its decision, the defendant correctly recalculated the operating result between the applicant’s affiliated undertakings, accepted the method and filtering used by the applicant and the market price range determined on this basis, including the application of the applicant’s calculated interquartile range for 2013. All these factors were used to determine the adjusted profit and the corporation tax payable. [27] The Curia agreed with the defendant that the plaintiff’s incorrect determination of the operating result between related companies led to the tax difference in the decision. In its application for review, the defendant did not challenge the first instance court’s rejection of the use of the interquartile range in determining the 2014 result, and the Curia therefore did not address the relevant part of the first instance court’s judgment. Therefore, the order of the Court of First Instance to set aside the judgment of the Court of First Instance and to initiate new proceedings is correct, as explained above, as amended. In the new procedure, the corporation tax difference for 2014 for the applicant must be determined by taking into account the minimum-maximum market price range worked out by the applicant and accepted by the defendant, on the basis of the operating profit adjustment carried out by the defendant.” Click here for English translation. Click here for other translation Kfv.35618_2019_11 ...

The Absolut Company AB had been issued an assessment of additional taxable income of SEK 247 mio. The assessment was based on the position that (1) The Absolut Company AB had been selling below the arm’s length price to an US group company – The Absolut Spirit Company Inc. (ASCI), and (2) that acquired distribution services from ASCI that had been priced above the arm’s length price. In 2018 the Swedish Administrative Court of Appeal ruled in favor of the tax administration. The Swedish Supreme Administrative Court has now ruled in favor of The Absolute Company AB. According to the Supreme Administrative Court the Swedish Tax Agency did not fulfill the burden of proof. The Supreme Administrative Court further states that the full range of results in the benchmark study could be applied and that a multiple year analysis of the tested party data can be used to support an arm’s length result. Click here for translation Sweden vs Absolut AB 2019 ...

Auto Parts Ktf’s principal activity is the manufacture and sale of passenger cars and spare parts. Between 1 January 2013 and 31 December 2014, it sold its products to its affiliated undertakings and to unrelated parties. Auto Parts Ktf had prepared transfer pricing documentation, in which it determined the arm’s length price using the transaction net margin method (TNMM). Auto Parts Ktf identified 9 comparable companies for 2013 based on a benchmark using the Amadeus database version of 17 April 2014, and based on the financial documents of these companies for 2010-2012, it defined the interquartile range of the normal price range as the market price range between 2.13% and 9.78%. For 2014, it did not update its benchmark, but fixed the minimum-maximum range as in 2013 and considered this as the market price range. For both years, the applicant examined the total operating profit of the manufacturing activity on a consolidated basis, which showed a profit of 2,22 % in 2013 and 1,52 % in 2014. As this fell within the interquartile range for 2013 and 2014, it made no adjustment. The tax authority examined the applicant’s transfer pricing documentation during the course of its audit, and accepted that the sales of the two products should be treated as a single transaction and priced using the TNMM method. It did not accept, however, that Auto Parts Ktf had examined the arm’s length nature of its overall operating results. The tax authority found that Auto Parts Ktf made a loss of -0.92% on its related party transactions in 2013 and 0.84% in 2014. It recorded that the net profit margin realised on related party transactions was below the lower end of the market price band (lower quartile 2.10%) in both years. In view of this, it increased its corporate tax base by HUF 6,665,000,227 in 2013 and HUF 8,331,347,000 in 2014. It assessed a total of HUF 1,071,880,000 in corporate taxes against the applicant, on top of which it charged a tax penalty and a late payment penalty. Judgement of the Administrative Court. The Court allowed the appeal of Auto Parts Ktf. “The applicant has also duly explained why its pricing mechanism is determined by the local market, a position supported by the applicant’s expert. For example, in countries where own brand cars are available, it can be stated without further proof that … is less able to penetrate the market and that this has an obvious impact on its pricing policy. It can also be stated without further proof that the company’s aim is to be present on as many markets as possible and to sell as many products as possible in order to reduce fixed costs. The Court also notes that the expert clearly stated that the OECD Guideline 3.57 does not require the normal market value range to be narrowed down to the interquartile range. This is only possible if data on comparable transactions is limited. Defendant used the interquartile range for 2014 on the basis that the overall comparability of the companies included in the comparison was lower because there was no independent car manufacturer in the market. However, this does not justify the application of the above-mentioned statistical method. The companies included in the comparison all have the same activities – otherwise they would not have been included in the screening result – and the screening provided sufficient data, so there was no real reason for the tax authority to narrow the minimum-maximum range based on the operating results of the companies included in the comparison for 2014. In conclusion, it can therefore be concluded that the applicant correctly treated its operating results as a whole in the context of the determination of the arm’s length price. The correctness of the method applied was clearly confirmed by the expert and it can therefore be concluded that the defendant reached the conclusion, without justification and incorrectly, that only the result of sales to affiliated companies could be examined in the context of determining the arm’s length price and therefore incorrectly adjusted the corporate tax base. In the light of the above, the court ruled as set out in the operative part, in that the annulment only affects the provisions of the defendant’s decision and the decision at first instance which are challenged in the action. The tax authority at first instance may not, in the repeated proceedings, adjust the applicant’s corporation tax base on the ground that only its transactions with related parties may be taken into account in determining the arm’s length price. Nor can it adjust the corporate tax base on the ground that the interquartile range applies for 2014. Accordingly, it is obliged to adjust the other tax consequences, such as the amount of the tax penalty and the amount of the late payment penalty. ” Click here for English translation. Click here for other translation K.27084_2019_8 ...

The tax administration had issued an adjustment to the taxable profit of IKEA’s subsidiary in Spain considering that taxable profit in years 2007, 2008, and 2009 had not been determined in accordance with the arm’s length principle. In 2007 taxable profits had been below the interquartile range and in 2008 and 2009 taxable profits had been within the interquartile range but below the median. In all years taxable profits had been adjusted to the median in the benchmark study. Judgement of the Court In regards to the adjustment mechanism – benchmark study, interquartile range, median – the Court provide the following reasoning “However, the OECD Guidelines in point 3.60 provide that “if the relevant terms of the controlled transaction (e.g. price or margin) are within the arm’s length range, no adjustment is necessary”. Conversely, under rule 3.61, if the relevant terms of the controlled transaction “(e.g., price or margin) are outside the arm’s length range determined by the tax administration, the taxpayer should be given the opportunity to argue how the terms of the controlled transaction satisfy the arm’s length principle, and whether the result falls within the arm’s length range (i.e., that the arm’s length range is different from the arm’s length range determined by the tax administration). If the taxpayer is unable to demonstrate these facts, the tax administration must determine the point within the arm’s length range to which to adjust the condition of the controlled transaction”. And, finally, rule 3.62 provides: “In determining this point, where the range comprises highly reliable and relatively equal results, it may be argued that any one of them satisfies the arm’s length principle. Where some defects in comparability persist, as discussed in paragraph 3.57, it may be appropriate to use measures of central tendency to determine this point (e.g. median, mean or weighted mean, depending on the specific characteristics of the data) in order to minimise the risk of error caused by defects in comparability that persist but are not known or cannot be quantified”. In the Board’s view, the appellant should be upheld on this point. Indeed, as we have indicated, the Inspectorate was consistent, it gave the same treatment to the 2007 and 2008 financial years, as it understood that it should apply the median of 4.1%, in accordance with point 3.62 of the Guideline, it was appropriate to use measures of central tendency such as the median, specifically because it considered that “the study has comparability defects given that the companies included in the samples have lower sales volumes” – p. 38 of the Ruling. 38 of the Resolution. Logically, the circumstances justifying the use of the median were valid for both 2007 and 2008, as the reasons were the same. However, the TEAC, starting from the fact that the Inspectorate assumes the opinion of PwC, affirms that the data obtained will never be perfectly reliable, not being congruent “that the sample is used as an analysis of comparability as well as to extract data on which the regularisation itself is based, to then be rejected for the effect that could be favourable to the interested party, such as for the application of rule 3.60 of the aforementioned Guidelines, which excludes adjustments when they are within the range”. Therefore, it annulled the Agreement on this point, as the entity was within the range, remember that the interquartile range was between 2.1% and 7.6% and in 2008 it was at 2.42%. In other words, for the TEAC it was not possible to apply the rule of art. 3.62 on which the Tax Inspectorate based itself, because in 2008, the company was within the margins required by art. 3.60, which was not the case in 2007. However, in our opinion it is clear that if the ROS is outside the limits of the inter-quantile range, the corresponding adjustment must be made, as only from 2.1 % onwards is the company within the comparable market margins. However, in order to apply the median, there must also be “comparability defects”, and if these did not exist for 2008, for the same reason they did not exist for 2007 either. It should be noted that, in response to the arguments of the Inspectorate which argued that there were defects of comparability, the TEAC states that “a difference in the volume of sales is not sufficient reason to reject the validity of the report… The fact that the entity being verified occupies a leading position within its sector due to its sales volume does not in itself cause a lack of comparability – p. 40 TEAC Resolution-. In short, it seems to us that, once it has been determined that the appellant’s ROS in the year under discussion is outside the lowest inter-quantile range – 2.1% – it is indeed appropriate to make the corresponding adjustment. However, the fact that that is the case does not, without more, allow the median to be applied in the terms provided for in Rule 3.62, since the application of that rule is not justified by the fact of being outside the range of full competence, but by the existence of ‘comparability defects’, which, according to the arguments of the TEAC itself, were not the case in 2008 and, by extension, would not be the case in relation to 2007 either. The plea is upheld, since the Board agrees, with the applicant, that the adjustment should have been made on 2.1% and not 4.1%. It is not necessary, therefore, to analyse whether the median of the interquantile range should have been used instead of the median of the sample.” Click here for English translation Click here for other translation Spain vs Ikea 06 March 2019 ...

The Italian tax authorities had issued an assessment against a local distribution company of a multinational group, where the transfer pricing analysis conducted by the taxpayer had been disregarded. The tax authorities, carried out a new benchmark analysis based on the transactional net margin method (“TNMM”) and adjusted the company’s profitability to the median. Judgement of the Court The Court decided in favour of BI S.r.l. and cancelled the assessment. The Court stated that the profitability range calculated by the tax authorities goes, for the year 2013, from a minimum value of 1.40% to a maximum of 18.28%. The local distribution company had obtained a ROS/EBIT margin of 8.38%, and since the last percentage falls between the minimum and the maximum, the court set aside the assessment. In regards to the TP analysis performed by the tax authorities the Court stated: “The company had applied the CUP method, as it was considered the most direct and reliable method to apply the principle of free competition and, therefore, according to today’s appellant, this method had to be preferred to the application of any other method. The Office, on the other hand, considered the TNMM method more correct, thus arriving at ROS (return on sales) values that were totally different from those applied by the company for the three-year period 2010, 2011 and 2012. The office, by changing method, without any specific reason had settled on the percentage of the median. The office had taken refuge behind that percentage, without justifying in the notices of assessment why “The appellant’s objections on the issue of comparables are upheld, as the present company exercised, for the years in dispute, sales and routine functions, while the key role within the group was played by the company B.R.; the latter, as the “real entrepreneur” who was responsible for the fundamental decision-making fruitions, the definition of the various business strategies and, no less, the fruitions in the development and production area.” “B.I. was the sole distributor in Italy of a single supplier, to which it was linked by a shareholding relationship. The comparables compared by the Office did not adequately match the model of the company under examination, as the companies compared carried out production activities, operated in different sectors and distributed different products. This being the case, the office had identified competitors that were not comparable in terms of product sector, market and risk level. These obvious differences in distribution channels, type of goods or products sold or totally different local realities make the analysis carried out by the office unacceptable as a whole.” Click here for English translation Click here for other translation Commissione Tributaria Provinciale Lombardia Milano ...

“Cork Portugal SA” is engaged in the production and marketing of natural wine corks and is part of a Multinational group operating in the sector of closures for the wine industry. The Portuguese tax administration issued an adjustment of EUR 337,493.97 to the taxable income for 2010 on the basis that, its sales of cork to a related company in the US – via an Irish trading company B within the group – had not been at arm’s length. Portuguese provisions of Article 63(1) of the CIRC, provides “In commercial transactions […] carried out between a taxable person and any other entity, whether or not subject to IRC, with which he is in a situation of special relations, terms or conditions substantially identical to those that would normally be contracted, accepted and practised between independent entities in comparable transactions must be contracted, accepted and practised”. The adjustment was based on a benchmark study provided by the company. Net cost plus margin of comparables (average 2007-2009)Maximum: 9,48%3rd Quartile: 6.82%Median: 5,76%,1st Quartile: 4,60%,Minimum:-2,19% In 2010, the net cost plus margin of “Cork Portugal SA” on sales to B… was 2.91% – a figure that falls within the identified full range – but outside the interquartile range. The Arbitration Tribunal upheld the transfer pricing adjustment issued by the tax authority. “The profit sharing [between Portugal and Ireland] that is concretely presented to us does not reflect the activities / responsibilities of each entity in the group, and the reasons why such a differentiated allocation of margins over operating costs, which is only 2.91% for the Applicant, is not demonstrated, while B…(which carries out an activity of “management assistance”) obtains a marketing margin of 12.4%, with its participations and responsibilities in the process being as proven to be so different.And where, as a result, in addition to the arguments already summoned, it seems to us based on the facts and the best prudence that the application of the clause in concrete advises, the choice of the median as the point that best reflects the arm’s length behaviour between comparable independent entities, in this specific case and according to the proven circumstances of the same.“ Click here for English Translation P609_2015T - 2016-05-02 - JURISPRUDENCIA Decisao Arbitral ...