Macroeconomic trends such as central bank lending rates or interbank reference rates, and financial market events like a credit crisis, can affect prices. In this regard, the precise timing of the issue of a financial instrument in the primary market or the selection of comparable data in the secondary market can therefore be very significant in terms of comparability. For instance, it is not likely that multiple year data on loan issuances will provide useful comparables. The opposite is more likely to be true, i.e. that the closer in timing a comparable loan issuance is to the issuance of the tested transaction, the less the likelihood of different economic factors prevailing, notwithstanding that particular events can cause rapid changes in lending markets ...

The use of multiple year data does not necessarily imply the use of multiple year averages. Multiple year data and averages can however be used in some circumstances to improve reliability of the range. See paragraphs 3.57-3.62 for a discussion of statistical tools ...

Multiple year data can also improve the process of selecting third party comparables e.g. by identifying results that may indicate a significant variance from the underlying comparability characteristics of the controlled transaction being reviewed, in some cases leading to the rejection of the comparable, or to detect anomalies in third party information ...

Multiple year data will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. The data from earlier years may show whether the independent enterprise engaged in a comparable transaction was affected by comparable economic conditions in a comparable manner, or whether different conditions in an earlier year materially affected its price or profit so that it should not be used as a comparable ...

In order to obtain a complete understanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both the year under examination and prior years. The analysis of such information might disclose facts that may have influenced (or should have influenced) the determination of the transfer price. For example, the use of data from past years will show whether a taxpayer’s reported loss on a transaction is part of a history of losses on similar transactions, the result of particular economic conditions in a prior year that increased costs in the subsequent year, or a reflection of the fact that a product is at the end of its life cycle. Such an analysis may be particularly useful where a transactional profit method is applied. See paragraph 1.151 on the usefulness of multiple year data in examining loss situations. Multiple year data can also improve the understanding of long term arrangements ...

In practice, examining multiple year data is often useful in a comparability analysis, but it is not a systematic requirement. Multiple year data should be used where they add value to the transfer pricing analysis. It would not be appropriate to set prescriptive guidance as to the number of years to be covered by multiple year analyses ...

See 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 ...

The existence of a cycle (e.g. economic, business, or product cycle) is one of the economic circumstances that should be identified. See paragraph 3.77 in relation to the use of multiple year data where there are cycles ...

BIOMERIEUX ESPAÑA SA is active in the business of clinical and biological analysis, production, distribution, training and technical assistance. Likewise, the provision of computer services and, in particular, the computer management of laboratories. Following an audit the tax authorities found that the controlled prices agreed for the acquisition of instruments and consumables between bioMérieux España and its related entities, bioMérieux SA and bioMérieux Inc, did not provided bioMérieux España with an arm’s length return on is controlled activities. A tax assessment was issued for FY 2008 on the basis af a thorough critical analysis of the benchmark study provided by the BIOMERIEUX, and detailed reasoning and analysis in regards to comparability and market developments. Judgement of the National Court The Audiencia Nacional dismissed the appeal of Biomerieux España SA and decided in favour of the tax authorities. Excerpts “As we already reasoned in our SAN (2nd) of 6 March 2019 (Rec. 353/2015 ), it is legitimate to resort to what the Guideline calls “measures of central tendency”, but whoever resorts to them has the burden of reasoning and setting out the reasons that lead to their application. In our opinion, the Inspectorate, in this case, does reason and state the reasons.” “2008 was a year of outstanding economic results for the bioMérieux Group, as well as for bioMérieux Spain in terms of sales growth, according to the report. However, this situation of increased results for the Group is not reflected in the income statement of bioMérieux Spain’s distribution business, whose profitability fell from 8% in 2007 to 4.47% in 2008. This is not consistent either with the Group’s results or with the market remuneration for performing the same functions in 2007 and 2008, a market which has not been shown to have seen its margins of free competition reduced.” “It is true that, as stated in point 1.13 of the Guidelines, the objective sought by the rule is “to arrive at a reasonable approximation of what would be an arm’s length result based on reliable information. At this point, it should also be remembered that transfer pricing is not an exact science, but requires value judgements on the part of both the tax administration and taxpayers”. Precisely for this reason, the correct thing to do is to proceed as the inspectorate did, i.e. to ask the appellant to justify the price set and to analyse the reasonableness of the price obtained. In this sense, it is reasonable to require the appellant to keep the information regarding the criteria they have used to set the transfer price and the documentation that has justified them or, at least, to be able to precisely identify the sources from which they have obtained the information. This will allow for verification. In this sense, paragraph 3.3 of the OECD Guidelines “considers it good practice for a taxpayer that uses comparables to justify its transfer prices ( ) to provide the other interested party with the supporting information that allows it to assess the reliability of the comparables used”.” “All these reasons, assessed as a whole, lead us to conclude that the detailed analysis carried out by the Inspectorate allows us to conclude that the calculations made by the Inspectorate are closer to the purpose of the rule, that is to say, to the search for the price set at arm’s length, than those provided by the appellant.” “The applicant submits that the Spanish authorities have reached an amicable agreement with the French authorities and have fixed the agreed mark-up as market rate at 6,20 %. What is sought is to apply the same margin in relation to the US company, in respect of which there is no amicable procedure. The tax authorities opposes this argument, reasoning that the transfer price agreed with France in an amicable procedure is the result of a negotiation between sovereign entities involving considerations of international public law, and therefore its results cannot be extrapolated.” “The agreement obtained is an agreement that binds the negotiating States, but cannot extend its effects to relations with another State. The fact that the Kingdom of Spain, for reasons unknown to us, has reached an agreement with the Republic of France does not mean that the transfer price fixed by the Spanish administration is not correct, but simply that the States have given in on their respective claims and reached an agreement, the effects of which cannot be extrapolated.” Click here for English Translation Click here for other translation SAN_416_2021 ...

As with other analyses under the OECD TPG, numerous considerations may come into play, including the availability and choice of potential transfer pricing methods and comparables, and the interrelationship among them and the parameters of the testing periods (e.g. a transaction-based method may have a different time frame from a profit-based method). Just as it may improve reliability to use separate or more carefully circumscribed testing periods (or price setting periods) in some fact patterns (see paragraph 27), in other fact patterns the use of combined periods (that include both years that are impacted by the pandemic and years that are not impacted) may improve reliability.14 This approach would aggregate the financial results of FY2020, which may be exceptional, with the more normal results of prior years in order to test the arm’s length nature of the transfer pricing policy applied in FY2020. 14 Paragraphs 3.75 and 3.79 of Chapter III of the OECD TPG ...

This aspect is also relevant in performing the comparability analysis. For instance, assume government intervention forces a taxpayer to close its distribution facilities for three months. In undertaking a benchmark analysis, care should be taken in verifying that comparable enterprises have faced similar restrictions or conditions. Otherwise, it might be necessary to adjust the period over which the comparison is performed (e.g. excluding the economic data corresponding to the three months where the taxpayer was unable to operate). Taxpayers and tax administrations should determine on a case-by-case basis the extent to which these adjustments are necessary in circumstances where the potential differences may not have a material impact on the comparability. In this respect, the guidance in paragraphs 3.50 to 3.52 of the OECD TPG is relevant ...

As a pragmatic means of addressing divergent economic conditions in the pre- or post-pandemic period, and when the pandemic was in effect and its effects on economic conditions were material, it may be appropriate to have separate testing periods (and periods considered for price setting) for the duration of the pandemic or for the period when certain material effects of the pandemic were most evident. This may be appropriate, so long as the data from independent comparables can be measured over a similar period in a consistent manner. Care should be taken to ensure the financial data of years affected by the pandemic do not unduly distort results from pre- or post-pandemic periods. In addition, government intervention in a market may materially affect the performance of activities. For example, in certain situations, the activities that otherwise normally would have occurred absent the pandemic may not occur in the same manner (or at all) during the period that the government intervention is in place. Also, in some cases a government intervention may permit activities to proceed that otherwise would have been curtailed or stopped by the pandemic. The accurate delineation of a controlled transaction will determine the effect, if any, of such intervention on the price or form of any controlled transaction associated with such activities ...

The principles outlined in Section B.5 of Chapter III of the OECD TPG regarding the use of multiple year data and averages remain applicable. In ordinary circumstances, the use of multiple year data and multiple year averages for comparability analyses may have certain advantages. For example, it can be used as a means to mitigate the impact of accounting differences, appropriately measure the effects on profitability for the tested party based on its business and product life cycles, and to evaluate the same for the comparables, such that the reliability of the comparison is increased.13 13 Paragraph 3.77 of Chapter III of the OECD TPG ...

An assessment had been issued where the pricing of intra group rental expenses for machinery had been set aside by the tax authorities for FY 2010-2013. By an application filed with the Court of Appeal S.C. A. S.R.L. requested the Court for annulment of the assessment issued by the tax authorities. The Court of Appeal by judgment no. 164 of 31 October 2017, partially partially annulled the assessment. Unsatisfied with this decision, both parties filed an appeal to the High Court. S.C. A. S.R.L. considers that the first court misapplied the substantive rules of law applicable to the case with regard to the additional determination of a corporation tax in the amount of RON 56,715 for 2010, with reference to the interpretation of the OECD Guidelines. “Although the expert appointed by the court of first instance correctly established the adjusted margins of trade mark-up for each of the years 2010 to 2013 and the adjusted margins of operating profit for the same period, he erred in finding that, for the purposes of the final calculation, an analysis of the year-by-year comparability of the profitability indicators obtained in the period 2010 to 2013 is required. The approach is wrong because paragraphs 3.76 and 3.79 of the OECD Guidelines require the elimination of any market influences or gaps that may have an impact on the company, the only correct method being to use multi-year financial data. The use of this method is intended to minimise the impact of individual factors on comparable entities and the economic environment, as well as temporary economic factors such as the economic crisis.” Judgement of Supreme Court The Supreme Court upheld the decision of the court of first instance. Excerpts “As regards the method chosen, although the appellant criticises the ‘year-on-year’ comparability method, it does not specifically point out what its shortcomings are, but only why it is necessary to use the method of multi-year or agreed financial data. The ‘year-on-year’ comparability method was used because it was observed that the adjusted net trading profit margins and adjusted operating profit margins for 2012 were lower than the lower quartile limit, so it was correctly required to adjust the company’s 2012 revenue to bring the profitability indicators to the median of the market range obtained for independent comparable companies. Paragraph 3.76 of the OECD Guidelines was correctly interpreted by the court of first instance as meaning that the provision primarily considers the analysis of the data for the year under assessment and, in the alternative, the data for previous years, so that the use of the aggregate comparison method is not required. Furthermore, paragraph 3.79 of the OECD Guidelines states that the use of multi-yearly data may only be used to improve the accuracy of the range of comparison, but in the present case the appellant has not shown in concrete terms the consequences of using that method.” “With regard to the estimation of transfer prices and the increase of the tax base by the amount of RON 3 815 806, the appellant-respondent submits that the difference in income between the expert’s report and the tax inspection report is due solely to the fact that the expert used the indicators from 7 companies and the tax authority used the indicators from 3 companies out of the 11 chosen. The criticism is unfounded because the expert and, by implication, the court of first instance, demonstrated that there were 4 other companies which were comparable in terms of the activity carried out and for which the tax inspection authorities considered that there was no information, but it was demonstrated by the evidence in the file that they should be included in the comparability sample.” Click here for English translation Click here for other translation Jurisprudence 4453-2020 ...

Macroeconomic trends such as central bank lending rates or interbank reference rates, and financial market events like a credit crisis, can affect prices. In this regard, the precise timing of the issue of a financial instrument in the primary market or the selection of comparable data in the secondary market can therefore be very significant in terms of comparability. For instance, it is not likely that multiple year data on loan issuances will provide useful comparables. The opposite is more likely to be true, i.e. that the closer in timing a comparable loan issuance is to the issuance of the tested transaction, the less the likelihood of different economic factors prevailing, notwithstanding that particular events can cause rapid changes in lending markets ...

The case of Volkswagen Argentina S.A. revolves around benchmarking and comparability adjustments. In the transfer pricing analysis Volkswagen adjusts the results of the tested party (local entity) for extraordinary losses due to local economic conditions. The Federal Court of Appeals supports the adjustment to the results of the tested party and also the approach of averaging out the results of the tested party over a period of three year. Click here for English Translation ARGVW dec 2019 ...

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 ...

The use of multiple year data does not necessarily imply the use of multiple year averages. Multiple year data and averages can however be used in some circumstances to improve reliability of the range. See paragraphs 3.57-3.62 for a discussion of statistical tools ...

Multiple year data can also improve the process of selecting third party comparables e.g. by identifying results that may indicate a significant variance from the underlying comparability characteristics of the controlled transaction being reviewed, in some cases leading to the rejection of the comparable, or to detect anomalies in third party information ...

Multiple year data will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. The data from earlier years may show whether the independent enterprise engaged in a comparable transaction was affected by comparable economic conditions in a comparable manner, or whether different conditions in an earlier year materially affected its price or profit so that it should not be used as a comparable ...

In order to obtain a complete understanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both the year under examination and prior years. The analysis of such information might disclose facts that may have influenced (or should have influenced) the determination of the transfer price. For example, the use of data from past years will show whether a taxpayer’s reported loss on a transaction is part of a history of losses on similar transactions, the result of particular economic conditions in a prior year that increased costs in the subsequent year, or a reflection of the fact that a product is at the end of its life cycle. Such an analysis may be particularly useful where a transactional profit method is applied. See paragraph 1.131 on the usefulness of multiple year data in examining loss situations. Multiple year data can also improve the understanding of long term arrangements ...

In practice, examining multiple year data is often useful in a comparability analysis, but it is not a systematic requirement. Multiple year data should be used where they add value to the transfer pricing analysis. It would not be appropriate to set prescriptive guidance as to the number of years to be covered by multiple year analyses ...

See 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 ...

The existence of a cycle (e.g. economic, business, or product cycle) is one of the economic circumstances that should be identified. See paragraph 3.77 in relation to the use of multiple year data where there are cycles ...

At issue were tax deductions for expenses related to assets and expenses for services paid by SC A SRL to a related party, C SpA Italy. Following an audit the tax authorities had issued an assessment, where certain costs were considered non deductible and where the cost of services had been determined by applying the transactional net margin method (TNMM). The assessment was brought to the courts by SC A SRL. Judgement of Supreme Court The Supreme Court found the appeal of SC A SRL unfounded and decided in favor of the tax authorities. Excerpt “As regards the criticisms made by the appellant concerning the use of the net transaction margin method used by the tax authorities and held by the judgment delivered by the court of first instance to be correct, the Supreme Court considers them to be unfounded. As is apparent from the evidence adduced in the case, during the period examined by the tax inspection bodies, it was found that the transactions carried out by the appellant were transactions between related persons and that the price at which goods were transferred in transactions between related persons was the transfer price. Since the appellant submitted an incomplete record of the transfer prices charged in relation to the affiliated person C Spa Italia, in the period 2007-2010, without justifying the transfer prices charged, the tax authorities proceeded in accordance with the provisions of Article 3 of OMFP No 222/2008 to adjust the transfer prices charged between the two companies pursuant to the provisions of Article 11(1) and (2) of Law No 571/2003 on the Fiscal Code, as subsequently amended and supplemented. The trial judge correctly rejected the conclusions contained in the expert’s report with regard to the method of the net transaction margin used by the tax inspection bodies, the court of judicial review, in its analysis of that ground of appeal, points out that the purpose of the forensic technical expert’s report is to provide the court with an expert opinion on the documentation under examination, but the assessment of the evidence is made on the basis of the judge’s reasoning by correlating it with the other evidence adduced in the case and analysing it in the light of the legal rules applicable in the matter. In that context, the High Court finds that the criticisms made by the appellant-appellant in relation to the method of the net trading margin used which led to the adjustment of the income from operations in relation to the affiliated company C Spa Italia in the amount of 35 246 585 lei are in fact unfounded, since the judgment under appeal correctly held that the contested administrative and fiscal acts by which additional tax liabilities were established representing income tax with ancillary charges for the period under review are lawful and well founded. Having regard to all those considerations, the High Court, pursuant to Article 20(1) of Law No 554/2004 and Article 312(1) of the Code of Civil Procedure, will dismiss the appeal brought by the applicant, company A SRL, as unfounded. ” Click here for English translation Click here for other translation ROM Jurisprudence 2651-2016 ...

Adaptec. Ltd. is engaged in the business of software, design and development and testing in the field of storage solutions. It filed its tax return declaring income of Rs.89,51,330. Since assessee is functioning as service provider to it’s group parent on cost + 10% margin basis. Following an audit, the tax authorities selected 17 comparable companies, and arrived at an arithmetic mean of 25.26% and issued an assessment of additional taxable income of Rs.63,53,365. Adaptec filed an appeal with the Income Tax Appellate Tribunal. Judgement of the Court The Court ruled predominantly in favour of the tax authorities but remanded the case for recalculations. India vs Adaptec_India_P_Ltd 206-Hyd-2014 ...

Multiple year data should be considered in the transactional net margin method for both the enterprise under examination and independent enterprises to the extent their net margins are being compared, to take into account the effects on profits of product life cycles and short term economic conditions. For example, multiple year data could show whether the independent enterprises that engaged in comparable uncontrolled transactions had suffered from the effects of market conditions in the same way and over a similar period as the associated enterprise under examination. Such data could also show whether similar business patterns over a similar length of time affected the profits of comparable independent enterprises in the same way as the enterprise under examination ...

Data from years following the year of the transaction may also be relevant to the analysis of transfer prices, but care must be taken by tax administrations to avoid the use of hindsight. For example, data from later years may be useful in comparing product life cycles of controlled and uncontrolled transactions for the purpose of determining whether the uncontrolled transaction is an appropriate comparable to use in applying a particular method. Subsequent conduct by the parties will also be relevant in ascertaining the actual terms and conditions that operate between the parties ...

Multiple year data will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. The data from earlier years may show whether the independent enterprise engaged in a comparable transaction was affected by comparable economic conditions in a comparable manner, or whether different conditions in an earlier year materially affected its price or profit so that it should not be used as a comparable ...

In order to obtain a complete understanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both the year under examination and prior years. The analysis of such information might disclose facts that may have influenced (or should have influenced) the determination of the transfer price. For example, the use of data from past years will show whether a taxpayer’s reported loss on a transaction is part of a history of losses on similar transactions, the result of particular economic conditions in a prior year that increased costs in the subsequent year, or a reflection of the fact that a product is at the end of its life cycle. Such an analysis may be particularly useful where as a last resort a transactional profit method is applied ...

Svenske Shell AB imported crude oil from its UK sister company SIPC over a five-year period. Imports included the purchase and shipping of crude oil to the port of Gothenburg i Sweden from different parts of the world. The price of the oil was based on a framework agreement entered into between the parties, while the freight was calculated based on templates with no direct connection to the actual individual transport. The tax authorities considered that the pricing in both parts was incorrect and therefore partially refused deduction of the costs of oil imports. The assessment (and the later judgement of the Supreme Administrative Court) was based on the wording of the former Swedish “arm’s length” provision dating back to 1965. Decision of Court The Court did not consider that a price deviation has been sufficiently established where the applied price of only a single transaction deviates from the market price. Applying such a narrow view on price comparisons in general lacks support in the preparatory work, nor can it be justified in the light of the purpose of the legislation, which is to prevent unauthorized transfers of profits abroad. Where the controlled parties have continuous business transactions with each other, it is more aligned with the purpose of the legislation to focus on the more long-term effects of the bases and methods of pricing applied during the period under review. This means that “overprices” and “underprices” that have occurred within the same tax year should normally be offset against each other. According to the Court, it is therefore often necessary to make an overall assessment of the Swedish and foreign company’s business transactions with each other. The Court also concluded that it is sometimes possible to deviate from the principle of separate tax year’s when applying the arm’s length provisions. A pricing system that in a longer perspective is fully acceptable from an arm’s point of view can lead to overcharging in one year and undercharging in another year. It can also lead to costs in the form of premiums for a number of years leading to higher incomes or losses at a later stage. For a period of three years, Swedish Shell had applied one and the same business strategy with regard to its oil purchases. The strategy was considered justified for business reasons, which meant that the results during two of the tax years were taken into account in the assessment of the results in the third year. The price method used in the case was the market price method (CUP). This method was chosen as no material had been presented that could form the basis for using any of the other methods. The price test and choice of method had to be made in the light of the information available on the price conditions in the crude oil and freight markets. The Court stated that a market comparison presupposed that the contractual conditions and the market situation could be established. The sale of crude oil from SIPC to Svenska Shell had taken place on CIF terms (cost, insurance and freight) in the sense that SIPC had been responsible for shipping and insurance of the oil sold. It could have been worthwhile, the Court held, to base the arm’s length test on a comparison between that total price and the CIF prices which occurred in similar transactions on the market between independent parties. However, there was no investigation of such CIF prices and in fact it was the case that SIPC’s and Svenska Shell’s contractual relations in significant parts had no direct equivalent on the market during the relevant time period. Even though the sale of crude oil had taken place on CIF terms, the contractual relationship between Svenska Shell and SIPC had contained separate agreements on the pricing of crude oil and shipping. As a result of these agreements, prices of oil were more similar to FOB (free on board) prices and the prices of freight could be linked to standards that directly or indirectly reflected market prices. A separate price comparison of oil and shipping was therefore possible. According to the Court, there were also other reasons for making such a separate assessment of the prices, since the fundamental problems that arose during the arm’s length examination in the two areas differed in significant respects. Swedish Shell claimed that SIPC had the function of an independent trader and therefore took out a certain trading margin on crude oil sales. The Swedish Tax Agency claimed that SIPC was only a group-wide service body and therefore not entitled to any profit margin at all. However, the Swedish Tax Agency accepted a certain remuneration for the services provided by SIPC. The Court found that SIPC had borne certain risks in its purchasing and sales activities and that these risks were such that a certain trading profit was justified. To assess the trading margin when pricing crude oil, different types of list prices were used as a comparison. Some of these list prices contained a certain trading margin that amounted to different levels. The Court found that it was not possible to determine any general levels for the size of the trading margin based on the material. An acceptable margin therefore had to be estimated in the individual case. The Court did not find it clear that the trading margin taken by SIPC on crude oil exceeded the level that would have been agreed between independent parties. When it came to the pricing of crude oil, different price types were used based on price quotations in different markets. The Court assessed the extent to which the different price types could be used for purpose of pricing the controlled transaction. One of the price types used was the US list prices. These were average prices that the US tax authorities produced as comparative prices for one year at a time. The list consisted of a large number of sales worldwide. The Court found that these list prices were based on a ...