Ferroli España, S.L.U. is a Spanish manufacturer manufacture of cookers and heaters. In FY 2010 and 2011 the company had various transactions with other companies in the Ferroli Group and reported negative profit margins on these transactions. According to the company this was due to the financial crises in Spain. Following an audit, the tax authorities issued a notice of assessment where the profit of Ferrolia had been adjusted resulting in additional taxable income. The TNN method had been used and profits were adjusted to the median. An appeal was filed by Ferroli. Judgement of the Court The Court largely ruled in favor of the tax authorities, but according to the Court, an adjustment to the median could only be made where the tax authorities established the existence of comparability defects. Since sufficient proof of such defects had not been established, the adjustment was reduced to the lower quartile (3 % ROS). Excerpts “We are therefore within the scope of point 3.61 of the OECD Guidelines, which states: “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 that determined by the tax administration). If the taxpayer is not able 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”.” “Well, the Central Economic-Administrative Court justifies the application of this rule in the following reasoning: “finding ourselves in a situation in which the margin used is out of range, and the reasons have not been accredited, we have to say that we consider it correct to apply the median or central tendency for the determination of the net operating margin between the company’s sales (in this sense, section 3.57 of the OECD Directives”. In the judgment of this Chamber and Section of 4 February 2021 (ROJ: SAN 416/2021, FJ 2.10), we have summarised the interpretative position on the conditions under which recourse to rule 3. 61 of the OECD Guidelines, as expressed in the judgment of 6 March 2019 (ROJ: SAN 1072/2019), in the following terms: “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 the aforementioned judgment of 6 March 2019 (ROJ: SAN 1072/2019, FJ 3), the improper application of the disputed rule by the Tax Administration was reasoned as follows: “In short, it seems to us that, in effect, once it has been determined that the appellant’s ROS in the year under discussion is outside the lowest interquartile range – 2.1% – it is appropriate, in effect, to carry out the corresponding adjustment. But the fact that this occurs 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 rather by the existence of “defects in comparability”, which according to the arguments of the TEAC itself were not acceptable in 2008 and, by extension, neither would they be acceptable in relation to 2007″.” As we can see, the contested decision incurs in the same deficiency of reasoning that we appreciate in the precedent cited above, beyond the differences between the different factual assumptions being tried, as the Central Economic-Administrative Court considers the appeal to the median to be plausible due to the mere existence of a deviation from the range of full competence determined by the Tax Administration. The justification offered by the assessment agreement and which the respondent administration reiterates in its reply, that the margins obtained are too wide, is not sufficient to consider that the burden of reasoning and setting out the reasons that lead to the application of the median in accordance with the provisions of rule 3.61 of the OECD Guidelines, that is to say, due to the persistence of defects of comparability, has been fulfilled. The reasoning offered by the tax authorities that the margins are too wide, having accepted that in 2011 the arm’s length range is within an interquartile range between 3.60 and 6.90 per cent, is not considered sufficiently expressive of the reasons that would support the application of the median in the sense stated above. The plea on this point is upheld and the application of the lowest point of the arm’s length range determined by the tax authorities (3%) is considered appropriate, with the legal effects inherent in this statement.” Click here for English translation Click here for other translation Spain SAN_3400_2023 ORG NW ...

Burkert Contromatic Italiana s.p.a. is engaged in sale and services of fluid control systems. The italian company is a subsidiary of the German Bürkert Group. Following a tax audit, the Italian tax authorities issued a notice of assessment for FY 2007 on the grounds that the cost resulting from the transactions with its parent company (incorporated under Swiss law) were higher than the arms length price of these transactions. The company challenged the tax assessment, arguing that the analysis carried out by the Office had been superficial, both because it had examined accounting documents relating to tax years other than the one under examination (2007), and because the Office, in confirming that the Transactional Net Margin Method (TNMM) was the most reliable method, in order to verify whether the margin obtained by the company corresponded to the arm’s length value, had carried out a comparability analysis (aimed at identifying the net remuneration margin obtained by independent third parties in similar transactions), identifying only three comparables.. The tax authorities replied that the analysis carried out using the Transactional Net Margin income method, had revealed an average Return On Sales (R.O.S.) equal to 13.35 %, with the consequent ascertainment of the company’s higher profitability and the recovery for taxation of intra-group costs exceeding the normal value. The Provincial Tax Commission decided in favor of Burkert Contromatic Italiana s.p.a., noting that the choice of companies made by the tax authorities was completely different from that made by the company. In particular, they pointed out that the benchmark analysis carried out by the taxpayer, and attached to the appeal, had the objective of identifying independent companies operating in the national territory engaged in activities comparable to that of the taxpayer itself, i.e. commercial companies that purchased products from third-party suppliers and resold them on the national market to third-party customers; this comparison had indicated an average profitability of 4.85% compared to that ascertained by the Office of 10.26%. It also excluded that the Office had provided clear and irrefutable evidence of the methodology applied in the assessment. An appeal was lodged by the tax authorities, which complained of failure to state reasons or insufficient reasons on decisive facts and infringement of Article 110, paragraph 7, since the grounds of the judgment did not show the reasons in law justifying the acceptance of the appeal. The Regional Tax Commission rejected the appeal of the tax authorities. It held that there was no “omitted and/or grossly inadequate motivation on decisive and controversial facts” on the part of the judges at first instance and even less a violation of the provisions of Article 110, paragraph 7, of the TUIR. The tax authorities  then filed an appeal with the Supreme Court. In the appeal the tax authorities stated that it is a clear case of motivation by reference, since the regional tax court confines itself to using vague and general formulas, stating that the judgment of the provincial tax court is “clear” and “well-founded”, without giving any reason to understand why the objections raised by the tax authorities to the judgment at first instance were unfounded and why the reasoning provided by the judge at first instance was shared. Judgement of the Supreme Court The Supreme Court decided in favor of the tax authorities. It set aside the judgment under appeal and referred the case back to the court of first instance, with a different composition. Excerpts “Referring to the judgment appealed against, the C.T.R. [Commissione tributaria regionale] limited itself to stating that the first judges, ruling on the benchmark analysis, “for the purpose of identifying the companies comparable to the appellant and the relevant interquartile range of market value”, carried out by the Office on the basis of a comparison with three companies, had concluded that the Administration had not offered irrefutable evidence of the methodology applied in the assessment. It did not, however, adequately explain either the reasons why it intended to adhere to the decision of the Provincial Tax Commission and, therefore, the reasons why the method used by the Office could not be considered reliable, or why the method used by the taxpayer company should be preferred, and it failed to examine the specific observations made by the Tax Office, which had clearly and exhaustively set out the methodology actually applied and the results of the audit. In so doing, it failed to explain whether the assessment made by the tax authorities deviated from the criteria that must guide the analysis of intra-group transactions aimed at ascertaining whether the taxpayer company complied with the arm’s length price by comparing it with similar transactions carried out by independent third party companies. The taxpayer’s defence is therefore not adequately argued and the overall reading of the judgment, which also includes the factual premise and the arguments put forward by the parties at the various stages of the proceedings, does not bear witness to an independent assessment by the appeal court because it does not allow for an understanding of the assessment made with regard to the transfer pricing analysis carried out by the Office.” Click here for English translation Click here for other translation ITA_20220118 ...

“TP Packaging” is mainly engaged in the marketing of packaging materials, which in 2013 required a number of goods and services provided by its related companies. The transfer pricing analysis of the controlled transactions was carried out with “TP Packaging” as the tested party. The transactional net margin method (TNMM) was applied using the profitability indicator ROS (return on sales) and external comparables (eleven comparables). “TP Packaging”‘s financial information for the years 2011 to 2013 was used but certain adjustments had been made to the 2013 financial results. The results showed that “TP Packaging”‘s profitability in 2013 was within the interquartile range. The tax authorities agreed with the study presented in the transfer pricing analysis. However, they did not accept the use of multi-year financial information (years 2011 to 2013) and the adjustments made to the financial results. As a result, “TP Packaging”‘s profitability in 2013 was now below the interquartile range. A transfer pricing adjustment was therefore made to the median, which resulted in an assessment of additional taxable income. Not satisfied with the assessment, “TP Packaging” appealed to the Tax Court. Decision of the Tax Court The Court upheld the assessment issued by the tax authorities and dismissed the appeal of “TP Packaging”. Excerpts “It should be reiterated that the purpose of the accounting adjustment referred to by the appellant was to prepare and present its financial statements in accordance with the IFRS accounting standard, this not having been an aspect taken into account in the search for and selection of comparable companies, given that independent companies were identified as such which adopted in some cases a different accounting standard (US GAAP) and in others the same accounting standard (IFRS), it is therefore not apparent that the exclusion of the accounting adjustment referred to by the appellant helped to improve comparability with the abovementioned companies, the argument that the comparable companies did not make an accounting adjustment to their financial information is not a valid reason, since, as mentioned above, the exclusion of that accounting adjustment would mean that the appellant’s financial information would no longer be shown in accordance with IFRS, which would be justified in the transfer pricing analysis if it were intended to bring the appellant’s accounting standard, as the party under analysis, into line with the accounting standards used by the independent third parties selected as comparable, which has not been verified in the present case. On the other hand, the transfer pricing analysis under the application of the TNM method performed by the submitted study, as well as the analysis performed by the Administration, used the financial information of the Appellant’s complete financial statements as the examined part, i.e. both parties considered it appropriate for the comparability analysis not to segment the Appellant’s financial information (which excludes income and expenses not related to the related transactions under examination)”, Therefore, the Appellant’s claim that the accounting adjustment for the adoption of IFRS relates to other transactions (machine leases) and that its exclusion for the transfer pricing analysis would therefore improve comparability with the independent companies selected as comparables is not supportable. From the foregoing, it is established that the relevance of the comparability adjustment proposed by the appellant (exclusion of the accounting adjustment for the adoption of IFRS) for the purposes of the transfer pricing analysis is not substantiated, and therefore the rejection by the Administration of said adjustment is in accordance with the law.” Click here for English Translation Click here for other translation Peru 06526-1-2021 ...

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 ...

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 ...

It is up to the Tax Administration to prove the existence of transactions between related companies with clear discrepancies compared to transactions of the same kind on an independent market, while the taxpayer bears the burden of proving that the transactions took place for market values to be considered normal. This is the division of the burden of proof at the basis of the decision of the Milan Regional Tax Commission (CTR) rejecting the appeal lodged by the Tax Revenue Office. The taxpayer, in the case in question, has in fact fulfilled its burden by describing and documenting in the records that the functions and organization chart of the German subsidiary were such as to give an exhaustive account of the peculiarities of the latter and of the reliability of the CUP method (Comparable Uncontrolled Price Method) used. On the contrary, however, the comparables used by the Revenue Office to prove the validity of its assessment were incorrect because they had nothing to do with the products and activities carried on by the appellant. Excerpt “The taxpayer has in fact discharged its burden of proof. The Agency’s construction is based on erroneous assumptions: the first aspect not clarified is the fact that the Agency’s attention was focused only on the German subsidiary; the second aspect is that of the comparables. With regard to the first aspect, the Board of Appeal, in agreement with the trial judge, points out that the functions and organisation chart of the German subsidiary described and documented in the file are such as to give an exhaustive account of the particular nature of the German subsidiary and of the reliability of the CUP method used, both with regard to the rules of the market, guaranteed by the presence of independent German partners, and with regard to the actual performance of incisive and important functions, such as customer management, project management, tenders, and assistance services. As regards the second aspect, the use of comparables, the companies compared by the Agenzia delle Entrate do not deal with the same products or the same activities as the German affiliate: they even operate with different activity codes and in years far removed from the year 2010 in dispute. In light of these considerations and of anything else specified by the trial judge, whose ruling is fully shared, the appeal is dismissed.” Click here for English translation Click here for other translation Sentenza del 25_01_2019 n. 376 - Comm. Trib. Reg. per la Lombardia Sezione_Collegio 3 ...

N. S.P.A. was issued a notice of assessment in regards of transfer pricing. The PLI initially taken into consideration by the tax authorities was the return on sales (ROS). The company observed that, since the uniform application of such a PLI to the amount of all revenues was not possible, it was necessary to take into consideration only the revenues deriving from intra-group transactions. At this point, the tax authorities, instead of simply requesting the income statement for these transactions, proceeded to the assessment on the basis of a completely different PLI, the ROA (return on assets: operating profit to total assets). An appeal was filed by N. S.P.A with the Provincial Tax Commission and in a judgement issued in 2015 the commission concluded that the tax authorities had failed to comply with its duty of fairness and that it had used a different method in the assessment without exploring the possibility of correcting the initial objection, thus completely nullifying the meaning of the anticipated cross-examination. An appeal was then filed by the tax authoritities with the Regional Tax Commission. Judgement of the Regional Tax Commission The Regional Tax Commission (CTR) upheld the decision of the Provincial Tax Commission and the annulment the contested notice of assessment. According to the Court, it is unlawful to replace the margin/profit level indicator used in the cross-examination phase (dispute report) with a different PLI in the assessment phase. Excerpt “…the Revenue Agency justifies the change of method used in the assessment in lieu of the method used in the contestation report with the lack of documentation offered by the company. However, this explanation does not justify the actions of the Revenue Agency. The PLI initially taken into consideration for the challenge to the audited company was the ROS (average operating result per unit of revenue). Having observed that this PLI could not be applied uniformly to the amount of all revenues, as it was necessary to take into consideration only the revenues deriving from intra-group transactions, the Revenue Agency, which had recognised the accuracy of the observation, instead of asking the company for the profit and loss account relative to intra-group transactions, proceeded to the assessment on the basis of a completely different PLI, the ROA (Return on Assets: operating profit on total assets) and, to calculate the total assets of intra-group transactions, selected a sample of 25 products considered most representative. In so doing, the Revenue Agency, on the one hand, failed in its duty of loyalty, completely nullifying the sense of the anticipated cross-examination, since it was carried out entirely using a different method from that used in the assessment, without exploring the possibility of correcting the initial contestation, inviting the taxpayer to produce the documentation specifically required and omitting a new contestation, on which the same company could present its observations. This constitutes a breach of the provisions of Articles 12(7) and 10 of Law 212/2000. The assessment, moreover, is null and void because the method chosen was applied inappropriately. First of all, an unrepresentative sample was used, because it was insufficient to demonstrate the transfer pricing applied by the company. The intra-group sales of the products examined by the Office are of the order of a few percentage points out of the total sales mentioned and, therefore, are not representative; in fact, the sample taken is too small to allow the presumptive reconstruction of the value of all the goods transferred intra-group.” Click here for English translation Click here for other translation Sentenza del 07_06_2018 n. 2629 - Comm. Trib. Reg. per la Lombardia Sezione_Collegio 24 ...