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 ...

ESAB CZ was a contract manufacturer for ESAB Europe. The contract set ESAB CZ’s target profit margin for 2014 and 2015 at between 2,5 % and 3,5 %, with an adjustment to 3 % if the actual profit margin achieved was outside that range. Those values were determined on the basis of a benchmarking analysis which produced a minimum profit margin of 0,41 % and an interquartile range of profit margins between 2,14 % and 5,17 %. The benchmarking analysis were not disputed, but the tax authorities held that the cost base on which the markup was calculated should have included annual amortisations/depreciations. ESAB CZ disagreed and filed a complaint with the Regional Court. Judgement of the Court The court ruled in favour of the tax authorities. Excerpts “51. Furthermore, it should be emphasised that the applicant has not demonstrated that the asset allowance does not relate to the applicant’s contract manufacturing and has not demonstrated that it relates to any other activity, failing to identify any other specific activity relating to the allowance and the income generated from it. Nor is any such thing apparent from the applicant’s accounts, where the write-down of the impairment is booked in the area of contract manufacturing for a ‘related party’. The tax authorities and, consequently, the defendant, therefore, reached the lawful conclusion that the cost item of the asset impairment charge in the tax years under review was related to the applicant’s contract manufacturing activities and that there was therefore no objective reason for excluding it from the cost base when calculating the profitability indicator. The applicant did not incur any real expenditure either on the valuation difference or on the assets as such. It merely took over the assets from its predecessor and included the depreciation of the remaining assets in the calculation of its profitability, so that it acquired assets for which it would have had to pay the purchase price if it had bought them. There is no doubt that those assets generate income for the applicant and that, if sold, their residual value will be an expense and the sale itself will generate income. Therefore, the applicant’s argument that the amortisation of the valuation difference does not constitute, by its very nature, a real cost incurred in the transaction under assessment and is an exceptional item caused by the conversion carried out cannot be upheld. 52. The Regional Court agrees with the defendant’s views and considers it beyond doubt that the depreciation relates to the revaluation of assets whose transfer resulted from the project and was the substance of the spin-off and those assets are related to the contractual production. Thus, the revaluation of the assets was the result of the project and the difference in the revaluation of the assets and the subsequent depreciation of the revaluation of those assets could not have been influenced by the applicant. Nor did it determine its position as a manufacturer or that this activity was its only source of profit. The defendant’s view that the consequences of decisions taken by another company in the group cannot be passed on to the applicant and thereby reduce its profits by those items excluded from the cost base is lawful. In those circumstances, the costs in the form of depreciation on the difference in the revaluation of assets should be included in the calculation of the applicant’s profitability because of the relationship of that depreciation to assets related to the applicant’s production activities.” (…) “…The TNMM method was chosen as the profitability indicator and the net operating cost margin (NCPM) as the indicator. The resulting interquartile range, which the applicant considered to be market normal and to which it referred, was set between 2,14 % and 5,17 %. This analysis was accepted and relied upon by the tax authority, which concluded that the data obtained in the comparative analysis were sufficiently reliable and that the difference between the negotiated price and the normal price within the meaning of Article 23(7) of the ITA was demonstrated by the tax authority…. (…) 57. As is apparent from the foregoing, the defendant assumed that the sufficiently large sample of 56 comparable companies identified included companies with revalued assets. In the present case, the Benchmarking Analysis took into account a multi-year sample (2013 to 2015) of data on independent companies. The independent companies reflect the development of the market, whereby they register their assets in both historical and real valuation, acquire new technologies or technically upgrade their assets, etc. The defendant thus concludes that the data obtained in the Benchmarking Study is sufficiently reliable and that the difference between the agreed price and the normal price within the meaning of Art. § The tax administration fulfilled its burden of proof with regard to all the relevant facts (there is no dispute as to the proof of the transaction between the related parties) and by the Call for Evidence it shifted the burden of proof to the claimant, who did not satisfactorily prove the price difference in relation to the item of the write-down of the valuation difference, although it had sufficient time to do so. 58. The Regional Court agrees with the defendant’s conclusions thus expressed. The defendant has commented in detail on the comparative analysis submitted by the applicant and has given proper reasons why it considers it sufficiently reliable. The defendant has also dealt properly with the question of why it is necessary to determine a value at the mid-point between two extreme values in order to guarantee the best possible comparability, when it is appropriate to base the value on a mean trend in order to eliminate outliers or inaccuracies. The Regional Court was therefore unable to uphold the applicant’s plea that the defendant acted unlawfully by applying a profit margin at the level of the bottom quartile rather than at the level of the minimum resulting from the comparative analysis, that minimum being only 0.41 %. The applicant supports that argument by citing ...

Transalliance Iberica SA had priced its controlled transactions for the years 2008-2013 by comparing the gross margin achieved on an overall basis with the gross margins of comparable companies. Following an audit, the tax authorities issued a notice of assessment rejecting the method used by the company due to differences in the treatment of cost items and thus issues of comparability at a gross margin level. Instead, the tax authorities applied the TNMM. The profit was outside the interquartile range and an adjustment to the median was made. Transalliance lodged an appeal. 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 such defects had not been established, the adjustment was reduced to the lower quartile. Excerpt “Of the points that are dealt with, the appellant focuses the discussion on the application of the median. In particular the Guidelines – 3.62 – state that “where the range comprises highly reliable and relatively equal results, it can 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 that allow this point to be determined (e.g. median, measure 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”. Applying this rule, p. 109 of the Agreement states that “the normal practice in such cases is to use the median as the most significant value of the interquantile range, as it avoids the problems that extreme values cause in the calculation of the arithmetic mean”. The appellant – p. 120 of the agreement – argued that the administration could not apply the median “mechanically”, as such automatism is not required by the Guidelines. Therefore, it argued that it is sufficient to apply the “lower quartile of the interquartile range” instead of the median. To which the Agreement replied that ‘the preference for the median must be justified on statistical grounds: it is a robust statistic, which is not influenced by extreme values in the sample of purchasables’. Both the TEAC and the Abogacía del Estado insist on the argument. The Chamber’s position in this regard is described in our SAN (2nd) of 6 March 2019 (Rec. 353/2015 ) – the appeal was rejected by order of 14/11/2019 – and 4 February 2021 (Rec. 658/2017), which hold that “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”. This solution has been accepted in the Resolution of the TEAC of 23 November 2021 (4881/2019), which states, with a correct interpretation of the position of this Chamber, “that in order to resort to the median, there must be defects of comparability. In the event that such defects are not highlighted by the inspection, the adjustment would be made to the lower quartile”. Well, what the Inspectorate has done is to “automatically” apply the median -also the TEAC and the Abogacía del Estado-, without explaining and reasoning the concurrence of “defects of comparability”, a burden that corresponds to it and that the Chamber should not replace. This means that the lower inter-quantile range must be applied and not the median, as the appellant claims. On this point, the appeal is also upheld.” Click here for English translation Click here for other translation Spain vs Logistica SA SAN 5336-2022 - November 2022 ORG PDF ...

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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(i) FS, a foreign corporation, produces apparel for USP, its U.S. parent corporation. FS purchases its materials from unrelated suppliers and produces the apparel according to designs provided by USP. The district director identifies 10 uncontrolled foreign apparel producers that operate in the same geographic market and are similar in many respect to FS. (ii) Relatively complete data is available regarding the functions performed and risks borne by the uncontrolled producers. In addition, data is sufficiently detailed to permit adjustments for differences in accounting practices. However, sufficient data is not available to determine whether it is likely that all material differences in contractual terms have been identified. For example, it is not possible to determine which parties in the uncontrolled transactions bear currency risks. Because differences in these contractual terms could materially affect price or profits, the inability to determine whether differences exist between the controlled and uncontrolled transactions will diminish the reliability of these results. Therefore, the reliability of the results of the uncontrolled transactions must be enhanced by the application of a statistical method in establishing an arm’s length range pursuant to § 1.482-1(e)(2)(iii)(B) ...

The methods described in §§ 1.482-2 through 1.482-6 are generally stated in terms of individual transactions. However, because a taxpayer may have controlled transactions involving many different products, or many separate transactions involving the same product, it may be impractical to analyze every individual transaction to determine its arm’s length price. In such cases, it is permissible to evaluate the arm’s length results by applying the appropriate methods to the overall results for product lines or other groupings. In addition, the arm’s length results of all related party transactions entered into by a controlled taxpayer may be evaluated by employing sampling and other valid statistical techniques ...

Arm’s length range limited to interquartile range. (i) To evaluate the arm’s length result of controlled transactions between USP, a United States manufacturing company, and FSub, its foreign subsidiary, the district director considers applying the comparable profits method. The district director identifies 50 uncontrolled taxpayers within the same industry that potentially could be used to apply the method. (ii) Further review indicates that only 20 of the uncontrolled manufacturers engage in activities requiring similar capital investments and technical know-how. Data with respect to five of the uncontrolled manufacturers is very limited, and although some material differences can be identified and adjusted for, the level of comparability of these five uncontrolled comparables is significantly lower than that of the other 15. In addition, for those five uncontrolled comparables it is not possible to accurately allocate costs between the business activity associated with the relevant transactions and other business activities. Therefore, pursuant to § 1.482-1(e)(2)(ii) only the other fifteen uncontrolled comparables may be used to establish an arm’s length range. (iii) Although the data for the fifteen remaining uncontrolled comparables is relatively complete and accurate, there is a significant possibility that some material differences may remain. The district director has determined, for example, that it is likely that there are material differences in the level of technical expertise or in management efficiency. Accordingly, if the comparable profits method is determined to be the best method pursuant to § 1.482-1(c), the arm’s length range for the controlled transaction may be established only pursuant to paragraph (e)(2)(iii)(B) of this section ...

Arm’s length range limited to interquartile range. (i) The facts are the same as in Example 2, except in this case there are some product and functional differences between the four uncontrolled comparables and USSub. However, the data is insufficiently complete to determine the effect of the differences. 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: Uncontrolled comparable Result (price) 1 $42.00 2 44.00 3 45.00 4 47.50 (ii) It cannot be established in this case that all material differences are likely to have been identified and reliable adjustments made for those 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 must be established pursuant to paragraph (e)(2)(iii)(B) of this section. In this case, the district director uses the interquartile range to determine the arm’s length range, which is the range from $43 to $46.25. If USSub’s price falls outside this range, the district director may make an allocation. In this case that allocation would be to the median of the results, or $44.50 ...

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 ...

Selection of comparables. (i) To evaluate the arm’s length result of a controlled transaction between USSub, the United States taxpayer under review, and FP, its foreign parent, the district director considers applying the resale price method. The district director identifies ten potential uncontrolled transactions. The distributors in all ten uncontrolled transactions purchase and resell similar products and perform similar functions to those of USSub. (ii) Data with respect to three of the uncontrolled transactions is very limited, and although some material differences can be identified and adjusted for, the level of comparability of these three uncontrolled comparables is significantly lower than that of the other seven. Further, of those seven, adjustments for the identified material differences can be reliably made for only four of the uncontrolled transactions. Therefore, pursuant to § 1.482-1(e)(2)(ii) only these four uncontrolled comparables may be used to establish an arm’s length range ...

The following examples illustrate the principles of this paragraph (e) ...

The rules of this paragraph (e) do not require that the district director establish an arm’s length range prior to making an allocation under section 482. Thus, for example, the district director may properly propose an allocation on the basis of a single comparable uncontrolled price if the comparable uncontrolled price method, as described in § 1.482-3(b), has been properly applied. However, if the taxpayer subsequently demonstrates that the results claimed on its income tax return are within the range established by additional equally reliable comparable uncontrolled prices in a manner consistent with the requirements set forth in § 1.482-1(e)(2)(iii), then no allocation will be made ...

If the results of a controlled transaction fall outside the arm’s length range, the district director may make allocations that adjust the controlled taxpayer’s result to any point within the arm’s length range. If the interquartile range is used to determine the arm’s length range, such adjustment will ordinarily be to the median of all the results. The median is the 50th percentile of the results, which is determined in a manner analogous to that described in paragraph (e)(2)(iii)(C) of this section (Interquartile range). In other cases, an adjustment normally will be made to the arithmetic mean of all the results. See § 1.482-1(f)(2)(iii)(D) for determination of an adjustment when a controlled taxpayer’s result for a multiple year period falls outside an arm’s length range consisting of the average results of uncontrolled comparables over the same period ...

For purposes of this section, the interquartile range is the range from the 25th to the 75th percentile of the results derived from the uncontrolled comparables. For this purpose, the 25th percentile is the lowest result derived from an uncontrolled comparable such that at least 25 percent of the results are at or below the value of that result. However, if exactly 25 percent of the results are at or below a result, then the 25th percentile is equal to the average of that result and the next higher result derived from the uncontrolled comparables. The 75th percentile is determined analogously ...

If there are no uncontrolled comparables described in paragraph (e)(2)(iii)(A) of this section, the arm’s length range is derived from the results of all the uncontrolled comparables, selected pursuant to paragraph (e)(2)(ii) of this section, that achieve a similar level of comparability and reliability. In such cases the reliability of the analysis must be increased, where it is possible to do so, by adjusting the range through application of a valid statistical method to the results of all of the uncontrolled comparables so selected. The reliability of the analysis is increased when statistical methods are used to establish a range of results in which the limits of the range will be determined such that there is a 75 percent probability of a result falling above the lower end of the range and a 75 percent probability of a result falling below the upper end of the range. The interquartile range ordinarily provides an acceptable measure of this range; however a different statistical method may be applied if it provides a more reliable measure ...

The arm’s length range will consist of the results of all of the uncontrolled comparables that meet the following conditions: the information on the controlled transaction and the uncontrolled comparables is sufficiently complete that it is likely that all material differences have been identified, each such difference has a definite and reasonably ascertainable effect on price or profit, and an adjustment is made to eliminate the effect of each such difference ...

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Uncontrolled comparables must be selected based upon the comparability criteria relevant to the method applied and must be sufficiently similar to the controlled transaction that they provide a reliable measure of an arm’s length result. If material differences exist between the controlled and uncontrolled transactions, adjustments must be made to the results of the uncontrolled transaction if the effect of such differences on price or profits can be ascertained with sufficient accuracy to improve the reliability of the results. See § 1.482-1(d)(2) (Standard of comparability). The arm’s length range will be derived only from those uncontrolled comparables that have, or through adjustments can be brought to, a similar level of comparability and reliability, and uncontrolled comparables that have a significantly lower level of comparability and reliability will not be used in establishing the arm’s length range ...

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. Use of more than one method may be appropriate for the purposes described in paragraph (c)(2)(iii) of this section (Best method rule) ...

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In some cases, application of a pricing method will produce a single result that is the most reliable measure of an arm’s length result. In other cases, application of a method may produce a number of results from which a range of reliable results may be derived. A taxpayer will not be subject to adjustment if its results fall within such range (arm’s length range) ...

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Amway India is engaged in the business of direct selling of consumer products through multi-level marketing. For FY 2013-2014 Amway paid royalties to a foreign Amway group company. Following an audit, an assessment was issued by the tax authorities where the royalty had been reduced based on a benchmark study resulting in additional taxable income. An appeal was filed by Amway India with the Income Tax Tribunal where the assessment was set aside. An appeal was then filed by the tax authorities with the High Court. In the appeal the tax authorities stated that the Tribunal had failed to appreciate the fact that the royalty payments were excessive considering the Advertisement, Marketing and Promotion (‘AMP’) expenses incurred by Amway India for the benefit of the group’s trademark and brand. According to the tax authorities Amway India created marketing intangibles for the group and should be compensated with a payment from the group rather than having to pay huge royalties. Judgement of the High Court The Court ruled in favor of Amway India. Excerpts “9. A perusal of the above order reveals that the ITAT and CIT (A), both fact finding authorities have concurrently held that the rejection of the two comparables by the TPO is based on conjectures and surmises and thus, deleted the addition made on account of transfer pricing adjustment for transaction related to royalty. Learned Counsel for the appellant concedes that if the rejected two comparables are taken into consideration, the payment made by the assessee to its AEs towards royalty would be at arm’s length and no adjustment would be merited. He also concedes that the said two comparables comply with all the filters prescribed by the TPO. In this view of the matter, we therefore find that the reliance placed by CIT(A) and ITAT on the judgment of this Court in Chrys Capital Investment (supra), was correct. The relevant portion of the said judgment reads as follows, “44. In light of the above findings, this Court concludes as follows: (a) The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. …………………..”    (Emphasis Supplied) 10. In this view of the matter, no substantial questions of law arise for consideration and accordingly, the appeal is dismissed” PCIT-Vs-Amway-India-Enterprises-Delhi-High-Court (1) ...

As part of tax legislation recently enacted in Hungary, rules governing the application of statistical tools – arm’s length range and adjustments within the range – will now be governed by law. When determining arm’s length prices based on benchmarks of comparables it will now be mandatory to use the interquartile range. If the price falls outside the arm’s length range, adjustment must be made to the median value – unless the taxpayer can prove that another value within the range is more appropriate. Where the price is within the arm’s length range, taxpayers will no longer be allowed to make year-end adjustments. The above amendments will have effect for FY 2022 and forward. Furthermore, certain information related to controlled transactions will now have to be provided in the corporate tax return. Details in this regard will be contained in a later Ministerial Decree. Click here for unofficial English translation Click here for other translation Hungary new TP legislation 27-07-22 ...

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 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 ...

In determining this point, where the range comprises results of relatively equal and high reliability, it could be argued that any point in the range satisfies the arm’s length principle. Where comparability defects remain as discussed at paragraph 3.57, it may be appropriate to use measures of central tendency to determine this point (for instance the median, the mean or weighted averages, etc., depending on the specific characteristics of the data set), in order to minimise the risk of error due to unknown or unquantifiable remaining comparability defects ...

If the relevant condition of the controlled transaction (e.g. price or margin) falls outside the arm’s length range asserted by the tax administration, the taxpayer should have the opportunity to present arguments that the conditions of the controlled transaction satisfy the arm’s length principle, and that the result falls within the arm’s length range (i.e. that the arm’s length range is different from the one asserted by the tax administration). If the taxpayer is unable to establish this fact, the tax administration must determine the point within the arm’s length range to which it will adjust the condition of the controlled transaction ...

It may also be the case that, while every effort has been made to exclude points that have a lesser degree of comparability, what is arrived at is a range of figures for which it is considered, given the process used for selecting comparables and limitations in information available on comparables, that some comparability defects remain that cannot be identified and/or quantified, and are therefore not adjusted. In such cases, if the range includes a sizeable number of observations, statistical tools that take account of central tendency to narrow the range (e.g. the interquartile range or other percentiles) might help to enhance the reliability of the analysis ...

1 December 2021 the Polish Ministry of Finance issued Tax clarifications on transfer pricing No. 4: Transactional Net Margin Method (TNMM) Clarification on application of the TNMM is provided in these areas: A. Principles of TNMM use A.1. Scope of application of the method A.2. Tested party A.3. Determination of net profit margin A.4. Definition of the base A.5. Choice of profitability indicator A.6. Profitability comparison B. Criteria for comparability of transactions and entities C. Difficulties in applying TNMM D. Comparison with other methods E. Practical application of TNMM Click here for unofficial English translation Objaśnienia_nr_4_Metoda_marży_transakcyjnej_netto_1122021 (1) ...

Varian Medical Systems Iberica S.L. is the Spanish subsidiary of the multinational company Varian Medical Systems and carries out two types of activities – distribution and after-sales services. The products sold was purchased from related entities: Varian Medical Systems Inc., Varian Medical Systems UK Ltd., Varian Medical Systems International AG and Varian Medical Systems HAAN GmbH. The remuneration of Varian Medical Systems Iberica S.L. had been determined by application of the net margin method for all transactions and resulted in a operating margin of 2.86% in 2005 and 2.75% in 2006. In 2010 an audit were performed by the tax authorities for FY 2005 and 2006, which resulted in an adjustment. The tax authorities accepted the net margin method, but made various corrections in its application. The adjustments made by the tax authorities resulted in a operating margin of 6.45% in the two years under review, The tax administration argued that the margins determined by Varian Medical Systems Iberica S.L. could not be accepted due to various technical discrepancies in the application of the method. Instead they determined that a operating margin of 6.45% would have been obtained in an arm’s length situation. The target margin of 6.45% resulted in a decrease in the cost of purchases of goods from related manufacturing entities by 725,108 euros in 2005 (1 October 2005 to 30 September 2006) and by 1,008,065 euros in 2006 (1 October 2006 to 30 September 2007). Varian Medical Systems Iberica S.L. filed an appeal before the Regional Administrative Court of Madrid, which was dismissed. An appeal was then filed to the Central Administrative Court, which was also rejected. Judgement of the Nacional Court The Court decided in favor of Varian Medical Systems Iberica S.L. and set aside the tax assessment. Excerpts: “Indeed, as stated in paragraph 1.48 of the 1995 OECD Guidelines (and in similar terms in paragraph 3.60 of the 2010 version of the OECD Guidelines), “if the relevant terms of the controlled transactions (e.g. price or margin) are within the arm’s length range, no adjustment should be made”. In the light of the foregoing, the Board agrees with the application in so far as it states, at p. 15, that “[a]ccording to the Court of First Instance’s findings, the Court of First Instance has held that “in accordance with the OECD Guidelines, given that the operating margin of the distribution function declared by VMS (2.86% in 2005-2006 and 2.75% in 2006-2007), is within the arm’s length range (either the taxpayer’s interquartile range, which ranges from 1.06% to 5.25%, or that of the Inspectorate, which ranges from 1.55% to 6.45%), no adjustment is necessary”. “The arm’s length price declared by the appellant company, as stated above, was within the arm’s length range determined by the tax authorities, ergo, no adjustment was appropriate.” “In conclusion, for the reasons set out above, the technical basis used by the tax authorities to regularise the taxpayer’s situation, as regards the points at issue here, is not in accordance with the law.” Click here for English translation Click here for other translation SPAIN vs SAN_4241_2021 ...

This case deals with arm’s length pricing of various inter-company loans which had been granted – free of interest – by Cypriot company Ltd. to an affiliate group company. Following an audit of Cypriot company Ltd, an upwards adjustment of the taxable income was issued. The adjustment was based on a comparison of the terms of the controlled transaction and the terms prevailing in transactions between independent parties. The lack of interest on the funds provided (deposit of a remittance minus acceptance of a remittance) was not considered in accordance with the arm’s length principle. Cypriot company Ltd disagreed with the assessment and filed an appeal with the tax court. Judgement of the Tax Court The Tax Court dismissed the appeal of Cypriot company Ltd. in regards of the arm’s length pricing of the loans. Excerpt “It is evident from the above that the bond loan taken is related to the outstanding balance of the debt as at 31/12/2014 and is not an investment option. As the contracting companies are related entities, the above transaction falls within the scope of the verification of the arm’s length principle. As in the previous cases above, the independent party for the comparison of the terms of the transaction is understood to be domestic financial institutions. Therefore, the independent market interest rate for the calculation of interest is the interest rate of bank loans in euro for the interest rate category to non-financial companies “To non-financial companies – Long-term loans of regular maturity – Loans over EUR 1 million”, according to the methodology defined by the Bank of Greece. For the month of purchase of the bonds (December 2015), the applicable average market interest rate is approximately 4.86%, higher than the one specified in the contract (2%). It can therefore be seen that in the present case the principle of equal distance is not respected, since interest crediting the lender with a lower interest rate than the one applicable between independent parties is calculated. The accounting of interest on the funds granted at a lower rate of interest constitutes a derogation from the arm’s length principle. Therefore, the audit was right to calculate imputed credit interest in order to restore the arm’s length principle and in accordance with the provisions of Article 50 of the Law. 4174/2013. The applicant claims that it was not informed as to how to calculate the interest for the 2018 tax year in the note of findings, however, the reasoning and the numerical verifications are identical to the corresponding accounting differences of the previous years for which it received detailed information and therefore the allegations made as to the violation of the right to be heard in this matter lack any substantial basis. Since the applicant company also claims that the contested acts, which are unfavourable attributive acts, were adopted by the Tax Administration after the expiry of the exclusive period of one month from the submission of the observations and in breach of the provisions of Article 28 of Law No. 4174/2013 in conjunction with the provisions of Article 10 par. 5 of Law no. 2690/1999. However, this claim is rejected as unfounded as the right to control and issue tax acts is regulated exclusively by Article 36 of Law No. 4174/2013 and as it is clear from the evidence in the file, the stamp duty and income tax differences in question were charged by the issuance and notification of the contested acts within the prescribed limitation period (except for the contested stamp duty act for the tax year 2014, which was referred to above). Because the findings of the audit, as recorded in the 08/12/2020 partial audit reports of the income tax and stamp duty assessment of the C.E.M.E.P. auditor, on which the contested acts are based, are considered to be valid, acceptable and fully reasoned.” Click here for English translation Click here for other translation ΔΕΔ Α 2940ORG ...

Following an audit the tax administration had adjusted the margin obtained by the taxpayer to the median, as it was below the interquartile range of the benchmark analysis. An appeal was filed by the taxpayer with the TEAC. Judgement of the TEAC The TEAC upheld the taxpayer’s appeal and annulled the decision of the tax authorities. Excerpt “… In the present case, the inspectorate has accepted the comparability study of the company without noting any shortcomings in the study. It only notes, perhaps as a justification for the unreliability of the company’s information, that: It should be clear, therefore, that, according to the background information in the file, at no time has group X commissioned or agreed to have its costs and other elements determining the group’s internal data, including its own costs, verified by an independent third party, prior to their provision to the entity responsible (…) for preparing the documentation on related-party transactions, provided in the course of this verification. This observation, in any event, referring to the entity’s costs, does not constitute a defect in the comparability of the study carried out by the taxpayer, since, as we have seen, the method and the search for comparable companies have been admitted by the inspection, as have the interquartile ranges resulting from this selected sample. In conclusion, once it has been established that the appellant’s margins in the years under discussion are outside the lowest interquartile range, the corresponding adjustment should indeed be made. However, the fact that this 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 arm’s length range, but by the existence of ‘shortcomings in comparability’, which have not been explained by the inspectorate, so that the application of the median is not justified. This is in line with what is stated in the Judgment of the Audiencia Nacional of 06-03-2019 (appeal number 353/2015), which, after some illustrative reasoning in this regard, concludes (only this conclusion is extracted, without prejudice to the interest of the full Judgment, to which we refer): “Now, 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, since only from 2.1% is the company within the comparable market margins. In order for the median to be applied, however, there must also be ‘comparability defects’. In the present case, no defects of comparability have been revealed in the study carried out by the taxpayer, which, as we have said, has been accepted by the inspectorate, so that the application of the median is not in accordance with the law and, consequently, we must uphold the claimant’s claims and annul the settlement. …” Click here for English translation Click here for other translation Spain vs XZ SA, May 2021, TEAC, Case No Rec. 2545-2019 ...

A-Contract Manufacturer LDA is an entity residing in Portugal, whose main activity is contract manufacturing of coffee machines and irons, as well as spare parts, tools etc. on behalf of its German parent B A.G. Following an audit, the tax authorities found that the results of A-Contract Manufacturer LDA had not been at arm’s length. An assessment of additional income was issued where the adjustment had been determined based on a benchmark study and use of statistical tools – interquartile range and median. Not satisfied with the assessment A-Contract Manufacturer LDA brought the case to the CAAD, a Portuguese arbitration tribunal. Decision of CAAD The CAAD decided in favour of the tax authorities and upheld the assessment. Excerpt “In sum, regarding the first claim of the Claimant that the arm’s length principle was violated, it appears that the Defendant did nothing more than, in compliance with the duty imposed by art. In short, as to the first claim of violation of the arm’s length principle, it appears that the Claimant, in compliance with the duty imposed by article 3 of Ministerial Order no. 1446-C/2001, of 21 December, and in the exercise of a margin of technical discretion resulting from that precept, carried out calculations that are fully based on the OECD guidelines, after concluding that “the operating result generated [by the Claimant] was lower than it would have been had those transactions been carried out between independent entities” (point 1.4 of the RIT). The mere invocation of its nature as a “contract manufacturer” is not a reason to preclude the application of the arm’s length principle to the special relations between the Claimant and the corporate Group of which it forms part, and even less to conceive any exceptional regime vis-à-vis the rule of application of the OECD Guidelines and the national rules that define those guidelines. As to the Claimant’s second allegation that the arm’s length principle was violated, consisting in the argument that the median value used by the Defendant was highly inflated, this is a mere divergence of quantifications and calculations between the Claimant and the Defendant, and not a doubt that, as the Claimant claims, could lead to the application of art. 100 of the CPPT – since the conclusions of the RIT do not show any such doubt, besides the fact that there is no evidence of any error in the calculations made by the AT that led to the results shown in the RIT. Moreover – and this is the most relevant point – even with lower medians and interquartile ranges such as those proposed by the Claimant, the margins presented by the Claimant are well below these medians, and outside these ranges, with all the consequences that we have seen must result.” Click here for English translation. Click here for other translation Portugal P808_2019-T - 2020-12-21 ...

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 tax authority had set the price range for “APA Ktf’s” request for an advance pricing arrangement (APA) at 12.50 to 22.50 basis points. According to the tax authorities, it follows from points 3.61 and 3.62 of the Guidelines that it is only appropriate to adjust the arm’s length price for such transactions to a level close to the mid-point of the range if there is a comparability gap. In the present case, however, it had not been established that there are any shortcomings in comparability, so the first turn of paragraph 3.62 applies: any point in the range, including the mid-point, is in accordance with the arm’s length principle. Judgement of the Court of Appeal. The Court of Appeal pointed out that the applicant had applied for the determination of the normal market price under Article 132/B of the Art. “[37]Defendant [tax authorities] argued in its application for review that, under paragraphs 3.61 and 3.62 of the Guidelines, it is only appropriate to adjust the arm’s length price for such transactions to a level close to the mid-point of the range if there are comparability gaps. In the present case, however, the defendant has not established that there are any shortcomings in comparability, so the first turn of point 3.61 applies: any point in the range, including the mid-point, is in line with the arm’s length principle. In other respects, the defendant argues that, even if there are no shortcomings in comparability, only the extreme values of the range can be used, and not other values, such as the mean value: this cannot be combined with the interpretative criteria required by Article 28 of the Fundamental Law. [38] In its application for review, the defendant also argued that the principle of the proper exercise of rights under Article 1(2) of the Tao Law must be taken into account when applying Article 18(1) of the Tao Law. However, no breach of that fundamental principle of the Tao Law was found in the decision of the defendant which was the subject of the judicial review, nor is it found in the upheld decision of the first instance. Page 37, paragraph 3 of the first instance decision states in general terms, without mentioning the place of the legislation, that “The tax authority’s … transfer pricing adjustment up to the nearest point of the band is not based on Article 97(6) of the Tax Code, but on the relevant provisions of the Tao. In the absence of a specific provision of authority to that effect, the court of first instance could not rule on the matter by a final judgment and, consequently, it cannot be the subject of a review procedure. In the absence of a final judgment, the Curia also failed to analyse the question, following the applicant’s counterclaim, whether transfer pricing can be regarded as a rule or tax advantage (tax exemption, tax reduction) affecting the tax liability or tax liability affected by Section 1(2) of the Tao.tv. [39] In addition to the facts of the case, the applicant was required to determine the value according to which the condition of the controlled transaction had to be corrected, pursuant to Article 18(1) of the Tao.tv. In the absence of a provision in the Tao.tv., the method of correction was, by virtue of § 31(2)(b) of the Tao.tv., the first turn of point 3.62 of the Guidelines: any point within the range corresponds to the arm’s length price. On the basis of the actual content of Article 18(1) of the Tao Law, the Court of First Instance correctly concluded that neither the APA Decision, nor the Guidelines, nor the Tao Law, implied that, in the case of several normal market prices that can be designated in a given range, the adjustment for a consideration applied outside that range can only be made to the nearest extreme value. [40] In the light of the above, the Curia upheld the judgment of the court of first instance on the basis of Paragraph 275(3) of the Hungarian Civil Code. Content of the decision in principle [41] In the case of an arm’s length price set in a decision fixing the arm’s length price (advance pricing arrangement), the consideration applied outside the arm’s length range may be adjusted not only to the nearest extreme value but also to any element of the range, in accordance with Section 18(1) of the Tao.tv.” Click here for English translation Click here for other translation 35-504 ...

18 June 2019 the Polish Minister of Finance issued the first explanations on transfer pricing concerning – technical aspects of preparing comparability analyses and transfer pricing documentation. With regard to the technical aspects of preparing comparability analyses, the explanations cover such detailed issues as: data comparability vs. locality feasibility of using internal data feasibility of using bid data the appropriateness of using comparables that are not publicly available (so-called secret comparables) reasonableness of discarding from the comparables sample entities with extreme results (including those with loss) minimum sample size for benchmark data analysis selection of an interval point updating the benchmark data analysis. The second key issue addressed by the explanatory notes is the preparation of descriptions of the consistency of the terms of transactions and other events agreed with related parties with the terms that would be agreed among independent parties. Click here for unofficial English translation Objaśnienia_podatkowe_w_zakresie_Ceny_Transferowych ...

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 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 ...

It may also be the case that, while every effort has been made to exclude points that have a lesser degree of comparability, what is arrived at is a range of figures for which it is considered, given the process used for selecting comparables and limitations in information available on comparables, that some comparability defects remain that cannot be identified and/or quantified, and are therefore not adjusted. In such cases, if the range includes a sizeable number of observations, statistical tools that take account of central tendency to narrow the range (e.g. the interquartile range or other percentiles) might help to enhance the reliability of the analysis ...

“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 ...

In this case a Korean subsidiary, Photo Corp, sold photo paper, film, and other imports from overseas related parties to local stores. The Korean Tax Authority had applied the transactional net margin method (TNMM) to derive the arm’s length price. Six comparable companies had been selected and a tax assessment was issued based on the difference between the operating profit margin of the comparable companies and Photo Corp. Photo Corp disagreed with the assessment and filed an appeal claiming that the selected six companies were not comparable. The court found the tax authorities had applied the transaction net profit margin method without explaining why the traditional methods (CUP, RSM, CPM) could not be applied. The court also found that five of the selected comparables were retailers, and about ten times larger in terms of sales and company size than the tested party. In addition one of the selected companies manufactured products through separate research and development with the company’s affiliated research institutes and four of the selected companies sold high-end luxury goods to general consumers in department stores and other places. The court concluded that the six companies were not suitable for comparison in calculating the arm’s length price. The court refered the case back to the authorities with an order to re-examine the basis for applying a CUP-method. Translation of Korean 2006서1465 Korean 2006서1465 ...