Category: Interquartile range and median

Often the application of a transfer pricing method produces a range of figures. In some cases, not all comparable transactions will have a relatively equal degree of comparability. Where every effort has been made to exclude points that have a lesser degree of comparability, it may still be the case, that what is arrived at is a range of figures for which comparability defects remain that cannot be identified and/or quantified.

Substantial deviation among points in that range may indicate that the data used in establishing some of the points may not be as reliable as the data used to establish the other points in the range

In such cases, if the range includes a sizeable number of observations, statistical tools (e.g. the interquartile range or other percentiles) can enhance the reliability of the analysis.

It may also be appropriate to use measures of central tendency (for instance the median, the mean or weighted averages) to determine the arm’s length price applied, in order to minimise the effect of unknown or unquantifiable remaining comparability defects.

See on this issue, TPG 2017, para 3.55 – 3.62

Spain vs Varian Medical Systems Iberica S.L., October 2021, Audiencia Nacional, Case No SAN 4241/2021 - ECLI:ES:AN:2021:4241

Spain vs Varian Medical Systems Iberica S.L., October 2021, Audiencia Nacional, Case No SAN 4241/2021 – ECLI:ES:AN:2021:4241

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 ... Continue to full case
France vs (SAS) SKF Holding France, October 2021, Conseil d'Etat, Case No. 443133

France vs (SAS) SKF Holding France, October 2021, Conseil d’Etat, Case No. 443133

RKS, whose business consists of the manufacture of very large custom bearings for the civil and military industries, is controlled by the Swedish group SKF through  (SAS) SKF Holding France. RKS was subject to a tax audit for FY 2009 and 2010, at the end of which the tax authorities adjusted the prices at which it had invoiced its products to the SKF group’s distribution companies abroad. According to the tax authorities, RKS was a simple manufacturing company that did not have control over strategic and operational risks, at therefore should not have losses resulting from such risks. As a result of the adjustment, SKF Holding France (the immediate parent of RKS) was subject to additional corporate income taxes amounting to EUR 5,385,325, including penalties. In a 2018 judgment the Montreuil Administrative Court discharged the additional taxes. However, this decision was set aside by the ... Continue to full case
Finland vs A Oy, September 2021, Supreme Administrative Court, Case No. KHO:2021:127

Finland vs A Oy, September 2021, Supreme Administrative Court, Case No. KHO:2021:127

A Oy, the parent company of group A, had not charged a royalty (the so-called concept fee) to all local companies in the group. The tax authorities had determined the level of the local companies’ arm’s length results and thus the amounts of royalties not collected from them on the basis of the results of nine comparable companies. The comparable companies’ performance levels were -0,24 %, 0,60 %, 1,07 %, 2,90 %, 3,70 %, 5,30 %, 8,40 %, 12,30 % and 13,50 %. The interquartile range of the results had been 1.1-8.4% and the median 3.7%. The tax inspectors had set the routine rate of return for all local companies at 4,5 %, which was also used by A Ltd as the basis for the concept fee. A’s taxes had been adjusted accordingly to the detriment of the company. Before the Supreme Administrative Court, A ... Continue to full case
Panama vs "Pharma Distributor S.A.", July 2021, Administrative Tax Court, Case No TAT-RF-066

Panama vs “Pharma Distributor S.A.”, July 2021, Administrative Tax Court, Case No TAT-RF-066

An adjustment for FY 2013 and 2014 had been issued to a pharmaceutical company in Panama “Pharma Distributor S.A” that resulted in an income adjustment of 19.5 million dollars, which in turn resulted in additional taxes of 2.4 million dollars. The resale price method had been used by Pharma Distributor S.A. to determine the market value of an asset acquired from a related entity that was sold to an independent entity. This method was rejected by the tax authorities based on the fact that the analysis presented by the taxpayer did not meet the requirements for application of the method. The tax authorities instead applied a TNMM. The tax authorities also rejected tax deductions for expenses purportedly paid for administrative services due to the absence of supporting documentation. Provisions of article 762-G “Administrative services received” in the Tax Code in Panama contemplates tax deductibility for ... Continue to full case
Finland vs A Oy, June 2021, Supreme Administrative Court, Case No. KHO:2021:73

Finland vs A Oy, June 2021, Supreme Administrative Court, Case No. KHO:2021:73

A Oy was part of the A group, whose parent company was A Corporation, a US corporation. A Oy had acted as the group’s limited risk distribution company in Finland. The transfer prices of the group companies had been determined on a mark-to-market basis using the net transaction margin method and the group companies’ operating profit on a mark-to-market basis had been determined on the basis of US GAAP, the accounting standard commonly applied within the group. The target profit level for the group’s limited risk distribution companies, including A Ltd, was set at 0,5 % in the group’s transfer pricing documentation, based on a comparables analysis. In 2011, the competent authorities of the countries of residence of the A Group’s European manufacturing companies had entered into an Advance Transfer Pricing Agreement (APA) under which transfer pricing is monitored in accordance with the Group’s common ... Continue to full case
Denmark vs Tetra Pak Processing Systems A/S, April 2021, Supreme Court, Case No BS-19502/2020-HJR

Denmark vs Tetra Pak Processing Systems A/S, April 2021, Supreme Court, Case No BS-19502/2020-HJR

The Danish tax authorities had issued a discretionary assessment of the taxable income of Tetra Pak Processing Systems A/S due to inadequate transfer pricing documentation and continuous losses. Judgement of the Supreme Court The Supreme Court found that the TP documentation provided by the company did not comply to the required standards. The TP documentation did state how prices between Tetra Pak and the sales companies had been determined and did not contain a comparability analysis, as required under the current § 3 B, para. 5 of the Tax Control Act and section 6 of the Danish administrative ordinance regarding transfer pricing documentation. Against this background, the Supreme Court found that the TP documentation was deficient to such an extent that it had to be equated with missing documentation. The Supreme Court agreed that Tetra Pak’s taxable income for FY 2005-2009 could be determined on ... Continue to full case
Chile vs Avery Dennison Chile S.A., March 2021, Tax Court, Case N° RUT°96.721.090-0

Chile vs Avery Dennison Chile S.A., March 2021, Tax Court, Case N° RUT°96.721.090-0

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low. Judgement of the Tax Tribunal The Tribunal decided in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the ... Continue to full case
Spain vs BIOMERIEUX ESPAÑA SA, February 2021, National Court, Case No 2021:416

Spain vs BIOMERIEUX ESPAÑA SA, February 2021, National Court, Case No 2021:416

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 ... Continue to full case
South Africa vs ABC (PTY) LTD, January 2021, Tax Court of Johannesburg, Case No IT 14305

South Africa vs ABC (PTY) LTD, January 2021, Tax Court of Johannesburg, Case No IT 14305

ABC Ltd is in the business of manufacturing, importing, and selling chemical products. It has a catalyst division that is focused on manufacturing and selling catalytic converters (catalysts) which is used in the abatement of harmful exhaust emissions from motor vehicles. To produce the catalysts, applicant requires, inter alia, some metals known as the Precious Group of Metals (PGMs). It purchases the PGMs from a Swiss entity (“the Swiss Entity”). The PGMs are liquified and mixed with other chemicals to create coating for substrates, all being part of the manufacturing process. Once the manufacturing is complete, the catalysts are sold to customers in South Africa known as the original equipment manufacturers (OEMs). ABC Ltd and the Swiss Entity are connected parties as defined in section 1 of the ITA. Following an audit carried out in 2014 the revenue service issued an assessment for FY 2011 ... Continue to full case
Romania vs "Electrolux" A. SA, November 2020, Supreme Court, Case No 6059/2020

Romania vs “Electrolux” A. SA, November 2020, Supreme Court, Case No 6059/2020

In this case, a Romanian manufacturer and distributor (A. SA) in the Electrolux group (C) had been loss making while the group as a whole had been profitable. The tax authorities issued an assessment, where the profit of A. SA had been determined based on a comparison to the profitability of independent traders in households appliances. When calculating the profit margin of A. SA certain adjustments was made to the costs – depreciations, extraordinary costs etc. When comparing A. SA’s net profit to financial results with those of the group to which it belongs, it emerged that, during the period under review, the applicant was loss-making while C. made a profit. With reference to paragraphs 1.70 and 1.71 of the OECD Transfer Pricing Guidelines, when an affiliated company consistently makes a loss while the group as a whole is profitable, the data may call for ... Continue to full case
Panama vs "Petroleum Wholesale Corp", September 2020, Administrative Tribunal, Case No TAT-RF-062

Panama vs “Petroleum Wholesale Corp”, September 2020, Administrative Tribunal, Case No TAT-RF-062

“Petroleum Wholesale Corp” is engaged in the wholesale of petroleum products, accessories and rolling stock in general in Panama. Following a thorough audit carried out by the Tax Administration in Panama, where discrepancies and inconsistencies had been identified between the transfer pricing documentation and financial reports and other publicly available information, an assessment was issued for FY 2013 and 2014 resulting in additional taxes and surcharges of approximately $ 14 millions. Petroleum Wholesale Corp disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal decided in favor of the tax authorities with a minor adjustment in the calculations for 2014. “…we consider that the Tax Administration adhered, in this case, to the powers conferred by law, and that there is no defenselessness, since it was verified that, in the course of the audit, several requests for information were made (as ... Continue to full case
Greece vs "G Pharma Ltd", july 2020, Court, Case No 1582

Greece vs “G Pharma Ltd”, july 2020, Court, Case No 1582

“G Pharma Ltd” is a distributor of generic and specialised pharmaceutical products purchased exclusively from affiliated suppliers. It has no significant intangible assets nor does it assume any significant risks. However for 17 consecutive years it has had losses. Following an audit, the tax authorities issued an assessment, where the income of G Pharma Ltd was determined by application of the Transactional Net Margin Method (TNMM). According to the tax authorities a limited risk distributor such as G Pharma Ltd would be expected to be compensated with a small, guaranteed, positive profitability. G Pharma Ltd disagreed with the assessment and filed an appeal. Judgement of the Court The court dismissed the appeal of G Pharma Ltd and upheld the assessment issued by the tax authorities. Excerpts “First, the reasons for the rejection of the final comparable sample of two companies were set out in detail ... Continue to full case
Denmark vs Icemachine Manufacturer A/S, June 2020, National Court, Case No SKM2020.224.VLR

Denmark vs Icemachine Manufacturer A/S, June 2020, National Court, Case No SKM2020.224.VLR

At issue was the question of whether the Danish tax authorities had been entitled to make a discretionary assessment of the taxable income of Icemachine Manufacturer A/S due to inadequate transfer pricing documentation and continuous losses. And if such a discretionary assessment was justified, the question of whether the company had lifted the burden of proof that the tax authorities’ estimates had been clearly unreasonable. The Court ruled that the transfer pricing documentation provided by the company was so inadequate that it did not provide the tax authorities with a sufficient basis for determining whether the arm’s length principle had been followed. The tax authorities had therefore been entitled to make a discretionary assessment of the taxable income. For that purpose the Court found that the tax authorities had been justified in using the TNM method with the Danish company as the tested party, since sufficiently reliable ... Continue to full case
Czech Republic vs. ACTRAD s.r.o., February 2020, Supreme Administrative Court, No. 7 Afs 176/2019 - 26

Czech Republic vs. ACTRAD s.r.o., February 2020, Supreme Administrative Court, No. 7 Afs 176/2019 – 26

The issue in this case was the pricing of advertising services acquired by ACTRAD s.r.o. from related parties PRESSTEX PRINT and PRESSTEX MEDIA . According to the authorities ACTRAD instead of acquiring advertising and promotional services directly from the sports clubs (which was possible), used the services of intermediaries PRESSTEX PRINT and PRESSTEX MEDIA, who increased the price of the services provided significantly (290, 229 and 102 times), without adding any value to the transaction. The final price paid for the advertisement thus increased 290 times in 2011, 229 times in the first half of 2012 and 102 times in the second half of 2012 compared to the initial invoice. This increase occurred while the content, scope and form of the services remained unchanged. The result of the arrangement was a reduction in the tax bases of ACTRAD s.r.o. The tax authorities issued an assessment ... Continue to full case
Panama vs "AC S.A.", January 2020, Administrative Tribunal, Case No TAT-RF-002

Panama vs “AC S.A.”, January 2020, Administrative Tribunal, Case No TAT-RF-002

“AC S.A” is engaged in sale of ventilation, heating and cooling equipment in Panama. AC S.A pays royalties for use of IP owned by the parent company of the AC Group. Following a audit carried out by the Tax Administration in Panama it was concluded that the profits of AC S.A 2.04% was below the arm’s length range determined by application of a TNM-method. After removing non-comparables from the benchmark study provided by the company, the interquartile range had a lower quartile of 6.15% and a median of 8.41%. Hence an assessment of additional taxable income was issued for FY 2014, bringing the profits of AC S.A up to the median (8.41%) of the adjusted benchmark. AC Corp disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal decided in favor of the tax authorities, but made adjustment to the ... Continue to full case
Poland vs "Cans Corp", September 2019, Provincial Administrative Court i Szczecin, Case no SA/Sz155/19

Poland vs “Cans Corp”, September 2019, Provincial Administrative Court i Szczecin, Case no SA/Sz155/19

At issue in this case was the remuneration of a Polish manufacturing subsidiary in an international group dealing in the production and sale of metal packaging for food products, including beverage cans, food cans, household cans and metal closures. The tax authorities had issued an tax assessment for FY 2009 – 2012 based on a benchmark study. Decision of the Administrative Court The Court upheld the decision of the tax authorities concerning income for the tax year from 01/01/2012 to 31/12/2012. In 2012, the Polish manufacturing site operated by producing lids for jars. In the course of the audit proceedings against the Party regarding corporate income tax for 2012, the first instance authority determined – based on a comparative analysis of the financial results of similar independent manufactures operating in the packaging industry on the market in Central and Eastern Europe, that this market showed ... Continue to full case
Romania vs "Broker" A SRL, September 2016, Supreme Court, Case No 3818/2019

Romania vs “Broker” A SRL, September 2016, Supreme Court, Case No 3818/2019

Following an audit Broker A SRL was ordered to submit corrective statements on the corporate income tax for the tax years 2016 and 2017, and not to take over the tax loss from previous years, in the amount of RON 62,773,810 in 2016 and 2017. The tax authorities had found shortcomings in the comparability study drawn up by the company and replaced it with their own study. According to Broaker A SRL the transfer pricing adjustment was unlawful: the measure of reworking the comparability study has no legal basis and was not reasoned by the tax authorities; the findings of the tax inspection bodies are based on a serious error concerning the accounting recognition of A. BV’s income in its records; unlawfulness as regards the adjustment of income in respect of support services. ANAF has made serious errors of calculation by reference to its own ... Continue to full case
Sweden vs Absolut Company AB, June 2019, Supreme Administrative Court, Case no 1913-18

Sweden vs Absolut Company AB, June 2019, Supreme Administrative Court, Case no 1913-18

The Absolut Company AB had been issued an assessment of additional taxable income of SEK 247 mio. The assessment was based on the position that (1) The Absolut Company AB had been selling below the arm’s length price to an US group company – The Absolut Spirit Company Inc. (ASCI), and (2) that acquired distribution services from ASCI that had been priced above the arm’s length price. In 2018 the Swedish Administrative Court of Appeal ruled in favor of the tax administration. The Swedish Supreme Administrative Court has now ruled in favor of The Absolute Company AB. According to the Supreme Administrative Court the Swedish Tax Agency did not fulfill the burden of proof. The Supreme Administrative Court further states that the full range of results in the benchmark study could be applied and that a multiple year analysis of the tested party data can be used ... Continue to full case
Spain vs Ikea, March 2019, Audiencia Nacional (TEAC), Case No SAN 1072/2019

Spain vs Ikea, March 2019, Audiencia Nacional (TEAC), Case No SAN 1072/2019

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 ... Continue to full case
Chile vs Monsanto Chile S.A, December 2018, Tax Court, Case N° RUC N° 14-9-0000002-3

Chile vs Monsanto Chile S.A, December 2018, Tax Court, Case N° RUC N° 14-9-0000002-3

Monsanto Chile – since 2018 a subsidiary of Bayer – is engaged in production of vegetable seeds and Row Crop seeds. The company uses its own local farmers and contractors, employs some 250 people and hires a maximum of 2,000 temporary workers in the summer months. It receives parental seed from global planners in the US and other countries and then multiplies these seeds in Chile on its own or third-party farms. The seeds are then harvested, processed and shipped to locations specified by global planners. Following an audit of FY 2009-2010 an adjustment was issued related to the profitability obtained in the operations of the “Production” segment (sale of semi-finished products to related parties) and “Research and Development” carried out on behalf of related parties abroad. The adjustment was determined by the tax authorities using the a Net Margin method. The tax authorities found ... Continue to full case