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

Italy vs Promgas s.p.a., May 2022, Supreme Court, Cases No 15668/2022

Italy vs Promgas s.p.a., May 2022, Supreme Court, Cases No 15668/2022

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 ... Continue to full case
Netherlands vs "Fertilizer BV", April 2022, Court of Appeal, Case No. ECLI:NL:GHSHE:2022:1198

Netherlands vs “Fertilizer BV”, April 2022, Court of Appeal, Case No. ECLI:NL:GHSHE:2022:1198

In 2016 Fertilizer BV had been issued a tax assessment for FY 2012 in which the tax authorities had imposed additional taxable income of €162,506,660. Various issues related to the assessment was disputed before the Court of Appeal. Dispute 1: Allocation of debt and equity capital to a permanent establishment in Libya in connection with the application of the object exemption. More specifically, the dispute is whether the creditworthiness of the head office was correctly taken as a starting point and a sufficient adjustment was made for the increased risk profile of the permanent establishment. The Court of Appeal answered this question in the affirmative, referring to the capital allocation approach that is regarded as the preferred method for the application of Article 7 of the OECD Model Convention. Dispute 2: Should all claims and liabilities denominated in dollars be valued in conjunction? The mere ... Continue to full case
Bulgaria vs Rubbertek Bulgaria EOOD, April 2022, Supreme Administrative Court, Case No 3453

Bulgaria vs Rubbertek Bulgaria EOOD, April 2022, Supreme Administrative Court, Case No 3453

By judgment of 22 May 2020, the Administrative Court upheld the complaint filed by “Rubbertek Bulgaria” and set aside an assessment for FY 2015-2016 issued by the tax authorities on the determination of the arm’s length income resulting from related party transactions. According to the Administrative court, the tax assessment was unfounded and unsubstantiated. An appeal was filed by the tax authorities with the Supreme Administrative Court in which the authorities stated that the decision of the Administrative Court was incorrect. The court erred in finding that the decision of the tax authorities referred to other comparable companies than those in Rubbertek Bulgaria’s documentation. Furthermore, the court uncritically accepted Rubbertek Bulgaria’s claim that the reason for the deviation of the declared income from the median for 2015 and 2016 was a relocation of assets from the German company to the Bulgarian company. Judgement of the ... Continue to full case
Panama vs "Construction S.A.", December 2021, Administrative Tax Court, Case No TAT- RF-111 (112/2019)

Panama vs “Construction S.A.”, December 2021, Administrative Tax Court, Case No TAT- RF-111 (112/2019)

“Construction Service S.A.” is active in Design, Repair and Construction of buildings. During the FY 2011-2013 it paid for services – management services and construction services – rendered from related parties. Following an audit the tax authorities issued an assessment where payments for these services had been adjusted by reference to the arm’s length principle. According to the authorities the benchmark studies in the company’s transfer pricing documentation suffered from comparability defects and moreover it had not been sufficiently demonstrated that the services had been effectively provided. The tax authorities pointed out that since the company is not considered comparable to the taxpayer, the interquartile range would be from 5.15% to 8.30% with a median of 5.70%; therefore, the taxpayer’s operating margin of 4.07% is outside the interquartile range. Not satisfied with the adjustment “Construction Service S.A.” filed an appeal with the Tax Court Judgement ... Continue to full case
Spain vs "Benchmark SA", November 2021, TEAC, Case No Rec. 4881/2019

Spain vs “Benchmark SA”, November 2021, TEAC, Case No Rec. 4881/2019

The tax authorities excluded some of the entities selected by the taxpayer in a benchmark study, as it considered that they did not meet the necessary comparability requirements, and also included some of the excluded entities, as it considered that they were comparable. These modifications to the benchmark resulted in a variation of the arm’s length range, with the margin earned by the taxpayer falling outside the range. The taxpayer argued that the recalculation of market value should be based on a complete new analysis to replace the one provided by the entity. In relation to the rejection of certain comparables, the taxpayer argued that the information used by the tax authorities and consulted on the internet was not available at the time the transfer pricing documentation was prepared. Judgement of the TEAC The TEAC rejected the claim filed by the taxpayer and upheld the assessment ... Continue to full case
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
Spain vs XZ SA, May 2021, TEAC, Case No Rec. 2545/2019

Spain vs XZ SA, May 2021, TEAC, Case No Rec. 2545/2019

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 ... 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
Portugal vs "A-Contract Manufacturer LDA", December 2020, CAAD Tax Arbitration, Case No 808/2019-T

Portugal vs “A-Contract Manufacturer LDA”, December 2020, CAAD Tax Arbitration, Case No 808/2019-T

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 ... 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