IHLE ESPAÑA (later NEX TYRES) purchased tyres from its German parent company (IHLE BB) using what it claimed was the CUP method. It claimed that IHLE BB sold the tyres at the same price as it paid to third party suppliers, simply passing on additional transport costs and a small administration fee.
The tax authorities rejected the CUP method used by IHLE and instead applied a TNMM, selecting a group of EU car parts wholesalers as comparables, using statistical tools to determine an interquartile range and then adjusting IHLE ESPAÑA’s profit to the median.
IHLE ESPAÑA appealed.
Judgment
The Court ruled largely in favour of the tax authorities, but partially upheld IHLT’s appeal.
The Court ruled that the “CUP method” used by IHLT was inconsistent because, once all indirect costs were added to the price, IHLE appeared to buy the tyres at a higher total price than it sold them, resulting in negative or minimal gross margins that no independent distributor would accept. In addition, the Court noted that IHLE had relied on internal comparables – tyres purchased independently in Spain – but that the tax authorities had identified various shortcomings in the comparability: differences in volumes, return policies and other conditions of sale which made a reliable price adjustment impossible.
The Court upheld the tax authorities’ choice of transfer pricing method (TNMM) and approved the comparables in the benchmark, agreeing that it was reasonable to look beyond the Spanish market to find companies of comparable size and activity, given the taxpayer’s own pan-European sourcing strategy. However, the Court concluded that the tax authorities had adjusted to the median without explaining how remaining “comparability deficiencies” justified disregarding lower points in the range. Under the OECD Guidelines, the use of the median requires a clear demonstration that there are imperfections in the comparables such that only a measure of central tendency can correct them. As the tax authorities did not provide such justification, the Court partially upheld the taxpayer’s appeal on this point.
Finally, the Court examined the tax authorities’ refusal to recognise the taxpayer’s tax losses from previous years (2006-2010). The tax authorities had assumed that the same transfer pricing errors discovered in 2011-2014 would also invalidate the earlier losses. The Court found that assumption unfounded and allowed those tax losses to stand unless and until the tax authorities had properly demonstrated that they resulted from incorrect transfer pricing in those unaudited years.
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