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

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The tax administration had issued an adjustment to the taxable profit of IKEA’s subsidiary in Spain considering that taxable profit in years 2007, 2008, and 2009 had not been determined in accordance with the arm’s length principle.

In 2007 taxable profits had been below the interquartile range and in 2008 and 2009 taxable profits had been within the interquartile range but below the median. In all years taxable profits had been adjusted to the median in the benchmark study.

Judgement of the Court

In regards to the adjustment mechanism – benchmark study, interquartile range, median – the Court provide the following reasoning

However, the OECD Guidelines in point 3.60 provide that “if the relevant terms of the controlled transaction (e.g. price or margin) are within the arm’s length range, no adjustment is necessary”.

Conversely, under rule 3.61, if the relevant terms of the controlled transaction “(e.g., price or margin) are outside the arm’s length range determined by the tax administration, the taxpayer should be given the opportunity to argue how the terms of the controlled transaction satisfy the arm’s length principle, and whether the result falls within the arm’s length range (i.e., that the arm’s length range is different from the arm’s length range determined by the tax administration). If the taxpayer is unable to demonstrate these facts, the tax administration must determine the point within the arm’s length range to which to adjust the condition of the controlled transaction”.

And, finally, rule 3.62 provides: “In determining this point, where the range comprises highly reliable and relatively equal results, it may be argued that any one of them satisfies the arm’s length principle. Where some defects in comparability persist, as discussed in paragraph 3.57, it may be appropriate to use measures of central tendency to determine this point (e.g. median, mean or weighted mean, depending on the specific characteristics of the data) in order to minimise the risk of error caused by defects in comparability that persist but are not known or cannot be quantified”.

In the Board’s view, the appellant should be upheld on this point. Indeed, as we have indicated, the Inspectorate was consistent, it gave the same treatment to the 2007 and 2008 financial years, as it understood that it should apply the median of 4.1%, in accordance with point 3.62 of the Guideline, it was appropriate to use measures of central tendency such as the median, specifically because it considered that “the study has comparability defects given that the companies included in the samples have lower sales volumes” – p. 38 of the Ruling. 38 of the Resolution.

Logically, the circumstances justifying the use of the median were valid for both 2007 and 2008, as the reasons were the same.

However, the TEAC, starting from the fact that the Inspectorate assumes the opinion of PwC, affirms that the data obtained will never be perfectly reliable, not being congruent “that the sample is used as an analysis of comparability as well as to extract data on which the regularisation itself is based, to then be rejected for the effect that could be favourable to the interested party, such as for the application of rule 3.60 of the aforementioned Guidelines, which excludes adjustments when they are within the range”. Therefore, it annulled the Agreement on this point, as the entity was within the range, remember that the interquartile range was between 2.1% and 7.6% and in 2008 it was at 2.42%. In other words, for the TEAC it was not possible to apply the rule of art. 3.62 on which the Tax Inspectorate based itself, because in 2008, the company was within the margins required by art. 3.60, which was not the case in 2007.

However, in our opinion it is clear that if the ROS is outside the limits of the inter-quantile range, the corresponding adjustment must be made, as only from 2.1 % onwards is the company within the comparable market margins. However, in order to apply the median, there must also be “comparability defects”, and if these did not exist for 2008, for the same reason they did not exist for 2007 either. It should be noted that, in response to the arguments of the Inspectorate which argued that there were defects of comparability, the TEAC states that “a difference in the volume of sales is not sufficient reason to reject the validity of the report… The fact that the entity being verified occupies a leading position within its sector due to its sales volume does not in itself cause a lack of comparability – p. 40 TEAC Resolution-.

In short, it seems to us that, once it has been determined that the appellant’s ROS in the year under discussion is outside the lowest inter-quantile range – 2.1% – it is indeed appropriate to make the corresponding adjustment. However, the fact that that is the case does not, without more, allow the median to be applied in the terms provided for in Rule 3.62, since the application of that rule is not justified by the fact of being outside the range of full competence, but by the existence of ‘comparability defects’, which, according to the arguments of the TEAC itself, were not the case in 2008 and, by extension, would not be the case in relation to 2007 either.

The plea is upheld, since the Board agrees, with the applicant, that the adjustment should have been made on 2.1% and not 4.1%. It is not necessary, therefore, to analyse whether the median of the interquantile range should have been used instead of the median of the sample.

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Spain vs Ikea 06 March 2019

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