Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the Czech company and the Swiss company is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. However, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from ... Read more

Two issues were adressed in this case – transfer pricing and withholding taxes. The transfer pricing issue concerned whether the Danish tax authorities (SKAT) had been entitled to issue an assessment on controlled transactions made between “Soy A/S” and a flow-through company in the group located in a low tax jurisdiction. The withholding tax issue concerned whether the 13 transfers actually constituted taxable dividends under section 31, D of the Danish Corporation Tax Act, which “Soy A/S” was subsequently liable for not having withheld tax at source, cf. section 69(1) of the Danish Withholding Tax Act. Judgement of the High Court In regards of the transfer pricing issue, the High Court found that the company’s TP documentation was subject to a number of deficiencies which meant that the documentation did not provide the tax authorities with a sufficient basis for assessing whether the transactions were made in accordance with the arm’s length principle. The High Court emphasised, among other things, ... Read more

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 ... Read more

On 29 May 2002, Malaysia updated its existing TP rules. The new rules are largely in line with the OECD Transfer Pricing Guidelines, but there are minor differences. For example, the new rules state that the arm’s length range is defined as the range between the 37.5th and 62.5th percentiles of a data set. Furthermore, according to the new rules, the tax authorities may make adjustments to the median or any point above the median, even if a taxpayer’s price is already within the arm’s length range where there is a lower degree of comparability or comparability defects in the dataset. “13. Adjustment by Director General (1) Notwithstanding any other provision under these Rules, where the Director General has reason to believe that any price including the rate of interest imposed or would have been imposed in a controlled transaction is not at arm’s length, the Director General may make an adjustment to reflect the arm’s length price or arm’s ... Read more

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 ... Read more

Sandakan Edible Oils SDN BHD principal activity is, amongst others, to carry out the refining and sale of edible oils and related products, and the packaging and sale of cooking oil. It applied the Comparable Uncontrolled Price (CUP) method as the transfer pricing methodology to determine the arm’s length pricing of its controlled transactions. Following an audit for FY 2010-2013 the tax authorities informed Sandakan Edible Oils SDN BHD that it would be invoking section 140A of the ITA to raise an additional assessment. The tax authorities rejected the CUP method and instead applied the Transactional Net Margin Method (TNMM). According to the benchmarking analysis, Sandakan Edible Oils SDN BHD’s financial results was within the interquartile range for all years, but for 2010 the results was below the median. On that basis the tax authorities held that the margin for 2010 should be adjusted up to the median. Sandakan Edible Oils SDN BHD filed a complaint with the Special Commissioners ... Read more

The tax authority, based on the results of an audit, found that the prices in controlled export transactions of goods, carried out between “LK Ukraine Group” and related parties, did not comply with the arm’s length principle, i.e. the selling prices of the goods were lower than the minimum values of the arm’s length range. Disagreeing with this conclusion, “LK Ukraine Group” stated that the the method applied by the tax authority during the audit of prices in controlled transactions was unlawful and inappropriate due to the lack of information on all possible costs. At the request of the supervisory authority, “LK Ukraine Group” provided evidence that when determining the prices of goods, the group was guided by information based on monitoring, in particular, prices on the Euronext exchange, namely, the average selling prices of agricultural products on the terms of delivery EXW-port, which refuted the assertion of the authority that the controlled transactions did not comply with the arm’s ... Read more

SGGE W T is a Spanish branch of SGG that carries out distribution and marketing activities related to the information technology network products and services. SGG is part of the KF group which “is an international group that provides solutions and services in the Information Technology (IT) sector, starting its activity in . .. as a distributor of access and communications networks”. The group “is the result of several corporate operations, mainly company acquisitions and mergers carried out to increase its share in world markets” and “is mainly organized in three divisions (SGG, QR and …) according to the IT areas (Technology, Integration and Consulting) in which they operate”. Following an audit of FY 2015 and 2016 the tax authorities issued assessments of additional income to the Spanish branch. One of the issues identified was SGGE’s remuneration for its sales and marketing activities. According to the tax authorities, the income of the Spanish branch was below the lower quartile of ... Read more

The tax authorities issued a transfer pricing adjustment of USD 1.4 million for FY2013, claiming that the remuneration of “Tech Distributor S.A.” had not been determined in accordance with the arm’s length principle. According to the tax authorities, there were inconsistencies between the amounts of controlled transactions reported in the transfer pricing documentation and the income tax return. The tax authorities also found that “Tech Distributor S.A.” had incorrectly included “other income” in the calculation of its operating margin for the purposes of applying the Transactional Net Margin Method (TNMM). Finally, some of the companies selected as comparables were rejected and “comparability adjustments” were also disregarded. After making these adjustments to the benchmark analysis, the profit margin of “Tech Distributor S.A.” was outside the interquartile range and therefore the profit was adjusted to the median. “Tech Distributor S.A. appealed to the Tax Tribunal. Decision of the Tax Tribunal The Tribunal dismissed the appeal and upheld the assessment of the tax ... Read more

Following an audit the tax authorities concluded that ARGO-HYTOS s.r.o. sold goods (valves, blocks and hydraulic aggregates) to related parties at a price that differed from the prices that would have been agreed between unrelated parties under the same or similar conditions. Furthermore, according to the tax authorities ARGO-HYTOS s.r.o. did not satisfactorily document the difference from those normal prices. An appeal was filed by ARGO-HYTOS s.r.o. with the Regional Court which was dismissed the action by the above-quoted judgment No 30 Af 21/2019-46 (‘the contested judgment’). In the judgement, the Regional Court concluded that ARGO-HYTOS s.r.o. had not satisfactorily demonstrated the difference between the prices agreed between it and the companies of the ARGO-HYTOS group and the prices which would have been agreed between unrelated parties under the same or similar conditions. The Regional Court held that, if the tax authorities wished to justify the reasons for the increase in the applicant’s tax liability, it was incumbent on them ... Read more

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 ... Read more

Following an audit, the Greek tax authorities determined that the profit of “Pharma Distributor Ltd” for sales and service activities had not been determined in accordance with the arm’s length principle. The tax authorities issued an assessment of additional taxable income, rejecting the resale price method used by “Pharma Distributor Ltd” and instead applying the TNMM. An appeal was filed by “Pharma Distributor Ltd”. Judgement of the Tax Court The Court dismissed the appeal in part and allowed it in part. The tax authorities’ assessment was largely upheld in relation to sales activities, where it was found that the prices charged by “Pharma Distributor Ltd” were outside the interquartile range. In relation to the service activities, the Court found that the remuneration for these activities was within the arm’s length range and therefore annulled the assessment. Excerpts “In the light of the above, as regards the applicant company’s intra-group transactions Nos 1 to 4, there is a question of non-compliance ... Read more

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 ... Read more

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 ... Read more

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 ... Read more

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 ... Read more

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 ... Read more

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 ... Read more

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 ... Read more

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 ... Read more

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Multiple year analysis. (i) The facts are the same as in Example 2. In addition, the district director examines the taxpayer’s results for the 1997 taxable year. As in Example 2, the district director increases USSub’s income for the 1996 taxable year by $24,250. The results for the 1997 taxable year, together with the 1995 and 1996 taxable years, are as follows: 1995 1996 1997 Average Sales $560,000 $500,000 $530,000 $530,000 Cost of Good Sold 460,000 400,000 430,000 430,000 Operating Expenses 110,000 110,000 110,000 110,000 Operating Profit (10,000) (10,000) (10,000) (10,000) (ii) The interquartile range of comparable operating profits, based on average results from the uncontrolled comparables and average sales for USSub for the years 1995 through 1997, ranges from $15,500 to $30,000. In determining whether an allocation for the 1997 taxable year may be made, the district director compares USSub’s average reported operating profit for the years 1995 through 1997 to the interquartile range of average comparable operating profits over this period. USSub’s ... Read more

Transfer of tangible property resulting in adjustment. (i) The facts are the same as in Example 1 except that USSub reported the following income and expenses: 1994 1995 1996 Average Sales $500,000 $560,000 $500,000 $520,000 Cost of Good Sold 370,000 460,000 400,000 410,000 Operating Expenses 110,000 110,000 110,000 110,000 Operating Profit 20,000 (10,000) (10,000) 0 (ii) The interquartile range of comparable operating profits remains the same as derived in Example 1: $19,760 to $34,840. USSub’s average operating profit for the years 1994 through 1996 ($0) falls outside this range. Therefore, the district director determines that an allocation may be appropriate. (iii) To determine the amount, if any, of the allocation, the district director compares USSub’s reported operating profit for 1996 to comparable operating profits derived from the uncontrolled distributors’ results for 1996. The ratio of operating profit to sales in 1996 is calculated for each of the uncontrolled comparables and applied to USSub’s 1996 sales to derive the following results: Uncontrolled distributor OP/S (percent) ... Read more

Transfer of tangible property resulting in no adjustment. (i) FP is a publicly traded foreign corporation with a U.S. subsidiary, USSub, that is under audit for its 1996 taxable year. FP manufactures a consumer product for worldwide distribution. USSub imports the assembled product and distributes it within the United States at the wholesale level under the FP name. (ii) FP does not allow uncontrolled taxpayers to distribute the product. Similar products are produced by other companies but none of them is sold to uncontrolled taxpayers or to uncontrolled distributors. (iii) Based on all the facts and circumstances, the district director determines that the comparable profits method will provide the most reliable measure of an arm’s length result. USSub is selected as the tested party because it engages in activities that are less complex than those undertaken by FP. There is data from a number of independent operators of wholesale distribution businesses. These potential comparables are further narrowed to select companies ... Read more

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 ... Read more

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, ... Read more

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 ... Read more

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 ... Read more

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

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 ... Read more

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 ... Read more

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 ... Read more

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 ... Read more

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 ... Read more

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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 ... Read more

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) ... Read more

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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) ... Read more

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This case concerns pricing of four reinsurance agreements concluded between Codan Forsikring A/S (Codan) and a controlled Irish company, RSA Reinsurance Ireland Ltd. for FY 2010-2013. The tax authorities had increased Codan’s taxable income for FY 2010, 2011 and 2012 by DKK 23 million, DKK 25 million, and DKK 18 million and reduced the taxable income for FY 2013 by DKK 4 million. At issue was whether the expenses incurred by Codan under the reinsurance agreements with RSA Ireland were commercially justified and thus deductible. If so, there were questions as to whether the reinsurance agreements had been concluded at arm’s length. By decision of 26 June 2019 the Tax Court reduced the assessment to DKK 0 for the 2010-2012 tax years and upheld Codan’s taxable income for FY 2013. An appeal was filed by the tax authorities. Judgement of the Eastern High Court The High Court upheld the decision of the Tax Court and set aside the assessment of ... Read more

C. spółka z o.o. is part of a larger group and mainly (95%) sells products (metal containers) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products sold to related parties. The company was audited for FY 2016. According to the tax authorities, the company did not provide enough evidence to support the cost-plus method. The tax authority instead used the transactional net profit method to estimate the company’s income for the year 2016, taking into account factors such as characteristics of goods or services, functional analysis, contractual conditions, economic conditions, and economic strategy by comparing the company’s performance with similar companies over a 3 year period by using EBIT margin. As a result, the authority adjusted the company’s loss and established income based on a EBIT margin of 3.66%, resulting in additional taxable income of PLN 1,803,592.08. Judgement of the Administrative Court The Court found ... Read more

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; ... Read more

In this case “A. Median S.R.L.” had appealed a decision of the court of first instance where the income had been determined to the median value. According to the company the median is not the only value corresponding to the market value, when both the lower limit and the upper limit of the range of comparison in turn reflect the market value of the goods or services supplied. The provisions of Article 2.7 of the Guidelines were relied on in that regard. “…the assessment must be made in a manner which does not contravene Article 2.7 of the OECD Guidelines, that is to say, does not lead to overtaxation. However, given that the court of first instance assumed that the only value which may be taken into account in determining the transfer price is the median value, any other value within the margin established is excluded, which is contrary to the Tax Code and the OECD Guidelines.” The Tax authorities ... Read more

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 based on the resale price minus method. 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, and on that basis an assessment was issued. A complaint was filed by Avery Dennison with the Tax Tribunal and in March 2021 the Tribunal issued a decision in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its ... Read more

DELSEY España distributes and sells suitcases and other travel accessories of the DESLEY brand on the Spanish market and belongs to the French multinational group of the same name. The Spanish distributor had declared losses for FY 2005-2010 and was subject to a transfer pricing audit for FY 2011 to 2014. Based on the audit, the tax authorities concluded that the losses in FY 2005-2010 was a result of controlled transactions not being priced at arm’s length. The same was concluded for FY 2011 and 2012. The CUP method and RPM method applied by the taxpayer was found to be inappropriate and was replaced with the TNMM by the tax authorities. An appeal was filed by Delsey España S.A. Judgement of the Court The Court dismissed the appeal and upheld the assessment. Click here for English translation Click here for other translation Spain vs Delsey STSJ_CAT_1467_2022 ORG1 ... Read more

A similar investigation should be undertaken for potential comparables returning abnormally large profits relative to other potential comparables ... Read more

Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses ... Read more

An independent enterprise would not continue loss-generating activities unless it had reasonable expectations of future profits. See paragraphs 1.149-1.151. Simple or low risk functions in particular are not expected to generate losses for a long period of time. This does not mean however that loss-making transactions can never be comparable. In general, all relevant information should be used and there should not be any overriding rule on the inclusion or exclusion of loss-making comparables. Indeed, it is the facts and circumstances surrounding the company in question that should determine its status as a comparable, not its financial result ... Read more

Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect other items, e.g. exceptional items which are below the line but nonetheless may reflect exceptional circumstances. Where one or more of the potential comparables have extreme results, further examination would be needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An extreme result may be excluded on the basis that a previously overlooked significant comparability defect has been brought to light, not on the sole basis that the results arising from the proposed “comparable” merely appear to be very different from the results observed in other proposed “comparables” ... Read more