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Database of Transfer Pricing Case Laws

TPG2022 Chapter III paragraph 3.28

Posted on January 20, 2022 | By OECD

Category: OECD Transfer Pricing Guidelines (2022), TPG2022 Chapter III: Comparability Analysis | Tag: Comparability adjustments, Comparability analysis, Comparability factors, Comparable Uncontrolled Price method (CUP), Difference in volumes, Internal comparables, Purchase volumes

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On the other hand, internal comparables are not always more reliable and it is not the case that any transaction between a taxpayer and an independent party can be regarded as a reliable comparable for controlled transactions carried on by the same taxpayer. Internal comparables where they exist must satisfy the five comparability factors in the same way as external comparables, see paragraphs 1.33-1.138. Guidance on comparability adjustments also applies to internal comparables, see paragraphs 3.47-3.54. Assume for instance that a taxpayer manufactures a particular product, sells a significant volume thereof to its foreign associated retailer and a marginal volume of the same product to an independent party. In such a case, the difference in volumes is likely to materially affect the comparability of the two transactions. If it is not possible to make a reasonably accurate adjustment to eliminate the effects of such difference, the transaction between the taxpayer and its independent customer is unlikely to be a reliable comparable.

Related Guidelines

TPG2022 Chapter III paragraph 3.27Step 4 of the typical process described at paragraph 3.4 is a review of existing internal comparables, if any. Internal comparables may have a more direct and closer relationship to the transaction under review than external comparables. The financial analysis may be easier and more reliable as it will presumably...

TPG2022 Chapter III paragraph 3.24A comparable uncontrolled transaction is a transaction between two independent parties that is comparable to the controlled transaction under examination. It can be either a comparable transaction between one party to the controlled transaction and an independent party (“internal comparable”) or between two independent enterprises, neither of which is a...

TPG2022 Chapter II paragraph 2.17In considering whether controlled and uncontrolled transactions are comparable, regard should be had to the effect on price of broader business functions other than just product comparability (i.e. factors relevant to determining comparability under Chapter I). Where differences exist between the controlled and uncontrolled transactions or between the enterprises undertaking...

OECD COVID-19 TPG paragraph 9The unprecedented change in the economic environment following the outbreak of COVID-19 creates unique challenges for performing comparability analysis. The pandemic may have a significant impact on the pricing of some transactions between independent enterprises and may reduce the reliance that can be placed on historical data when performing comparability...

TPG2022 Chapter III paragraph 3.54Ensuring the needed level of transparency of comparability adjustments may depend upon the availability of an explanation of any adjustments performed, the reasons for the adjustments being considered appropriate, how they were calculated, how they changed the results for each comparable and how the adjustment improves comparability. Issues regarding documentation...

TPG2022 Chapter III paragraph 3.53It is not appropriate to view some comparability adjustments, such as for differences in levels of working capital, as “routine” and uncontroversial, and to view certain other adjustments, such as for country risk, as more subjective and therefore subject to additional requirements of proof and reliability. The only adjustments that...

TPG2022 Chapter III paragraph 3.52It is not always the case that adjustments are warranted. For instance, an adjustment for differences in accounts receivable may not be particularly useful if major differences in accounting standards were also present that could not be resolved. Likewise, sophisticated adjustments are sometimes applied to create the false impression that...

TPG2022 Chapter III paragraph 3.51It bears emphasis that comparability adjustments are only appropriate for differences that will have a material effect on the comparison. Some differences will invariably exist between the taxpayer’s controlled transactions and the third party comparables. A comparison may be appropriate despite an unadjusted difference, provided that the difference does not...

TPG2022 Chapter III paragraph 3.50Comparability adjustments should be considered if (and only if) they are expected to increase the reliability of the results. Relevant considerations in this regard include the materiality of the difference for which an adjustment is being considered, the quality of the data subject to adjustment, the purpose of the adjustment...

TPG2022 Chapter III paragraph 3.49An example of a working capital adjustment designed to reflect differing levels of accounts receivable, accounts payable and inventory is provided in the Annex to Chapter III. The fact that such adjustments are found in practice does not mean that they should be performed on a routine or mandatory basis....

Supplemental Guidance

Spain vs MAHOU (SAN MIGUEL) S.A., December 2021, Audiencia Nacional, Case No SAN 5537/2021 – ECLI:ES:AN:2021:5537The Mahou San Miguel brewing group used the CUP method to price intra-group beer sales between its subsidiaries and distributor Cervezas Alhambra SL. Spanish tax authorities rejected CUP in favour of TNMM, arguing prices were set below market value to exploit Alhambra's loss carry-forwards. The Audiencia Nacional upheld the tax...

El Salvador vs Distribuidora Salvadorena de Petroleo S.A. DE C.V., September 2013, Supreme Court, Case No 386-2010A Salvadoran petroleum distributor was assessed by tax authorities who alleged that oil sales to a related party, Nejapa Power Company, were not at arm's length. The Supreme Court of El Salvador set aside the assessment in 2013, finding that the tax authority had improperly applied a presumptive basis method...

Colombia vs Masterfoods Colombia Ltda, Effem Colombia Ltda, February 2024, Supreme Administrative Court, Case No. 08001-23-33-000-2015-02445-01 (24364)Colombia's Supreme Administrative Court upheld the annulment of a transfer pricing assessment against Masterfoods Colombia for FY2008. The tax authority had replaced the taxpayer's transactional net margin method with the cost-plus method and adjusted results to the median of the interquartile range. The court found the authority's method and comparables...

Italy vs E.I. S.r.l., February 2021, Regional Tax Commission, Case No 12/02/2021 n. 546/9An Italian company priced transactions with a related Spanish entity using the cost-plus method. The tax authority issued an assessment based on an internal CUP with an independent party where prices were higher. The taxpayer successfully argued the difference reflected volume discounts. The Regional Tax Commission dismissed the tax authority's...

Portugal vs “FURNITURE S.A.” No I, November 2021, CAAD Administrative Tribunal, Case No 14/2021-TA Portuguese furniture manufacturer priced sales to its US subsidiary using the resale price method at 70% of list price. The tax authority substituted the internal price list, raising taxable profits. The CAAD Administrative Tribunal sided with the taxpayer in 2021, finding the authority failed to conduct a proper individual...

Portugal vs “FURNITURE S.A.” No II, November 2021, CAAD Administrative Tribunal, Case No 604/2021-TA Portuguese furniture manufacturer priced sales to its US subsidiary using the resale price method at 70% of list price. The tax authority reassessed FY2015–2016 using list prices as comparables. The CAAD Administrative Tribunal set aside the adjustment in 2021, finding that list prices failed the required comparability analysis and...

Italy vs Terex Italia S.r.l., January 2024, Supreme Court, Case No 2853/2024Terex Italia, a heavy machinery manufacturer, issued a credit note to its UK related distributor adjusting sales prices, which Italian tax authorities challenged as resulting in below-cost sales. The Provincial and Regional Tax Commissions largely upheld the assessments. Italy's Supreme Court, in January 2024, decided mostly in favour of the...

Ukrain vs PJSC Odesa Port Plant, October 2023, Supreme Administrative Court, Case No 826/14873/17Following a tax audit of PJSC Odesa Port Plant covering controlled transactions on mineral fertiliser exports to Swiss and other non-resident trading companies, Ukraine's tax authority challenged the use of the net profit method, arguing the comparable uncontrolled price method should have applied. The Supreme Administrative Court, in October 2023,...