Spanish Court Case Releases Ruling on Use of Multiple Year Data and Arm’s Length Range

On March 6, 2019, the Spanish Court of Appeal (Audiencia Nacional) reached a final ruling regarding adjustments arising from a tax audit by the Spanish Tax Authority of IKEA Distribution Services (“IDS”), SA, a wholesale distribution company that sells product to related party retail companies. The adjustments related to disagreements that the Spanish Tax Authority had with IDS’ implementation of the transactional net margin method for the 2007 fiscal year. The total adjustments at issue were 37 million Euros.

Overall, similar to other current transfer pricing cases reaching trial, the final consensus by the Court relied upon the OECD Guidelines. Specifically, the decision of the Spanish Court of Appeal together with the first instance court (TEAC) provide to some extent some legal certainty and security amongst taxpayers with regards to two transfer pricing topics that had been previously open to interpretation. These two topics relate to the appropriateness of using multiple-year analyses and to the selection of a point in the arms’ length range for purposes of determining adjustments.

Regarding the first topic, the appeals court found that while the interquartile range can be calculated on a multiple year basis, the taxpayer must validate the placement of individual year results within an arm’s length range on a year-by-year basis.

With regard to the selection of a point in the range, the National High Court determined (in line with the OECD Guidelines) that where the range comprises results of relatively equal and high reliability, any point in the interquartile range can satisfy the arm’s length principle, whereas, if comparability defects remain, the use of a median can be more appropriate for purposes of identifying adjustments. In the case of IDS, the court found that the transactional net margin method (TNMM) analysis employed did not suffer defects that would warrant the use of the median for adjustment purposes, and instead adjusted results to the lower quartile return (where necessary).

Read Transfer Pricing Times – June 2019

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