Spain: Spanish National Appellate Court says transfer pricing adjustments to the median must be grounded on comparability defects

On March 6 2019, the Spanish National Appellate Court (NAC), in a particularly relevant transfer pricing judgement, ruled on the selection of the point in the range of values of a sample obtained from a benchmarking analysis to justify the arm's-length nature of intra-group prices.

In the case considered, the results obtained by the audited entity in its wholesale distribution activity in Spain were below the interquartile range of remunerations resulting from the benchmarking analysis in one of the audited years (2007), whereas in the following fiscal year (2008, also assessed), they did fall within the said range.

The tax auditors adjusted the results of both fiscal years to the median of the benchmarking study, given that – in their opinion – there were comparability defects in the analysis (specifically, the differences in the taxpayer's sales volume with respect to those of the comparables used).

In the subsequent claim, the Central Economic-Administrative Tribunal (TEAC) ruled that there were no comparability defects because the tax auditors expressed no objection, considering the sample of comparables valid for making certain adjustments, and the differences in sales volume could not be deemed as such.

On that basis, the TEAC considered the adjustment of 2008 results (within the range) to the median value inappropriate, but confirmed the adjustment (to the median) for fiscal year 2007, where the results fell outside the range.

In its appeal before the NAC, the taxpayer sustained that its results in a pluriannual period were within the interquartile range and that for 2007 the adjustment, if deemed appropriated, should be to the lower quartile, not the median.

According to the NAC, a pluriannual period can be taken into consideration when performing the comparability study (based on the OECD Transfer Pricing Guidelines), but comparison with the taxpayer's results must be done individually with respect to each fiscal year reviewed.

Regarding the adjustment made for 2007, the NAC agreed on its appropriateness, as the taxpayer's results were outside the interquartile range.

However, the court reiterated (in line with paragraph 3.62 of the Transfer Pricing Guidelines) that, in order to use the median, there must be "comparability defects", and thus uphold the taxpayer's claim consistently with the TEAC's reasoning, according to which such defects did not exist in 2007 (nor in 2008).

Based on this lack of "comparability defects", the NAC considers that the adjustment for 2007 must be made to the lower quartile of the range.

According to the foregoing, this judgment will force the Spanish tax authorities to more thoroughly prove the existence of important defects in the comparability within the economic analysis used to justify the market value of related-party transactions, as a step prior to using the median when making a value adjustment.

If the taxpayer's results fall within the interquartile range of the sample of comparables obtained, that adjustment should not be made and the point in the range, even the lowest of all, should in principle be deemed valid.

This issue will also have an important impact when preparing benchmarking studies, as discussions with the tax authorities will focus on the comparability degree of the sample.

Thus, in order to avoid potential adjustments, taxpayers will need to conduct thorough analyses allowing them to justify and defend the robustness of the comparables identified, which is not always an easy task, as well as the reliability of the interquartile range to justify the arm's length nature of intragroup prices.