On 25th February 2021, the Spanish Tax Agency (hereinafter “AEAT”, for the Spanish acronym) published an explanatory note with the aim of analysing some problematic issues that arise when using ranges of values to determine a market value that respects the arm’s length principle.

The following paragraphs summarize the main practical issues addressed in this note, in a “Q&A” format.

Prior to the questionnaire, it should be clarified that the OECD Guidelines devote Section A.7 of Chapter III (specifically paragraphs 3.55 to 3.66) to the arm’s length range. As known, the Guidelines are considered to be the basic international transfer pricing doctrine.

The questions are the following:


1. Why does the range of values exist?

The OECD Guidelines in paragraph 3.55 provide that in order to apply the valuation method in order to find the market price and thus comply with the arm’s length principle, it is possible to determine either a single figure or a range of values. While determining a single figure would be ideal, transfer prices are not an exact science so in the vast majority of cases this is not possible and the application of the most appropriate valuation method will lead to a range of values.

The OECD TP Guidelines justify the existence of this range for two main reasons:

  • On the one hand, the fact that the application of the arm’s length principle (through valuation methods) cannot reflect an exact reality of the conditions under which third parties had carried out their transactions.
  • On the other hand, the reality that not all independent parties that carry out comparable transactions under comparable conditions set the same price for them.


2. How is the range of values determined?

The OECD Guidelines in paragraph 3.56 state that related transactions identified as transactions with a lower degree of comparability should be removed from the range. In addition, to the extent possible, comparability should be adjusted to those values that require it. In this way, a range of values will be obtained in which the results are very reliable and similar.


3. Is it possible to determine a range of values in which the figures are relatively equally reliable?

It is possible but it is not very common. As mentioned in a previous question, transfer pricing is not an exact science and the process of selecting comparable companies is usually carried out using commercial databases developed for purposes other than transfer pricing analysis. As a consequence, some statistical tools are usually used to achieve greater reliability in the analysis.


4. How to proceed if a range is determined in which all figures are relatively unreliable?

The paragraph 3.57 of Chapter III, Section A.7 of the OECD Guidelines mentions that when it is obtained a range that includes a considerable number of observations and presents comparability defects, this range should be narrowed by using statistical tools of central tendency as a reference.

Therefore, in general, the results included between the first and third quartile are used[1].

Furthermore, paragraph 3.59 of the above-mentioned chapter of the OECD Guidelines contains a presumption of unreliability for ranges with a significant deviation between their points.


5. What to do in case of wide dispersion in the range?

When a range has dispersed points, the OECD recommends a further analysis to assess the possibility of eliminating the least reliable points or making appropriate comparability adjustments if possible.

Of course, it is important to analyze case-by-case as the acceptability of a greater or lesser dispersion in the range will depend on the facts and circumstances of each case.


6. What point in the range should be selected to set the value of the related transactions?

 The Guidelines, in paragraphs 3.60 to 3.62, lay down general rules when selecting a point within the range. The selection of the value will depend on the functional analysis performed, since the functions, assets and risks are essential for selecting the value of the related transactions.

On the one hand, when the value declared by the taxpayer is within a range considered to be at arm’s length, the Tax Administration will not be able to make an adjustment.

However, when the value is outside the arm’s length range, the Tax Administration will proceed to adjust the value of the transaction, unless the taxpayer could justify that it meets with the arm’s length principle.

Finally, in paragraph 3.62, the OECD sets out how to determine the point in the range to which the Tax Administration should adjust the transaction declared by the taxpayer when the value of the related transaction is outside the range of market values. The Guidelines indicate that when the range comprises very reliable results any point satisfies the arm’s length principle and will be adjusted to the nearest point. However, when a range is not highly reliable, central trend measures, usually the median, will be used, although it can also be adjusted to the average or weighted average depending on the specific circumstances of each case.

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[1] As the OECD echoes this, in addition to paragraph 3.57 of the Report of the EU Joint Price Forum, in its recommendation 6.1 by recognising as standard practice the narrowing of the rank.


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