In our Insights section, you can access our free publications, our regular newsletter and the news about transfer prices and our signature.

Newsletter 2/2019

The Spanish National Court rejects to automatically adjust to the median of the arm’s length range

In its judgement of 6 March 2019, the National Court (“Audiencia Nacional”) has aligned itself with the recommendations of the OECD Transfer Pricing Guidelines with regard to the point in the arm’s legth range at which transfer pricing adjustments should be made.

In the judged case, the taxpayer, a wholesale distributor, determined its transfer prices using the transactional net margin method (TNNM) , using the operating margin (OM) as a profit level indicator. Its results for the year were below the interquartile range of values. The Tax Administration reassessed the transfer prices by automatically adjusting the tapayer’s results to the median of that interquartile range, without justification as to why the median was the most appropriate point.

The Court rejects the Administration’s approach because, as the OECD Guidelines indicate, unless there is evidence to the contrary, all points within the arm’s length range are equally comparable and therefore valid for the practice of transfer pricing adjustment. Consequently, the Court orders that the adjustment be made to the lower quartile of the arm’s length range.

Profit participating loans: an area of transfer pricing risk

Profit Participating Loans enjoy a certain popularity thanks to their enormous flexibility and the advantages provided by their mercantile and accounting regulation in Spain. 

For profit participating loans granted before 20 June 2014, variable interest (linked to the evolution of the activity) was a tax-deductible expense for the borrower and taxable income for the lender.

Therefore, when such participating loans were subscribed between related persons or entities, such variable interests must also comply with the Arm’s Length Principle stated in Article 16 of the former Law 43/1995 and the subsequent consolidated text of the Corporate Income Tax Law, with the practical complexities that this type of instrument presented in order to undertake the Comparability Analysis.

However, the recent National Court Decisions of 28 June 2018 and 1 February 2019 point to the variable remuneration of profit participating loans as a source of controversy with the Tax Administration.

Read full article

BEPS 2.0 moves forward with a consensus road map

The 129 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) adopted a Programme of Work laying out a process for reaching a a consensus-based long-term solution on tax challenges arising from the digitalisation of the economy by the end of 2020.

The Programme of Work will explore the technical issues to be resolved through the two main pillars. The first pillar explores potential solutions for determining where tax should be paid and on what basis («nexus»), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located («profit allocation»).

The second pillar explores the design of a system to ensure that multinational enterprises – in the digital economy and beyond – pay a minimum level of tax. This pillar would provide countries with a new tool to protect their tax base from profit shifting to low/no-tax jurisdictions, and is intended to address remaining issues identified by the OECD/G20 BEPS initiative.

Austria issue draft Bill on “Google Tax”

On 4 April 2019, the Austrian Federal Ministry of Finance (MOF) released a draft bill on the taxation of the digital economy. The bill’s proposals would introduce a new 5% digital services tax (DST) on online advertising services.

The draft bill was subject to a period of public consultation, which ended on 9 May 2019. The MOF now will evaluate the comments received and possibly make changes to the draft bill before it is passed by parliament, which is expected shortly.

Companies providing covered services would be subject to the DST only if their worldwide revenues exceed EUR 750 million and their revenues from Austrian-source covered services exceed EUR 25 million. For multinational groups, these thresholds would apply to consolidated revenues.

The DST rate would be 5%, in line with the existing rate of Austrian advertising tax (which currently does not cover online advertising). The DST would be self-assessed, with payments due to the competent Austrian tax office by the 15th day of the second month following the month in which the service was rendered. The draft bill does not impose the DST liability on the covered service recipient.

The DST is expected to apply as from 1 January 2020.

Spanish National Court rules that LImited-Risk Distributor cannot deduct financial costs for increased payment terms

In its ruling of 29 March 2019, the Spanish National Court («Audiencia Nacional») endorsed the regularisation of a computer’s limited-risk distributor (LRD) in relation to higher financial costs for factoring arising from a change in the group’s commercial strategy and delays caused by changes in logistics with the group supplier.

The limited-risk distributor bore higher financial costs arising from increased customer collection periods as a result of a change in the group’s commercial strategy (giving greater weight to customers to retailers) and delays in shipments and cancellations due to changes in the group’s international logistics.

The Tax Administration considered that this increase in financial expenses is incompatible with the functional profile of the Spanish entity as a limited risk distributor, and proceeded to adjust them.


Spanish High Court rules that the tax administration is obliged to make the bilateral adjustment

The Judgment of the High Court of Justice of Galicia of 28 February 2019 has ruled that the Tax Administration is obliged to make the bilateral adjustment when it corrects the value of related-party transactions between a Spanish parent company and its Spanish subsidiary.

In the judged case, a parent company provided maquila services for its subsidiary. The Tax Administration considered that the price charged was higher than its market value and proceeded to reduce the deductible expense in the subsidiary.

In the Court’s opinion, the Tax Administration should also reduce the taxable income in the parent company ex officio.

India: “users” could be the allocation key for the new digital service PE

Following up on its efforts to address the tax challenges of the digital economy, India introduced the concept of a digital permanent establishment (PE) in 2018. Now India has proposed that “users” may be considered as one of the factors taken into account in attributing profits to a digital PE.

The Central Board of Direct Taxation (CBDT) set up a committee to examine the various issues related to the attribution of profits to a PE under India’s domestic law and tax treaties and to propose steps to best address this issue. The committee issued a report, entitled “Proposal for Amendment of Rules for Profit Attribution to a Permanent Establishment,” on 18 April 2019 that sets out proposed changes to India’s rules on the attribution of profits to a PE in India.

At the outset, the committee disagreed with the OECD approach for attributing profits to a PE based on functions, assets and risks (FAR analysis). Instead, the committee finds merit in adopting a three-factor approach for profit attribution by apportioning profits derived from India based on sales, employees and assets, using a specific formula.

However, in the case of digital businesses, the committee recognizes the roles and relevance of users that significantly contribute to the value and profits generated by the business. Accordingly, the committee is of the view that, in addition to the factors based on sales, employees and assets, where a digital business has a large number of users, those users should be taken into account as a fourth factor for the attribution of profits in business models when the users are crucial to the profits of the enterprise.

The committee also considered the weight to be ascribed to users for purposes of profit attribution. The committee prefers the option of assigning different weights based on user intensity, recommending a lower weight of 10% for business models involving low or medium user intensity, and a higher weight of 20% to users for business models involving high user intensity. (Where users are assigned a weight of 10%, each of the other three factors should be assigned a weight of 30%; where users are assigned a weight of 20%, the share of assets and employees each is reduced to 25%, with sales retaining a weighted factor of 30%.)

Japan implements hard-to-value intangible guidance into local TP rules

Japan’s 2019 tax reform package, approved by the National Diet on 27 March 2019, contains new rules that represent the domestic implementation of the OECD’s guidance on hard-to-value intangibles (HTVI). The new rules will apply for fiscal years beginning on or after 1 April 2020 for corporations and as from the 2021 calendar year for individuals. Additional detail on the rules is expected to be included in the cabinet orders (expected shortly after the law passes) and commissioners’ directives (expected later in 2019).

In addition to introducing the HTVI approach in Japan, the following changes are made to the tax law:

  • The definition of intangible assets is clarified;
  • The methods for calculating arm’s length prices is revised (the discounted cash flow (DCF) is introduced as a method that can be used for calculating transfer prices where no comparable transactions exist);
  • The statute of limitations is extended from six years to seven years; and
  • The interquartile range is formalized.

Related posts


TPS Newsletter – February 2024

Transfer Pricing developments around the world United Kingdom: HM Revenue and Customs (HMRC) has published a guide on transfer pricing risk analysis HMRC has published

Read More »

TPS Newsletter – January 2024

Switzerland: the Federal Tax Administration (FTA) has published a guide on interest rates applicable to financial transactions. Swiss companies that lend money to related parties

Read More »

TPS Newsletter – February 2024

Transfer Pricing developments around the world United Kingdom: HM Revenue and Customs (HMRC) has published a guide on transfer pricing risk analysis HMRC has published

Read More »
This site is registered on as a development site.