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The Spanish National High Court upholds the Tax Administration challenging the selected transfer pricing method

In the recent resolution 5537/2021 of 20 December 2021 (Rec. n.º 537/2018) of the Administrative Chamber, the National High Court considers that the most appropriate method for the valuation of related-party transactions is the transactional net margin (hereinafter, “TNMM”) argued by the Tax Administration, instead of the comparable uncontrolled price method (hereinafter, “CUP”) applied by the taxpayer.

Case under analysis

The case under analysis is about a group of companies located in Spain, being the activity of one of the entities the marketing and distribution of beverages that are manufactured by two other entities of the group that are wholly owned by the first company.

The transactional flow is shown below:





Controversial aspects


One of the issues raised in the appeal concerns the selection of the transfer pricing method to be applied in related-party transactions consisting of the sale of beverages by the manufacturers to the other group entity responsible for their sale and distribution.


The appellant defends the use of the CUP against the TNMM applied by the Tax Authority, which led to an adjustment of the operating results and tax bases of the related-party transactions.


In that regard, the Tax Administration considered that the sales of the product had been conducted below market value to assign a higher profit to the entity marketing and distributing the product, as that entity had tax losses carryforward.


The Tax Authorities also pointed out that, although the taxpayer defended the application of the CUP, the entity had applied the TNMM in previous years to those under tax audit in similar transactions involving the sale of beverages manufactured by other entities in the group.

Decission of the Court


The Court accepts that the application of the TNMM in earlier years cannot bind the valuation of related-party transactions in later years to that method. However, what it does allow is to prove that the TNMM is a valid method by which transfer prices can be determined.


The Tax Administration carried out a benchmarking applying the TNMM which, according to the Court’s criteria, “the comparable samples (…) meet the requirements of activity and independence in accordance with the OECD guidelines”.


Finally, it is important to mention that the Tax Administration rejected the application of the CUP due to the non-existence of an internal comparable for the same type of beverages based on the following:


  • The comparable product used by the taxpayer was not marketed under the manufacturer’s brand.
  • The comparables obtained did not belong to the same year of the tax audit.
  • The volume of products sold was different.
  • There were differences in both the geographic market and the marketing stage of the product.




Although the current regulation of related-party transactions has eliminated the hierarchy of valuation methods, this does not mean that the taxpayer is free to apply the valuation method that suits it best.


The selection of the transfer pricing method is subject to selection and rejection rules provided for in the legislation and detailed in the OECD Transfer Pricing Guidelines, which are mandatory for both the Tax Administration and taxpayers.


The reasons for selecting or rejecting a valuation method for a related-party transaction are not only a formal requirement of the mandatory transfer pricing documentation that can be justified with a few standardized paragraphs or phrases. The selection of the method must be supported by facts identified during the comparability analysis since it will be reviewed by the Tax Administration and, where appropriate, the Courts of Justice.

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