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A recent ruling by the Spanish National Court in Nex Tyres SL v. Administración establishes key principles for multinational enterprises (MNEs) facing transfer pricing audits. The decision reinforces the importance of selecting appropriate pricing methods, justifying profit adjustments, and ensuring compliance with OECD guidelines.
The court upheld the tax authority’s choice of the Transactional Net Margin Method (TNMM) over the Comparable Uncontrolled Price (CUP) method, citing insufficient evidence supporting the latter’s validity. However, it annulled the tax authority’s median-based profit adjustment, ruling that the median of an interquartile range cannot be applied mechanically without demonstrating comparability defects.
This ruling follows a 2019 Spanish National Court decision in Ikea Iberica SA v. Administración, further cementing the principle that tax authorities must justify their selection of a median within an arm’s-length range.
Key Takeaways for MNEs:
✅ Method Selection Matters – Companies must substantiate their choice of transfer pricing methods with robust economic evidence.
✅ Median Adjustments Must Be Justified – Authorities cannot apply the median profit margin arbitrarily without proving comparability issues.
✅ OECD Guidelines Are Key – The ruling aligns with OECD Transfer Pricing Guidelines, emphasizing the need for thorough benchmarking and documentation.
✅ Proactive Compliance Reduces Risk – MNEs should ensure that transfer pricing documentation clearly justifies method selection and comparability analysis to avoid disputes.
The Case: What Happened?
Nex Tyres SL, a Spanish subsidiary of the German-based Ihle Tire Group, was acquired by Michelin in 2014. Acting as a distributor, the company used the CUP method to justify its intercompany pricing, arguing that its parent company’s pricing structure was more competitive than third-party suppliers.
However, the Spanish tax authority rejected this approach, citing:
Negative operating margins in two of the four audited years under the CUP method.
Failure to prove that independent distributors would accept similar pricing terms.
Significant differences in sales volume and stock return policies between related-party and third-party transactions.
Instead, the tax authority applied the TNMM, adjusting profits to the median of the interquartile range. The taxpayer contested this move, arguing that tax authorities cannot automatically select the median without proving comparability defects—an argument ultimately upheld by the court.
Why This Matters
The ruling has global implications for MNEs operating in Spain and beyond, emphasizing the importance of:
Transparent transfer pricing documentation
The economic justification for method selection
Proactive audit readiness to mitigate tax risks
With tax authorities worldwide intensifying scrutiny on transfer pricing, this case serves as a critical reference point for businesses navigating tax audits and compliance challenges.
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