On 29 July 2023, the Spanish National Court issued a decision that provided clarification on the range of arm’s length pricing adjustments applicable.

In this case, Ferroli Spain, a Spanish manufacturer specializing in non-electric stoves, heaters, and domestic heating appliances, played a central role. Ferroli Spain is completely owned by an Italian company, Ferroli SpA, through a Luxembourg holding company. Additionally, Ferroli Spain holds full ownership of a Spanish subsidiary named Cointra Godesia, with which it has established a corporate tax group for tax-related purposes.

During the fiscal years 2010 and 2011, the tax group disclosed a negative profit margin on sales concerning dealings with related entities. Nevertheless, in its transfer pricing report, the profit level indicator, measured as the return on sales, fell within the range of 3% to 6.8% when using the selected transactional net margin method. When the tax authority conducted an audit for that fiscal year, they acknowledged the range provided in the transfer pricing report. They subsequently boosted the group’s profit by approximately EUR 1.16 million, relying on the median margin of 4.6%. This decision was subsequently challenged through an appeal process.

The group argued that the lower profit margin was due to extraordinary indirect costs and severance payments caused by the Spanish economic crisis in 2011. In contrast, the tax authority contended that the outcomes did not justify a deviation below the arm’s-length range and that the median remained acceptable given the wide range.

In its ruling, the National High Court determined that although the tax authority’s transfer pricing adjustment was valid, the wide range does not automatically permit the tax authority to adopt the median figure. If the tax authority intends to employ the median, it must present a rationale for doing so, which it failed to do in this case. Consequently, the minimum percentage within the range that mean 3% should be employed as the arm’s length margin.