Spanish Transfer Pricing Ruling Gives Guidance for MNEs in Audits

This article was originally published on Bloomberg Tax, March 2025 and is reproduced with permission from the publisher.

In its recent decision in Nex Tyres SL v. Administración, the Spanish National Court highlighted critical principles in transfer pricing audits—selecting an appropriate method, properly justifying adjustments, and adhering to OECD standards.

The court upheld the tax authority’s selection of the transactional net margin method, or TNMM, over the comparable uncontrolled price, or CUP, method, emphasizing the lack of evidence to support the CUP method’s validity in the case.

The court annulled the tax authority’s transfer pricing adjustment based on the median profit margin, citing the absence of a supporting analysis to justify its selection. The decision follows the Spanish National Court’s 2019 stance in Ikea Iberica SA v. Administración that the median can only be selected when defects in comparability are proven.

This ruling reinforces the principle that tax authorities can’t mechanically apply the median within an arm’s-length range without identifying comparability defects, aligning with the Organization for Economic Cooperation and Development Transfer Pricing Guidelines.

 

Importance for MNEs

This ruling provides important insights for multinational enterprises operating in Spain and beyond, particularly those undergoing transfer pricing audits:

Method selection: It’s important to select the most appropriate transfer pricing method based on economic realities rather than a preference by tax authorities.

Median vs. range: Tax authorities must justify the use of the median within a profit range rather than automatically applying it. Tax authorities might adjust a taxpayer's position to the median by altering the initial benchmarking, causing it to fall outside the interquartile range.

OECD alignment: Tax authorities need to follow the OECD Transfer Pricing Guidelines when conducting transfer pricing adjustments.

Compliance considerations: Multinational enterprises should ensure that their transfer pricing documentation provides clear reasoning for the chosen methodology and comparability analysis to mitigate audit risks.

 

The Case

Ihle España y Portugal SLU (later merged into Nex Tyres SL) was part of the German-based Ihle Tire Group before being acquired by Michelin in 2014. The Spanish subsidiary operated as a distributor, purchasing tires, rims, and accessories from its German parent company, Ihle Baden-Baden Geschäftsführung AG, and selling them in the Spanish market.

The taxpayer applied the CUP method to justify its intercompany pricing, arguing that the parent company’s pricing was more competitive than third-party suppliers due to volume-based discounts and the absence of restocking fees.

However, the Spanish tax authority rejected this approach, asserting that the CUP method led to negative operating margins for two out of four audited years. The tax authority applied the TNMM, which they considered more reliable given the economic circumstances of the taxpayer.

Following their analysis, the tax authority adjusted the taxpayer’s profits to the median of the interquartile range, a common practice in tax audits. The taxpayer contested this adjustment, arguing that the median should not be applied automatically without identifying comparability defects within the range.

After the Spanish Central Tax Tribunal dismissed the taxpayer’s appeal in 2020, the company escalated the matter to the national court, which ultimately ruled on both the method selection and the median adjustment.

Method selection: On the method selection, the court upheld the TNMM and therefore dismissed the CUP method, primarily because the taxpayer failed to provide sufficient evidence demonstrating that the transactions with its parent company were truly comparable to third-party transactions.

The court noted that:

• The taxpayer didn’t establish that independent distributors operating in similar market conditions would have accepted the same pricing structure.
• The CUP method resulted in negative operating margins in multiple audit years, which raised concerns about the reliability of the method in accurately reflecting an arm’s-length price.
• The taxpayer failed to demonstrate that the volume-based discounts and absence of restocking fees were typical of third-party agreements in the market, particularly given that the prices paid to independent suppliers could not be directly compared with those paid to the related entity. The court emphasized that the conditions under which transactions with third parties occurred—including sales volumes and stock return policies—were significantly different.
• Further, the adjustments necessary to align the transactions were not quantifiable, evidenced by the inquiries the tax authority carried out with the independent suppliers.
• The tax authority’s comparability adjustments under the TNMM were found to be more aligned with the economic realities of the taxpayer’s operations.

The court ruled that the tax authority could not apply the median mechanically without an analysis of comparability defects as required under OECD Transfer Pricing Guidelines (paragraphs 3.61 and 3.62).

On comparability analysis, the court noted that while the tax authority's selected comparables were “more reasonable” a detailed justification of comparability differences was lacking.

Going forward, multinational enterprises should take note of this ruling when preparing transfer pricing documentation and handling tax authority audits in Spain and beyond.

The decision highlights the importance of substantiating the selection of a transfer pricing method with strong economic evidence and ensuring that comparability analyses are well-documented.

It also reinforces that tax authorities cannot apply the median mechanically within an arm’s-length range without identifying comparability defects, underscoring the need for robust benchmarking and clear justification in intercompany pricing strategies.