INTM466120 - Examining transfer pricing reports: Arm’s length range
Experience suggests that transfer pricing reports tend, by referring to the results of supposedly comparable companies, to produce a range of results which may be presented as the arm's length range. In some cases analysis is confined to the interquartile range of these results and in cases where the results of the tested party are within this interquartile range, the report will typically conclude that the transfer pricing must be arm's length.
This is not in accordance with HMRC’s interpretation of the notion of a range of results in the OECD Transfer Pricing Guidelines. We do not interpret the concept of an arm's length range in this way because this is not what the OECD means when it talks about an arm's length range in its guidance.
Considering a range of results is appropriate because, whatever the strictness of the comparability requirements, one company will have different results from another company even if those companies are ostensibly comparable and have been assessed as such using every single measure of comparability listed by the OECD. This is because there will always be unquantifiable differences between companies, and no two companies are exactly alike. It is hard to believe that two companies would be exactly alike even if anyone had the ability to gauge this because no two human beings are alike and human beings run companies. After due diligence then, you have discovered transactions carried out by independents which are for all intents and purposes identical to the ones carried out by the tested party. There are no differences between these transactions which could materially affect the price. However, it would be amazing if both the tested party and the independent companies made exactly the same profits. There will also be occasions where an enterprise trades in the same product in the same circumstances with two different parties and charges each of them a different price, for no apparent reason. Because of this, OECD recognises that a range of results is appropriate and if the results of the tested party are within this range then it would be appropriate to conclude that its results are arm's length. It is likely that such a range would be extremely narrow since any significant differences ought to have emerged in the course of the functional analysis.
You should be aware of the potential distinction between the arm's length range in this context and the range suggested to be appropriate in a given transfer pricing report. A range which consists of the results of independent companies which are no more than superficially similar to the tested party is not an arm's length range within the meaning of the OECD Transfer Pricing Guidelines. Confining arguments by reference to the interquartile range of such results adds nothing to the soundness of the case.
Look also at the sections in this guidance on TNMM - see INTM466100 above and also the chapter on the OECD Transfer Pricing Guidelines, INTM463080 in particular. Consider also where a tested party lies in the range.
