HMRC (His Majesty’s Revenue & Customs) is the UK tax authority responsible for administering and enforcing transfer pricing rules, reviewing comparable analyses, assessing arm’s length ranges, and making adjustments when transactions between related parties do not reflect market values.
The value of the range: an updated look at comparability
When searching for uncontrolled comparables, you typically obtain a range of results. If the result of the analyzed party is within the arm’s length range, no adjustment is made; if it is outside, the price or margin must be adjusted. When analyzing a wide range, three aspects must be considered:
- whether all comparables are equally reliable or whether some should be excluded;
- whether comparability defects persist and there are enough observations to apply statistical tools;
- if the reported result falls outside the range, to what point within the range it should be adjusted.
To improve reliability, less reliable comparables should be eliminated and it should be justified that the final range is based on the most reliable information available. Although neither the TIOPA10 regulations nor the OECD Guidelines require the use of the interquartile range (IQR), it can be used when:
- comparability defects persist despite efforts to clean up the data, and
- there are a sufficient number of observations.
The number of observations alone does not guarantee reliability; what matters is the quality of the comparables. Consideration may also be given to working with more comparable subsets within the initial group.
When the result falls outside the range, a point within the range should be chosen for adjustment. According to the OECD, when comparability defects exist, it is appropriate to use measures of central tendency, with the median normally being the most defensible and most commonly used option to ensure that the adjusted price falls within the true arm’s length range.
Conclusion
The HMRC material concludes that the determination of the arm’s length price should be based on the most reliable set of comparables, refined by eliminating less comparable companies and using statistical tools—such as the interquartile range—when comparability defects persist. Furthermore, when the taxpayer’s result falls outside the arm’s length range, HMRC considers that adjusting to the median value offers the strongest and most defensible position, as it represents the midpoint within a range constructed from reliable data.
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Source: GOV.UK