On April 2, 2025, the National Court of Spain issued a ruling for the “Nex Tyres SL against Management,” significantly guiding regarding Transfer Pricing audits for multinational companies.
Background
Ihle España and Portugal SLU (merged into Nex Tyres SL afterward) belonged to the German group Ihle Tire 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 to the Spanish market.
The taxpayer applied the CUP method to support the pricing among companies, arguing that the prices of the parent company were more competitive than those of external providers due to volume discounts and the lack of restocking charges.
Conversely, the Spanish tax authority rejected this approach, claiming that the CUP method led to negative operating margins in two of the four years audited. The tax authority applied the TNMM, considering it more reliable due to the taxpayer’s economic situation.
Following its analysis, the tax authority adjusted the taxpayer’s earnings to the median margin of the interquartile range, a common practice in tax audits. The taxpayer challenged this adjustment, arguing that the median margin should not automatically apply without identifying comparability defects in the range.
After the Central Tax Appeals Court dismissed the taxpayer’s appeal in 2020, the company brought the case to the national Court, which ultimately ruled on the method selected and the median margin adjustment.
Method Analysis and Comparability
Regarding the method selected, the Court upheld the TNMM instead of the CUP method, principally because the taxpayer failed to provide evidence demonstrating its transactions were actually comparable with third-party transactions. The Court pointed out the following:
- The taxpayer did not demonstrate that independent distributors operating in similar market conditions would have accepted the same pricing structure.
- The CUP method resulted in negative operating margins in several auditing years, which made its reliability questionable to reflect a market price precisely.
- The taxpayer did not report that volume discounts nor the lack of restocking charges were usual features of third-party agreements in the market, especially given that prices paid to independent providers could not be directly compared to those paid to the related party. The Court emphasized that the conditions of the third-party transactions, such as sales volumes and stock return policies, were significantly different.
- In addition, the adjustments necessary to align transactions were not quantifiable, as demonstrated by the tax authority’s research on independent providers.
- The comparability adjustments performed by the tax authority under the TNMM were considered more aligned with the economic realities of the taxpayer’s transactions.
The Court ruled that the tax authority could not apply the median of the interquartile range calculated without a comparability gap analysis, as required by the OECD Transfer Pricing Guidelines (paragraphs 3.61 and 3.62).
Regarding the comparability analysis, the Court noted that while the comparables selected by the tax authority were “more reasonable,” the comparability differences were not thoroughly demonstrated.
Call to Action
Due to the difficulties and implications of this ruling, multinational companies must review and adjust their Transfer Pricing strategies and documentation to ensure compliance and optimize their tax situation in Spain.
For expert advice and customized solutions in Transfer Pricing and tax compliance in Spain, contact TPC Group. Our professional team is at your disposal to assist in this tax environment and keep a competitive advantage in the Spanish market.
Source: Bloomberg Tax