The evaluation criteria used by the Spanish tax authorities to verify the fair market value in transactions carried out by related parties (transfer pricing in Spain) are described in the article 16.4 of the Corporate Tax Law.
Methods – transfer pricing in Spain
1. Transaction-based methods
a/Comparable Uncontrolled Price Method
b/Cost Plus Method
c/Resale Price Method
2. Transactional Profit Methods
d/Profit Distribution Method
e/Transactional Net Margin Method
These criteria are set out in parallel with the recommendations of the OECD, and are detailed below:
- Comparable uncontrolled price method: This is the main method used by both the Spanish tax authorities and the OECD. This method compares the price of the good or service in an operation between persons or entities linked to the price of an identical good or service of similar characteristics in an operation between independent persons or entities in comparable circumstances.
- Cost plus method: This method is based on the cost of production, to which all normal expenses plus a profit margin are added, with which the “fair market” sales price is obtained.
- Resale price method: With this method, the fair market value is obtained from the sale price of those goods or services previously purchased from a group company, which is applied to an independent buyer. At this sale price, the gross margin included is eliminated, apart from the seller’s profit, as well as the expenses incurred.
- Profit distribution method: This method is based on the determination of the profit made by all the parties involved in a related transaction. Once this profit is identified, it is distributed among all the companies that have been involved in the operation, applying an equitable distribution that objectively reflects the possible distribution of the profit that had been made by independent companies.
- Transactional Net Margin Method: This method is based on the net profit generated in the set of operations carried out with a related entity, calculated over a reference factor, such as costs, sales, etc.
Summary – transfer pricing in Spain
As described above, there are various methods to determine transfer pricing in Spain. Depending on the type of operation to be examined, we will use one or the other, although the OECD clearly recommends the use of the first three, the transaction-based methods.