![]() ![]() the interquartile range or other percentiles) might help to enhance the reliability of the analysis.” In such cases, if the range includes a sizeable number of observations, statistical tools that take account of central tendency (e.g. “…while every effort has been made to exclude points that have a lesser degree of comparability, what is arrived at is a range of figures for which it is considered, given process used for selecting comparables and limitations in information available on comparable, that some comparability defects remain that cannot be identified and/or quantified, and are therefore not adjusted. This was also considered in the 2010 update of the guidelines, in further developing the issue of differences in the comparability of comparable transactions by including in paragraph 3.57 that: However, the use of the interquartile range has proliferated to the extent that it has been explicitly included in the legislations of many jurisdictions. However, we must be cautious because in a similar way, as in statistics, “correlation is not causation,” the mere fact that a group of results has a similar behaviour or magnitude does not necessarily mean that there is homogeneity in terms of comparability factors (terms and conditions, functions, assets, risks, characteristics, economic circumstances, business strategies, etc.). ![]() This approach led to the consideration of different ways of calculating the arm’s length range, the most commonly used by practitioners and tax administrations being the interquartile range, which in simple terms consists of limiting the arm’s length range to only half of the values (50%) around the (central value of the observations), so as to exclude extreme values that could be distorted by unidentified elements at the time of analysis. Therefore, the actual determination of the arm’s length price requires exercising good judgment.” However, in some cases, not all comparable transactions examined will have a relatively equal degree of comparability. “It is also possible that the different points in the range represent the fact that independent enterprises actually engage in comparable transactions under comparable circumstances that may not establish exactly the same price for the transaction. The foregoing then suggested the construction of a range starting with the minimum value of the observations and ending with the maximum value, from which, in principle, it could be inferred that any price or margin agreed between related parties within the minimum and maximum values, would comply with the arm’s length principle. In these cases, differences in the figures that comprise the range may be caused by the fact that in general the application of the arm’s length principle only produces an approximation of the conditions that would have been established between independent enterprises.” ![]() However, because transfer pricing is not an exact science, there will be also occasions when the application of the most appropriate method or methods produces a range of figures which are relatively equally reliable. “In some cases, it will be possible to apply the arm’s length principle to arrive at a single figure (e.g., price or margin) that is the most reliable to establish whether the conditions of a transaction are arm’s length. In this regard, the 1995 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Transfer Pricing Guidelines) of the Organization for Economic Co-operation and Development (OECD) stated in paragraph 1.45 that: Thus, when more than one comparable transaction is available, a range is constructed with the comparable results commonly referred to as the arm’s length range. For the application of transfer pricing methods, it is necessary to make a comparison between the results (prices or margins) of the controlled transaction and the results of comparable transactions (or companies). ![]()
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