Will your benchmark stand up to scrutiny by the tax authority? Key takeaways from the recent foreign case law.

Transfer pricing practices are constantly evolving, and one of the most important sources of insight into these developments is the case law of administrative courts. That’s why we are launching the series ‘TP Under the Court’s Lens: Analyzing Key Rulings,’ aimed at presenting the most significant judgments and their practical implications for taxpayers. In upcoming posts, we will examine the key theses of these rulings, their significance, and the associated risks and best practices. 

The first entry focuses on benchmarking analyses – the cornerstone for verifying the arm’s-length nature of transactions. Preparing a reliable benchmarking analysis is a process that requires much more than just proficiency in using databases. Above all, it requires the ability to translate the specific business aspects of a transaction into economic terms, which begins with a precise definition of the functional profile. As recent foreign case law shows, the incorrect classification of functions, risks, and assets is one of the most common errors committed not only by taxpayers but also by tax authorities.   

Below, we present key conclusions from foreign court rulings, with particular emphasis on the significance of the functional profile of the parties to the transaction.  

Why is the functional profile the foundation of a reliable benchmark?  

A proper characterization of the functional profile is not merely a formal description in the documentation – it is the functional profile that determines the criteria for selecting comparable companies and allows for a reliable determination of the target arm’s length remuneration. A court in South Korea (judgment 2024두54065) analysed a case in which the tax authority, when assessing a distributor of small household appliances with a limited functional profile, selected companies with a full range of functions and risks. These entities independently developed marketing strategies, held exclusive sales rights, and bore full responsibility for price management in the local market. 

The court deemed such a comparison unacceptable, noting that the taxpayer’s role was limited solely to providing support and operationally adjusting prices to local conditions, which is typical of a limited-risk distributor model. The key takeaway from this ruling is a reminder that the transaction net margin method (TNMM) remains exceptionally sensitive to functional differences.  

If the tested party does not bear significant market risks, it cannot be compared to full-fledged distributors who perform more extensive functions and bear greater risk, and thus require higher compensation for their input. 

What are the consequences of an incorrect selection of the group of comparables? 

An error in determining the functional profile is a fundamental error that affects all subsequent stages of the benchmarking analysis and, consequently, the reliability of its results.  

The Italian Administrative Court in the case of TNMM S.r.l. (Case No. 454/2025) ruled that the burden of proof lies with the tax authorities to demonstrate that the transfer prices set by the taxpayer deviate from the market level. The court deemed the tax authority’s selection of comparable entities to be unlawful, noting that the selected companies operated under economic and organizational conditions too far removed from the taxpayer’s reality. 

The incorrect selection of comparable entities undermines the entire analysis and directly leads to an erroneous determination of the arm’s length range and the taxpayer’s position within that range. The court also emphasized a significant procedural aspect: an attempt by the authorities to correct these errors at a later stage, by proposing an alternative group of companies, does not remedy the defects of the original decision. This means that a benchmark prepared incorrectly by the authority may result in the complete invalidation of the income reassessment decision. 

Is the authorities’ selective approach to benchmarking analysis a mistake? 

Extremely important guidance regarding the fairness of the authorities’ proceedings comes from a ruling by the Court in Romania (Case 3413/2025). The Court challenged the practice of including data in a benchmarking analysis that supports the tax authority’s position while ignoring evidence from the opposing party. 

In the case in question, the tax authority committed a series of methodological errors in its benchmarking analysis: 

• • the analysis conducted by the authority lacked context and did not take into account the taxpayer’s economic profile in a consistent and clear manner, 

• • the tax authorities unjustifiably rejected the benchmarking analysis prepared by the taxpayer, 

• • the tax authority did not present a logical line of reasoning or a legal basis justifying the omission of data selected by the taxpayer.  

How to prepare a benchmark that will stand up during an audit? 

An analysis of the above rulings from Korea, Romania, and Italy leads to the conclusion that, in a dispute with the tax administration, an analysis based on economic facts and a reliable profiling of the taxpayer is of key importance.  

Therefore, the preparation of a reliable benchmarking analysis should be based on three fundamental steps. 

1. 1. First, it is essential to precisely define the functional profile of the transaction parties, which serves as the basis for preparing the transfer pricing analysis. The description of functions, assets, and risks must reflect operational reality, not merely theoretical contractual assumptions. Any discrepancy, such as assigning strategic risks to an entity that does not actually control them, provides a direct point of contention for the tax authority. 
   2. Second, consistency and transparency in the selection process are key. The criteria for including and excluding companies from the sample must be objective and applied consistently to all entities in a given industry. The description of the selection process should clearly explain why specific entities were rejected, which constitutes the best line of defense against allegations of data selectivity. 
   3. Third, a meticulous verification of economic conditions is necessary. Companies in the database must operate under conditions that are comparable not only in terms of NACE codes, but above all in terms of business model, transaction stage, and market environment. This approach was adopted by the taxpayer in the Italian ruling, which ultimately led to a favorable outcome for the taxpayer. 

The overview presented here is merely an outline of a broader discussion on evolving trends in transfer pricing case law. To explore the topic further and understand how Polish and foreign courts interpret issues of methodology or functional profile, we invite you to read our latest publication.  

In the TP Rulings Brochure (https://www.mddp.pl/transfer-pricing-in-case-law-a-review-of-trends-in-2025/), our experts have thoroughly analyzed key rulings that have recently set market standards in the field of transfer pricing. 

If you want to ensure that your benchmarking analysis is methodologically consistent and resistant to challenge by tax authorities, please contact us. We will help you verify your benchmark or prepare one that will stand up to scrutiny during a potential tax audit. 

https://www.mddp.pl/transfer-pricing/ 

Related topics 

• https://www.mddp.pl/qualitative-transfer-pricing-analyses-en/