Interquartile range for transfer pricing, clear as mud!

Currently, one of my top blog posts is IQR – Exclusive or Inclusive, that is the question. During my hiatus I did not respond to the comments raised in the post (sorry) but because there were a few, I am sure many others also struggle with this concept. So I wanted to unpack this a bit further and also raise some more awareness around IQRs for transfer pricing purposes. What makes the IQR so interesting from a transfer pricing perspective is that not every tax authority applies the calculation of an IQR consistently.

This brings about some technical questions, for example, if one tax authority accepts an IQR that calculates a higher arm’s length range to another that does not, when using exactly the same data, what should I do? How will the tax authorities interpret this and what can a taxpayer do? I won’t go into further detail here, but let me know if this is something I should unpack in another post or touch base with me directly.

Let’s get back to the topic at hand and with that explain in more detail how to calculate the IQR Inclusive and IQR Exclusive ranges with an example. Thereafter I also managed to find some data from a secondary reference source on how other tax authorities determine the IQR in their jurisdiction. I am not certain if this is indeed correct as I was not able to find a primary reference source, so I won’t mention the jurisdictions but rather just provide the way the tax authority supposedly calculates the IQR. That is also why it is always important to double check your transfer pricing with a local specialist!

Ok here it goes.

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IQR – Exclusive or Inclusive, that is the question

I have spoken a lot about the arm’s length range and when we should use a statistical tool such as the interquartile range (IQR) to derive an arm’s length range. But how do we calculate the IQR practically?

The easy answer is, Microsoft Excel or Numbers (for Mac) will do it for you, you just have to use the right formula. For Numbers this is a little easier as there is only one formula (=quartile) but for Excel users this can become a little more confusing as there are two formulas. Originally, Excel also only had one formula but now you have the option of either using =quartile.inc or =quartile.exc. The previous formula within Excel was equivalent to =quartile.inc, in case you were wondering.

So the questions are: Which formula should I use? Does it make a difference in the range? Will the tax authorities care?

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