UK Joins the ‘Median Club’ With Its Transfer Pricing Adjustments

The HM Revenue & Customs’ update to its internal manual clarifies how it will apply a range of results in transfer pricing. The conclusion: If a taxpayer’s results fall outside the arm’s length range, HMRC will meet you in the middle and adjust profits to the median.

While this might seem like a minor technical update, it signals the UK’s alignment with a specific and growing global approach to transfer pricing adjustments.

For multinational enterprises, understanding which school of thought a tax authority subscribes to is far from an academic exercise. It’s a key component of risk management that can mean the difference between a minor adjustment and a significant tax bill.

Schools of Thought

When transfer pricing results fall outside the acceptable range, tax authorities typically apply one of three adjustment methods.

The meet-in-the-middle approach: This method assumes that if a taxpayer’s margin is outside the arm’s length range, the most reliable substitute is the central tendency—the median.

The US is the most prominent proponent of this view, codifying the adjustment-to-median mechanism in its Section 482 regulation. Among major members of the Organization for Economic Cooperation and Development, Australia and Germany generally share this preference, too.

With the UK now explicitly joining, this club of nations already accounts for well over one-third of the global GDP.

For taxpayers, the outcome of this approach can be expensive. If a result sits just below the lower quartile of a range, an adjustment to the median can produce a significant adjustment (more than 25th percentile point upward movement in the range). The result is that you may miss the mark only by little, but you get adjusted a lot.

The benefit-of-the-doubt approach: Some jurisdictions take a more favorable view: If a taxpayer is outside the range, they only need to be brought to the closest arm’s length point (such as the lower quartile).

Among prominent OECD members, Spain and France have regulations or case law supporting the view that any point within the range is arm’s length. Therefore, if an adjustment is necessary, it should be minimal. This is taxpayer friendly.

For a company operating on thin margins, the difference between an adjustment to the lower quartile in the range versus the median can be significant and the resulting tax bill can eat up much of the net profit left.

The discretionary approach: Many countries leave the adjustment method unaddressed in their regulations, keeping the door open for case-by-case negotiation during tax audits. But as the transfer pricing regulations around the world mature, this group is getting smaller.

Case in point: The EU tried to convince its member states to codify the adjustment to the median approach through its transfer pricing directive. Although the directive was withdrawn due to lack of political traction, the initiative demonstrates the general tendency nonetheless.

Problem with Ranges

As if the adjustment mechanisms weren’t varied enough, the concept of the range itself is being increasingly contested.

In transfer pricing, there has been a long-standing practice that arm’s length outcomes shouldn’t be narrowed down to just one number. This sets the domain of transfer pricing quite apart from that of general valuation, where getting to an exact figure is often the main objective.

Imagine your dismay if an expert valuing your property for the purpose of, say, taking out a mortgage, provided you with a wide range of possible outcomes. Which value would the financing bank consider in your mortgage application? This wouldn’t be very practical for the general economy.

Unlike general valuation, where a single figure is often the goal, transfer pricing relies on ranges to approximate arm’s length conditions. However, this theoretical flexibility creates practical friction, as range definitions vary wildly across jurisdictions.

Countries such as Canada let the taxpayer use the benefit of a full range, if properly constructed. This is a taxpayer-friendly approach that is vanishingly rare. Most countries stick with the OECD’s recommended interquartile range (25th to 75th percentile). But then there are countries that define their own arbitrary ranges, a club that includes India (35th to 65th percentile), Vietnam (35th to 75th percentile), and Malaysia (37.5th to 62.5th percentile).

This lack of uniformity means that the same margin considered arm’s length in one country might trigger an adjustment in another, just by virtue of applying two non-overlapping ranges to the same set of numbers.

For tax directors, the strategy seems clear: Play it safe and aim for the median or have robust documentation ready to defend why you didn’t.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

David Zarecky is a transfer pricing adviser and co-founder of Reptune Tax in Amsterdam.

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