IQR vs Full Range: When to Use Which in Transfer Pricing Benchmarking

Quick Answer: When to Use IQR vs Full Range

The Interquartile Range (IQR) is the default choice for most benchmarking studies. Use it when comparability defects remain that can't be fully identified or quantified—which is the case in most TNMM analyses.

The Full Range (min–max) is acceptable only when you can demonstrate that ALL comparables are "equally reliable" with no material differences unaccounted for. This is rare and requires significantly more documentation.

Decision Rule:

• IQR → When any comparability defects exist (default)
• Full Range → When all comparables pass the "equally reliable" test (rare)
• Narrower Range → When jurisdiction mandates (India: 35th-65th, Malaysia: 37.5th-62.5th, Vietnam: 35th-75th)
• Canada → IQR not recommended; emphasize qualitative comparability screening

For detailed IQR calculation methods by jurisdiction, see our IQR Calculation Methods guide.

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What is the Arm's Length Range?

When you benchmark a tested party using TNMM or CPM, you compare its profitability against multiple comparable companies. Those comparables produce a range of results—the arm's length range.

The question is: should that range include ALL comparable results (full range, min to max), or should it be narrowed statistically (typically to the interquartile range, 25th to 75th percentile)?

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How to Calculate IQR (Quick Method)

In benchmarking, “IQR” is used in two closely related ways:

• Interquartile range (spread): (IQR = Q3 - Q1)
• Interquartile range (arm’s length range): the interval ([Q1, Q3])

Quick steps:

1. Sort your comparable results from low to high.
2. Calculate Q1 (25th percentile) and Q3 (75th percentile).
3. Your IQR-based arm’s length range is Q1 to Q3.

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The Interquartile Range: Default Choice

What OECD Says

OECD Transfer Pricing Guidelines ¶3.57 (paraphrase):

Where comparability defects remain that cannot be identified and/or quantified, and therefore no adjustments can be made for them, it may be appropriate—especially where there is a sizeable number of observations—to use statistical tools that take account of central tendency to enhance reliability.

The IQR excludes the bottom 25% and top 25% of results, focusing on the middle 50%. This filters out potential outliers and comparables with unidentified defects.

When to Use IQR

Use IQR when:

1. Comparability defects exist — Differences in functions, assets, risks, geography, accounting, or business cycle that can't be fully adjusted
2. Large comparable set — With 10+ comparables, statistical trimming is more meaningful (practice heuristic)
3. Wide dispersion — A large gap between min and max often signals comparability issues (practice inference)
4. Jurisdiction expects it — US, UK, Germany, Australia, and most OECD-aligned countries
5. Risk-averse approach needed — IQR is generally safer for audit defense

What Are "Comparability Defects"?

Comparability defects are differences between your tested party and comparables that affect profitability but can't be identified, quantified, or adjusted. Examples:

• Geographic market differences (emerging vs. developed)
• Business cycle timing variations
• Accounting policy differences (IFRS vs. local GAAP)
• Product/service mix variations
• Size or scale effects
• Risk profile differences you can't quantify

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The Full Range: Conditions for Use

What OECD Says

¶3.62:

"Where the range comprises results of relatively equal and high reliability, it could be argued that any point in the range satisfies the arm's length principle."

What US Regs Say

US Treasury Regulations §1.482-1(e)(2)(iii)(A):

The arm's length range consists of all results of uncontrolled comparables if the information on the comparables is "sufficiently complete that it is likely all material differences have been identified, each such difference has a definite and reasonably ascertainable effect, and an adjustment is made to eliminate the effect of each difference."

When Full Range May Be Acceptable

Full range requires meeting ALL of these conditions:

1. All comparables "equally reliable" — No material comparability defects remain
2. All differences identified and adjusted — Material differences have definite, reasonably ascertainable effects that have been eliminated
3. No significant outliers — The range is narrow and defensible
4. Enhanced documentation — You can articulate why EACH comparable is equally valid

Practical Indicators (Rules of Thumb)

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Decision Flowchart

Use this decision tree to select your range approach:

Always: Document your choice and rationale thoroughly.

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Jurisdictional Differences

Tax authorities have different approaches to range selection. Understanding local expectations helps you anticipate audit questions.

Canada: The Exception

Canada's CRA takes a different approach. Per the OECD Canada Country Profile (referencing TPM-16), CRA advises taxpayers not to use IQR to determine arm's length prices.

CRA's Philosophy:

• Emphasis should be on selecting truly comparable transactions—not statistical manipulation
• If you've done proper comparability analysis, the range is inherently meaningful
• Statistical trimming might discard useful information
• If the range is very wide, that's a selection problem—not something IQR should "fix"

India: Narrower Statutory Range

India's Rule 10CA mandates a 35th-65th percentile range (not IQR) when you have ≥6 comparables. If fewer than 6, use arithmetic mean with a tolerance band.

This is narrower than the standard IQR and reflects India's policy to constrain the arm's length range. Median adjustment applies if outside the range.

China: Median Focus

Chinese practice favors IQR with strong emphasis on median. In certain contexts (e.g., APA renewals), authorities may challenge results below the median even if they're within IQR. Being in the lower quartile may attract scrutiny.

UK (HMRC): Recent Practical Shift

If you operate in the UK, it’s worth reading HMRC’s operational guidance alongside the “default IQR” narrative. HMRC has emphasized that the IQR is a tool to enhance reliability in the presence of defects—not an automatic entitlement—and that small, high-quality subsets can be preferable to large, noisy sets.

See our practical breakdown: HMRC’s New Benchmarking Reality: Why the IQR Is No Longer Automatic.

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Practical Examples

Note: Quartile calculations vary by jurisdiction and method (Excel QUARTILE.INC vs QUARTILE.EXC, IRS rank-based, etc.). Numbers below are illustrative.

Example A: Large Set, Wide Dispersion → Use IQR

Scenario: 12 comparables for a distribution affiliate

Results (sorted): 1%, 2%, 3%, 4%, 5%, 8%, 9%, 10%, 12%, 15%, 18%, 20%

Analysis:

• Full range (19pp) is huge—suggests comparability defects exist
• The 1% and 20% extremes look like outliers
• Using IQR, tested party (4%) is just inside the range

Decision: Use IQR. The wide variance signals comparability defects.

If tested party were 3%: Outside IQR → adjustment to median (8.5%) = +5.5pp adjustment.

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Example B: Small, Tight Set → Full Range May Be Acceptable

Scenario: 4 highly similar comparables in a niche industry

Results: 5.0%, 5.5%, 6.1%, 6.5%

Analysis:

• All comparables extremely close (1.5pp range)
• No obvious outliers
• Tested party (5.2%) is inside full range but slightly below IQR (5.25%)
• With only 4 data points, IQR is less statistically meaningful

Decision: Full range may be defensible here. Document why all comparables are equally reliable.

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Example C: Borderline Case → Gray Area

Scenario: 8 comparables for a service provider

Results: 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%

Analysis:

• Under Full Range: 4% is inside (above 3%)
• Under IQR: 4% is outside (below 4.5%) → adjustment to median (6.5%)

Decision:

• If 3% comparable has identifiable defects → Use IQR
• If all 8 are "equally reliable" → Full range possible but risky
• Conservative approach: Use IQR, accept potential adjustment to median

Numerical Impact Summary

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Audit Defense: Documenting Your Choice

Documenting IQR Choice (Standard)

1. State the range approach: "The arm's length range has been determined as the interquartile range of [X%–Y%]."

2. Explain why: Reference ¶3.57 or US §1.482-1(e)(2)(iii)(B). Example: "We applied the interquartile range to mitigate the influence of comparability defects, in line with OECD guidelines."

3. List comparability defects: "While all companies are broadly comparable, differences in geographic markets and accounting treatment could not be fully quantified. Using a statistical range is appropriate."

4. Show calculation: List results, show Q1, Q3, median.

5. Cite local guidance: Reference HMRC/ATO/BMF guidance as applicable.

Documenting Full Range Choice (Enhanced)

All of the above, PLUS:

1. Justify equal reliability: "All comparables were found to be of high reliability after adjustments because [specific reasons for each]."

2. Address why narrowing wasn't necessary: "We considered IQR but determined it unnecessary because no comparability deficiencies warrant narrowing."

3. Reference the narrow range: "The full range of [X%–Y%] is itself narrow, reflecting high comparability."

4. Cite authority: Reference US §1.482-1(e)(2)(iii)(A) or ¶3.62.

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Related Topics

Guides:

• Complete Benchmarking Study Guide — Step-by-step methodology
• PLI Selection Guide — Choosing the right profit level indicator
• Working Capital Adjustments Guide — WCA formula and examples
• IQR Calculation Methods by Jurisdiction — How different countries calculate IQR

Glossary:

• Interquartile Range (IQR) — Statistical definition and calculation
• Arm's Length Range — Full vs narrowed ranges
• Median — The adjustment point
• Comparable Companies — Selection criteria

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Related OECD Guidance

This article is based on guidance from the OECD Transfer Pricing Guidelines (2022):

• Chapter III: Comparability Analysis — Section A.7 on arm's length range (¶3.55-3.66)
• Key Paragraphs: ¶3.55-3.57 (when IQR is appropriate), ¶3.60-3.62 (adjustment points)

→ Search the full OECD Guidelines

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Frequently Asked Questions

When should I use the full range instead of IQR?

Use the full range only when you're confident ALL comparables are of high quality and very closely comparable—meaning no material comparability defects remain. This typically means a small set of very similar comparables, a naturally narrow range (less than 3-4pp), and the ability to document why each comparable is equally reliable. In practice, full range is most defensible for CUP methods or when you have fewer than 5 highly comparable companies.

What exactly are "comparability defects" that trigger IQR?

Comparability defects are differences between the tested party and comparables that affect profitability but can't be identified, quantified, or adjusted. Examples include: geographic market differences, business cycle timing variations, accounting policy differences, product/service mix variations, size effects, and risk profile differences. If any of these exist and can't be adjusted—which is typical—use IQR.

Why does Canada discourage IQR while others use it?

Canada's CRA advises against using IQR to determine arm's length prices. The philosophy is that emphasis should be on selecting truly comparable transactions through rigorous qualitative screening—not on statistical manipulation. If you've done proper comparability analysis, the range is inherently meaningful. If the range is too wide, that's a selection problem to address, not something IQR should "fix."

What if my result is outside IQR but inside full range?

This is precarious. Most tax authorities will say being outside IQR means you're not arm's length—even if you're inside the full range. You can argue the result is still arm's length based on full range logic, but success requires demonstrating all comparables are equally reliable. The more common outcome: adjustment to median.

Can tax authorities require a narrower range than IQR?

Yes. India legally requires 35th-65th percentile. Malaysia uses 37.5th-62.5th. Vietnam uses 35th-75th. These are statutory requirements—not discretionary.

If outside the range, do I always adjust to median?

Not universally—it depends on jurisdiction:

• US: Median if using IQR; arithmetic mean "in other cases"
• UK: Median "most of the time" per HMRC 2025 guidance
• Vietnam: Median per Decree 132
• OECD: Allows median, mean, or weighted averages depending on facts

In practice, median is the most common adjustment point—but it's not a universal rule.

How does sample size affect range selection?

Sample size affects the reliability of statistical measures. With a very small sample (3-5 comparables), IQR is less statistically meaningful—you're discarding limited data. With larger samples (10+), IQR filtering is more robust. This is an argumentation point, not a legal rule.

What if my IQR excludes what I believe are valid comparables?

If Q1/Q3 excludes companies you think are comparable, this may indicate: (1) your screening criteria were too broad, (2) the excluded comparables have unidentified defects, or (3) you have a borderline case for full range. Don't "cherry-pick" by switching to full range just to include favorable outliers—document your reasoning either way.