Will your foreign-based transfer pricing documentation withstand CRA scrutiny?

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Episode 60: Will your foreign-based transfer pricing documentation withstand CRA scrutiny?

Release date: July 29, 2013
Guest: Karyn Issler
Running time: 6:44 minutes

In this episode of Tax Tracks, we examine what could happen when a Canadian company’s foreign parent prepares its transfer pricing documentation. To ensure this documentation withstands CRA scrutiny, it should be reviewed to ensure that it meets Canadian standards.

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Will your foreign-based transfer pricing documentation withstand CRA scrutiny?

You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.

Sharon: Hi, it’s Sharon Mitchell from PwC Canada and here with us today is Karyn Issler a Transfer Pricing specialist based in our Toronto office. Karyn joined PwC in 1996 and began specializing in transfer pricing shortly thereafter. She has a broad range of transfer pricing experience under her belt, including assisting with planning studies, preparation of contemporaneous documentation, and defense of client practices under audit by tax authorities.

Welcome Karyn.

Karyn: Thank you Sharon.

Sharon: Now today we’d like to speak to you about situations where a Canadian company’s foreign parent prepares its transfer pricing documentation. You suggest that in these circumstances the documentation should be reviewed to ensure that it meets Canadian standards.

Karyn: Yes, that’s what we recommend. A Canadian review is needed to ensure that the documentation complies with Canadian guidelines. This type of review might not be necessary in other countries with less developed transfer pricing legislation, but in Canada there are specific requirements, especially the “reasonable efforts” test, which companies must meet to avoid penalties.

Sharon: So is this a case of foreign companies just not being aware of the Canadian requirements?

Karyn: That may be the reason in some cases. But I should emphasize here that there are benefits to a multinational preparing its documentation from a global perspective. This can certainly be an effective approach, not least because it allows for consistency across all subsidiaries. But problems can arise, for example, where the foreign parent focuses its efforts on high-risk countries and transactions, which may not include Canada. Also, parent companies based in the US often assume that Canadian transfer pricing law is the same as in the US, which is NOT the case. And of course, legislation isn’t the end of the story. Even where the law is similar in different countries (and it often is, because its all based on the OECD Guidelines), we may see different approaches by tax authorities in practice, or more detailed guidance reflected in other forums like court decisions or CRA publications such as Information Circulars or Transfer Pricing Memos.

Sharon: So the issue may be more complex than it seems. Can you give us some examples of transfer pricing requirements that are unique to Canada?

Karyn: Of course. First, the CRA prefers an unbundled approach to the transactions being reviewed. This means that the analysis in your documentation, like the functional or financial analysis, should be performed on a transaction-by-transaction basis. Also, the CRA uses the full range of results rather than statistical measures like the interquartile range (which is used in the US), and results are reviewed on a year-by-year basis as opposed to a three-year weighted average basis. With respect to selecting comparables, the CRA expects a more precise selection of comparables than we may see in US-prepared reports.

These are the more technical issues. There are also more general issues that arise not so much from differences in legislation but because of the nature of global documentation, which may not be as detailed as what the CRA expects.

Sharon: Karyn, can you give us some examples of where global documentation may not be sufficient to meet CRA’s expectations?

Karyn: Well, the CRA expects a detailed functional analysis that includes a comprehensive description of the Canadian business. While this requirement isn’t necessarily unique to Canada, documentation prepared globally can oversimplify the functions that are being performed in Canada, assuming that its operations are the same as similar entities in other countries. On a related note, the comparable companies selected for Canadian documentation must operate in the North American market, while those in the global documentation might operate predominantly in Europe or Asia.

For the financial analysis, the segmented results of the intercompany transactions have to tie to the entity financial statements filed with the tax return. Again, this may not be unique to Canada, the financial information used in foreign-based documentation often comes from a centralized system and doesn’t always reflect the local entries such as goodwill amortization and purchase price accounting differences. The amounts in the financial statements must also agree to the Canadian company’s Form T106, a Canadian income tax form.

Sharon: Definitely some things to keep in mind. As we’re finishing up Karyn, can you summarize for our listeners the benefits of having their foreign-based transfer pricing documentation reviewed?

Karyn: Sure. Simply put, a documentation review by PwC will help ensure that you have all the information that the CRA needs to fully understand the Canadian operation and its relationships with foreign affiliates. Most significant, it should help reduce the CRA audit time, meet all the applicable deadlines (which are often earlier than in the US) and reduce the possibility of significant transfer pricing penalties based on any adjustments.

Sharon: So it sounds like a Canadian review is an important step for Canadian companies whose transfer pricing documentation is prepared by their foreign parent. Thanks for joining us today Karyn.

Karyn: You are welcome Sharon.

Sharon: Should our listeners have any questions about this or other Transfer Pricing Memos, please contact Karyn, your local PwC Transfer Pricing specialist or refer to our transfer pricing website at www.pwc.com/ca/transferpricing.

The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation.

Copyright 2013 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. For full copyright details, please visit our website at pwc.com/ca.

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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.