Transfer pricing: Tax avoidance & implications

Decrease your risk exposure

What is transfer pricing and what does it mean for you?

Transfer pricing—the practice of establishing arm's-length prices for related-party cross-border transactions—is one of the many complex tax issues multinational corporations face. With today’s focus on everyone paying their fair share of the tax burden, transfer pricing is becoming increasingly contentious as governments strive to protect their tax bases.

New regulatory and documentation requirements, increased information exchange, prolonged audits, rising enforcement and significant penalties are all part of the new transfer pricing reality. To help you navigate this new environment, our transfer pricing practice draws from a global pool of over 3,100 professionals in more than 90 countries to advise you on developing compliant, tax-efficient structures that help advance your business goals.

Transfer pricing planning

Business restructuring

Are you considering restructuring or closing operations?

While transfer pricing is often not considered when companies make changes to business operations, the Canada Revenue Agency continues to focus on the compensation due to a Canadian entity where its business activities have been restructured. Related CRA proposals tend to be time-consuming and costly to defend. Upfront planning and advice may help mitigate costly CRA audits in the future.

We can help you review and document the facts and circumstances surrounding your company’s decision to change its business operations in the context of the arm’s-length principle. We also review the treatment of costs associated with the actual changes to operations and any associated transfers of intangibles or other assets.

Captive insurance diagnostic

Is your company interested in setting up a group captive insurer? Are you concerned about the risks associated with an existing offshore captive?

A captive insurance company is typically used as a vehicle to improve risk management, decrease insurance costs and increase cash flows. With the right planning, a captive may also generate certain tax benefits. Our captive insurance team includes risk managers, actuaries and Canadian and international tax specialists and can provide holistic consideration of the viability of a captive and how your company can generate maximum benefits from using one.

In addition, the foreign affiliate rules are complex and it can be difficult to identify potential material tax risks in an existing offshore captive insurance structure from a corporate tax, transfer pricing and international tax services perspective. Companies may be overlooking these risks or not addressing them comprehensively. Our team can help you identify potential tax risks of your existing offshore captive insurance structure at a high level.

Financial transactions pricing (intercompany debt, interest and factoring rates and guarantee fees)

Does your company have formal or informal arrangements involving loans or debt guarantees within a group?

A company that borrows funds from a related party must be able to show that the amount and terms of the debt are arm’s length. This requires consideration of numerous factors, including current market conditions and the financial position of the borrower. Companies may not have easy access to the data required to perform a robust analysis.

We help your company determine an acceptable level of debt, for which tax relief on interest should be available, together with appropriate terms. We also help determine arm’s-length interest/factoring rates and guarantee fees and prepare related reports and analyses that can be tailored to your company’s needs (through either a high-level review or a more in-depth analysis).

Intellectual property pricing

Is your company engaged in related-party cross-border transactions involving intellectual property such as patents, know-how, trademarks and other intangibles?

Pricing intellectual property (IP) that may be used by numerous companies in a group presents a difficult scenario that requires expertise and judgment, especially where prices may need to change over time (if, for example, the IP is gradually becoming obsolete and its value is falling). IP pricing and analysis will need to consider current guidance from the Organisation for Economic Co-operation and Development on ownership and valuation, which includes important changes to IP valuation.

We can help by reviewing and discussing your company’s IP transactions and possible approaches to pricing methodologies. The discussion may be followed by detailed analysis of the transactions to develop appropriate pricing strategies.

Value-chain transformation

Enabling tax-efficient business change

In order to remain competitive, companies need to continually evolve and re-examine their business models, expand their geographic footprint, integrate acquisitions and transform their operational structures. Further driving the need to change are legislative adjustments, a mobile labour force and new technology developments. Our Value Chain Transformation™ (VCT) services are designed to help you transform your business in a tax-efficient manner so you can stay ahead of the competition, increase shareholder value and improve cash flow.

Adopters of the procurement buy-sell model could see a 50% increase in profit margin resulting from a 5% reduction in purchase costs. 

VCT is designed to help multinational corporations transform the way they do business at every step of the journey, from initial strategy through final delivery, in a tax-advantaged manner. So whether you’re expanding to another region, centralizing services into shared-service centres, moving your manufacturing operations, considering IP strategies or restructuring your supply chain, our VCT team can help. Our experience, industry knowledge and expertise in supply chain management, cross-border personal taxes, transfer pricing, value-added tax (VAT) and customs duties and the intricacies of the international tax system will help you meet your business transformation goals in a timely and cost-efficient manner.

Transfer pricing compliance

Attribution of profits to a permanent establishment (PE)

Does your company have branches or PEs for which they file tax returns? Is your company facing a potential inadvertent PE risk?

PEs in Canada must pay tax on profits earned, with the parent company responsible for attributing the appropriate amount to each branch/PE. In many cases, your company may not be aware that it has created a branch and that it owes taxes as a result.

If you’re aware of your company’s PEs, you may still be using an arbitrary method to attribute profits or one that doesn’t reflect the underlying substance of the activities performed or allocates too much profit to one jurisdiction. This increases the risk of adjustments and may also result in tax inefficiencies for your group.

We identify areas of potential tax savings or exposure by determining an appropriate attribution of profits to your company’s PEs.

Contemporaneous documentation

Does your company engage in intercompany transactions and want to avoid possible penalties? The extent of the documentation will depend on the size and complexity of the entity and materiality of the transactions

Failure to maintain adequate transfer pricing documentation can result in penalties and audit challenges, and in many cases companies can’t or don’t prepare these documents themselves. Global Coordinated Documentation (GCD) and TP Elements let us help companies of all sizes, both by preparing your transfer pricing documentation and providing a framework that helps you understand the requirements so you can do it yourself.

We prepare transfer pricing documentation to demonstrate that the arm’s-length nature of your intercompany transactions meet the requirements in Section 247 of the Income Tax Act. Services vary depending on your company’s needs: Global Coordinated Documentation is an option for multinational enterprises with more complex requirements, while smaller companies can take advantage of our TP Elements service, which offers several alternatives depending on needs and budget.

End-to-end (E2E) transfer pricing execution

Is your company facing potential tax risks (material errors) or does it have inefficiencies (i.e. manual, ad hoc practices, accounting policy or data mismatches and insufficient mechanisms for reconciliation) or breakdowns in the wider transfer pricing execution chain?

The practical execution of transfer pricing can be much more challenging than expected. While transfer pricing compliance is principally a matter for the tax team, responsibility for the execution of intercompany transactions requires shared responsibility with many other internal functions. This becomes even more difficult in practice as there is rarely someone with oversight of the entire process.

We review the execution of your company’s intercompany transactions and help you align your transfer pricing strategy and policies with other key functions, including controllership, accounting, technology, legal and tax.

Transfer pricing risk assessment

Base erosion and profit shifting (BEPS) tax diagnostic toolkit

Do you own a multinational enterprise with material offshore operating or IP structures?

BEPS, a global initiative to increase tax transparency and accountability, is a hot topic on the international tax policy agenda that could lead Canadian and foreign tax authorities to increase their scrutiny of domestic and cross-border transactions. This is particularly true for some hybrid arrangements and profit allocations, intercompany financing transactions, certain tax planning strategies and various transfer pricing issues. The BEPS tax diagnostic helps your company deal with this increased scrutiny and audit risk.

The BEPS tax diagnostic gives you a snapshot of how BEPS may impact your company. We assess the potential impact of both local and international BEPS initiatives on your company’s structure and identify whether you should make changes. We also help you better understand any tax issues in your existing structure and identify potential planning opportunities. The deliverable is a heat map that gives you a high-level assessment of your company’s risks and opportunities. We can also provide a jurisdictional heat map that highlights key risks related to specific measures in the BEPS action plan.

Strategic risk assessment

Are you concerned with understanding risk exposure and prioritizing efforts to mitigate risk?

The CRA can review and challenge your company’s offshore structures and/or transactions, and you should be prepared for these challenges.

We review your company’s overall transfer pricing exposure and develop options for managing and mitigating transfer pricing risk. This includes a factual review of your material tax audits, controversies and disputes, including proposed adjustments and assessments. We also discuss your company’s structure, transactions, operations and audit history, including an analysis of all competent authority cases, advance pricing arrangements or other tax rulings and existing documentation.

Transfer pricing disputes

Advance pricing arrangements (APAs)

Do you need certainty in transfer pricing or relief from expensive and difficult audits related to complex transactions?

Tax authorities may not always agree with your company’s pricing arrangements and policies, which can lead to audits and adjustments. Economic double taxation may also result where adjustments are made in one country without a corresponding change in the other relevant jurisdiction. Uncertainty related to these issues can make it difficult for your group to manage its effective tax rate and lead to greater tax risk than anticipated.

An APA is a formal agreement between a taxpayer and at least one tax authority to determine and set transfer prices for transactions between the entity and its related parties. APAs typically run five years or more with the possibility of renewal and rollback.


Audit defence/dispute resolution

Did you receive a three-month documentation request or are you experiencing issues with an ongoing audit?

Transfer pricing audits can be time-consuming and difficult. They can also drain internal resources, particularly for companies that don’t have a coordinated dispute resolution strategy in place, and can have significant tax, interest and penalty implications.

We offer support at all levels of a CRA audit, including strategizing, responding to a request for documentation, replying to audit queries, meeting with auditors and officials and preparing submissions, appeals, notices of objection and competent authority submissions.


Contact us

Ivan Williams

Ivan Williams

National Transfer Pricing Leader, PwC Canada

Tel: +1 403 509 7554

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