Best Practices in Transfer Pricing

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Episode 48: Best Practices in Transfer Pricing

Release date: May 29, 2012
Guest: Andy McCrodan
Running time: 6:32 minutes

In this episode of Tax Tracks, Andy McCrodan talks about important Transfer Pricing practices and the consequences of not having proper controls in place.

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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.

Best Practices in Transfer Pricing

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

Gerry Lewandowski: Today we’re joined by Andy McCrodan, a Transfer Pricing partner in PwC’s Toronto office. Andy is a CA and a Chartered Business Valuator. He began his transfer pricing career at PwC New York, helping companies comply with the first contemporaneous documentation requirements. Andy’s extensive cross border experience includes prospective studies for planning purposes, contemporaneous documentation engagements, competent authority assistance and advanced pricing agreements. Thank you for joining us today Andy.

Andy: My pleasure Gerry.

Gerry: It would seem to me that if you’re preparing transfer pricing contemporaneous documentation and complying with basic legislative requirements – there isn’t much else to consider. What do you mean by “best practices?”

Andy: Well, it’s one thing to create documentation to meet a statutory requirement, but quite another thing to maintain proper controls over the transfer pricing environment to mitigate your risk. “Best practices” refers to controls over the whole transfer pricing function from preparing documentation to dispute resolution. This means taking a hard look at the company’s process for ensuring that intercompany transactions are carried out at arm’s length and that overall transfer pricing policies are maintained. Not having the proper controls can have significant consequences.

Gerry: Can you give us an example?

Andy: Sure. A simple example involves proper staffing. Many US companies with Canadian subsidiaries often don’t have any local staff assigned to Canadian tax or transfer pricing matters. I had a case where one key person in the US managed the whole transfer pricing function and went on a temporary leave due to illness. There was no written policy or process in place for a new person to follow, and no one reviewed the Canadian financial results to make sure the Canadian company earned its target low risk return on sales. The company reported a big loss which was contrary to the policy. Upon audit, the company was subject to severe penalties of close to $1million.

Similarly, if there are no local tax people, local operational management may not understand the implications of receiving a CRA 3-month request for contemporaneous documentation, and penalties can ensue for late filing. All these separate issues left unattended can start to smoulder and cause giant fires when not discovered in time.

Gerry: So how do you suggest companies address these issues?

Andy: Basically it all comes down to having appropriate controls around your transfer pricing function. These could include documenting the process to follow annually to comply with the stated policy, and how to deal with any correspondence from a tax authority.

These controls are more important now, as the CRA implements its risk-based audit approach. This approach involves assessing a company’s controls and then assigning a risk factor which will affect how they are audited. A high risk rating, which means full audits every year, may result from a lack of internal controls, if the CRA can see that a company’s approach to transfer pricing is somewhat haphazard.

Gerry: So I’ve decided I want to take my transfer pricing to the next level. What are the first steps in this process?

Andy: I would say the first step is a general assessment of your current transfer pricing function. Do you have a strategy? Is it aligned with your business’ goals? Who knows about this strategy? And how do you ensure it’s implemented? What processes are in place to ensure continuity? Is it reviewed regularly? How are business changes like acquisitions and restructurings reviewed for transfer pricing implications? There are lots of questions to ask to assess your risk of an oversight and hence a costly mistake.

Gerry: So this sounds like some thought, some strategy and then documentation of that transfer pricing policy is necessary.

Andy: Yes, and once you’ve done all of that, the next step may be to establish defined roles and responsibilities for the transfer pricing function, which will also dictate your staffing needs. If it’s necessary to hire staff; hire adequate, qualified staff and, as I mentioned earlier, make sure that their responsibilities are covered if they’re on leave. You may also choose to involve outside experts for perspective and to help ensure continuity.

Ideally, if your organization is large enough, your transfer pricing team should be cross-functional, for example accounting, finance and operations managers. It could also be international, but most importantly, your transfer pricing team should have leadership’s support and involvement.

Lastly, the approach to dealing with a tax audit should be documented and understood by senior management. Early identification of risk always results in better risk management.

Gerry: Does everyone really need to be aware of the company’s transfer pricing plan?

Andy: Employee education can be very helpful, which means communicating the transfer pricing policies quickly and explaining how they will affect staff’s day-to-day work. There are things all staff can look out for - for example, a new related party transaction or a restructuring that has or will be undertaken. Staff can alert the transfer pricing specialist to possible issues such as they arise.

Gerry: It sounds like transfer pricing is not a one-time exercise for any company, but it’s more of an ongoing project that needs regular attention.

Andy: Exactly. To remain top notch, the process must be reviewed regularly and adapted as the company evolves. Taking this time up front will save a lot of headaches later.

Gerry: Thank you for joining us today Andy. For additional Transfer Pricing information, please visit our PwC website at which contains many pieces of PwC transfer pricing thought leadership and links to other PwC transfer pricing podcasts in this series.

Thank you for tuning into Tax Tracks at

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