Transfer Pricing Memo 14 - The CRA endorses OECD revisions

View this page in: Français

Episode 55: Transfer Pricing Memo 14 — The CRA endorses OECD revisions

Release date: April 30, 2013
Running time: 8:15 minutes

In this episode of Tax Tracks, we discuss the November 2012 Transfer Pricing Memo — TPM 14 in which the CRA confirms that it endorses the application of the revised OECD Guidelines for the administration of the transfer pricing provisions of the Income Tax Act.

Download | Send us your comments

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.

Transfer Pricing Memo 14 — The CRA endorses OECD revisions

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.

Sharon: Hi it’s Sharon Mitchell from PwC Canada and here with us today is Joanne Hawley, a senior manager from PwC’s Montreal Transfer Pricing team. Interestingly, Joanne has a PhD in chemistry from the University of Cambridge - her background is in research chemistry. Joanne joined PwC UK’s London transfer pricing practice in 2000 and transferred to PwC Canada in 2008. Joanne has undertaken a wide range of transfer pricing documentation, defense and planning projects for clients in diverse industries.

Welcome Joanne.

Joanne: Thank you Sharon.

Sharon: Today we’re speaking with Joanne about the November 2012 transfer pricing memo released by the CRA — TPM 14. Joanne, by definition a memorandum is an informal, brief communication. In this context, are CRA issued transfer pricing memoranda law?

Joanne: No they’re not law, but they are administrative guidelines issued by the CRA to support the transfer pricing legislation in the Income Tax Act. TPMs cover diverse topics, such as contemporaneous documentation and reasonable efforts (both terms that appear in the legislation), and help taxpayers and auditors by clarifying the CRA’s position and expectations on these and other transfer pricing matters addressed in the Act.

For example, prior to this issuance, the CRA released TPM-13, which clarifies its position on referrals to the Transfer Pricing Review Committee. That one was interesting because it’s the third version on this particular topic, so it demonstrates the CRA’s commitment to adapt its ideas and procedures as transfer pricing issues evolve. You could say that this commitment is also demonstrated in TPM-14, as it sets out the CRA’s position on the revisions made in 2010 to the OECD Transfer Pricing Guidelines. Of course, the CRA has always explicitly endorsed these guidelines.

Sharon: Just a note to our listeners, you can find out more about these earlier OECD Transfer Pricing revisions in one of our previous podcasts, Episode 43, an interview with Elisabeth Finch at

So Joanne, can you give us some background on TPM-14?

Joanne: Well, as was discussed in Elisabeth’s previous podcast 43, the 2010 revisions were not considered to be changes to the OECD Guidelines so much as more detailed guidance on concepts already discussed. We assume this is why the CRA didn’t make any changes to the actual legislation as a result of the revisions, that is, it didn’t see the revisions as necessitating any concrete changes to the requirements already in the Act. Nonetheless, there was still the need for some clarity with respect to how or even if the CRA would officially address the revisions or incorporate them into the Canadian requirements.

Sharon: So this is the purpose of TPM-14?

Joanne: Yes, exactly. In TPM-14 the CRA confirms that it endorses without reservation the application of the revised Guidelines for the administration of the transfer pricing provisions of the Income Tax Act. It also clarifies that the CRA will apply the revised Guidelines to all years open for audit, even to transactions before 2012, and that the revisions will apply to all treaties, again, including those in force before 2010.

Sharon: Now what about specific changes? Does TPM-14 discuss any of the revisions in particular, or suggest that some are more important than others?

Joanne: Actually, a few revisions are highlighted as significant. First, the revised Guidelines introduce the concept of “the most appropriate transfer pricing method” for a particular case, which represents a move away from the selection of a transfer pricing method based on the hierarchy of methods. The CRA notes that the revised OECD guidance focuses on the degree of comparability and the availability of reliable data under each transfer pricing method, so taxpayers may want to pay more attention to these factors.

Sharon: Now do you mean more attention when choosing the method or when documenting it?

Joanne: Definitely I would say both. But this has always been the case, in that it’s always been necessary to document why a certain method was chosen.

The second significant revision highlighted in TPM-14 is the CRA’s endorsement of the expanded guidance on the application of the arm’s length principle using a transactional profit method. This guidance includes more detailed criteria to be considered for the selection of a profit level indicator, more details on the calculation of net profit and the application of the profit split method, and discussion of the use of the Berry ratio.

TPM-14 also endorses typical processes outlined in the revised Guidelines, which includes an example of how to apply the new recommendations in practice to perform a comparability analysis that’s both reliable and transparent.

Last, Chapter IX of the revised Guidelines addresses a number of issues relating to business restructurings such as the allocation and transfer of risk among related parties and appropriate remuneration to the parties following the restructuring. This guidance is quite welcomed by the business community, as these are complex issues that are particularly relevant in an environment where many firms are dealing with post-recession and globalization issues.

Sharon: So how will this affect Canadian taxpayers? On a practical level, will much change?

Joanne: Well it’s hard to say as it’s early stages yet. However, I think that it may very well result in some practical changes going forward because it gives taxpayers greater certainty as to which transfer pricing methods are acceptable and how they should be applied, both of which are fundamental to preparing your annual transfer pricing documentation. I also think we may see both CRA and taxpayers making efforts to hold each other accountable to the higher standards of comparability discussed in the revisions.

With respect to business restructurings, again, I think that taxpayers will benefit from the guidance in the new Chapter IX, as it provides an objective framework for analyzing a number of complex issues and in particular whether compensation may or may not be appropriate. This has been a common audit issue in the past that has caused many prolonged disputes on audit and at competent authority.

Sharon: It sounds like TMP 14 needs to be closely considered by taxpayers when preparing their documentation. Thank you for joining us today Joanne.

Joanne: You are welcome.

Sharon: Should our listeners have any questions about this or other Transfer Pricing Memos, please contact Joanne in our Montreal office, your local PwC Transfer Pricing specialist or refer to our transfer pricing website

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