U.S. and Canada Grapple over Transfer Pricing Differences
Multinational corporations have found that revenue agents around the world are scrutinizing intercompany transactions. The Canadian Revenue Agency (CRA) and the IRS, in particular, have increased their emphasis on transfer pricing audits. Experts also say there is mounting evidence that Canada’s relationships with revenue authorities of other countries, including the U.S., are currently strained due to a gap in current transfer pricing laws. Moreover, Brian Trauman, Partner at the law firm Mayer Brown, argues that certain issues that commonly arise regarding the application of Canada’s transfer pricing rules make the potential for double taxation more significant.
Now, as tax authorities aggressively audit corporations and use penalty provisions in the tax law to encourage compliance, transfer pricing has become a top priority for multinational companies. Executive search firm, A.E. Feldman, says international tax jobs are opening up. The firm, which is currently working with the investment advisory community on transfer pricing matters, says clients are seeking talent to ensure that their exposure to double taxation, penalties and interest is minimized and their transfer pricing policies contribute to a sound international tax strategy.
Transfer prices are prices that multinational corporations charge for goods, services, and tangible and intangible assets they trade with their subsidiaries and other related entities. These transfer prices are set internally by management. They are not the same as fair market value…and they are frequently subject to scrutiny by both the IRS and the Canadian Revenue Agency (CRA).
Although both Canada and the U.S. use the “arm’s length standard” when evaluating transfer prices for tax purposes (meaning all transactions between the subsidiaries should be priced as if the transaction was conducted between two unconnected parties) and both tax authorities require companies to have documentary evidence supporting their transfer prices, they disagree over which transfer pricing methods are acceptable.
When there are differences in the substantive application of transfer pricing rules, there is significant potential for double taxation – which is by far the biggest impediment to cross-border trade, according to Trauman who is also the principal drafter of the paper, “American Bar Association Section of Taxation Comments Regarding Transfer Pricing as Related to Enhancing Canada’s International Tax Advantage.” Trauman notes there are certain issues that commonly arise regarding the application of Canada’s transfer pricing rules, in particular, that make the potential for double taxation more significant. In short, he says, the Canadian Revenue Agency (CRA) and the IRS must bridge the gap in the interpretation of transfer pricing principles.
Meanwhile, both the CRA and the IRS have increased their emphasis on transfer pricing audits, according to Thomas B. Akin, Edwin G. Kroft and Deborah J. Toaze of McCarthy Tetrault. In a report on FindLaw.com, they state that, “there is some evidence that Canada’s relationships with revenue authorities of other countries, in particular the United States, are currently strained. Some practitioners have noted a lack of willingness on the part of the CRA to be reasonable in negotiations, a reluctance to recognize the validity of positions of the other revenue authority and even a lack of good faith in negotiations.” They add that this development may lead to the use of litigation as the preferred method to resolve disputes.
The CRA and the IRS should work to come to terms on how to mutually interpret transfer pricing principles consistently in a practical way, argues Trauman. The ABA Section on Taxation’s paper states “This interpretation should be memorialized in a competent authority agreement to provide taxpayers with clear guidance as to what is reasonable and appropriate, and avoid the prospect of double taxation. Such an agreement would allow both governments to more quickly resolve existing and future cases.”
Amid the debate, any organization, including many U.S. companies, eying the Canadian marketplace for expansion opportunities, would be well advised to integrate transfer pricing into strategic business planning, according to the Federation of International Trade Associations (FITA). The group states that Canada, like many other high-tax jurisdictions, “has noted a worrying increase in capital moving out of this country and into low-tax jurisdictions and tax havens.”
The FITA concludes that any company which transacts business involving goods, services or intangibles with related parties across Canada’s borders “needs to adopt proactive strategies in order to avoid problems and penalties with the Canada Customs and Revenue Agency (CCRA). All of the benefits along with the reduced risk of disputes and penalties are good reasons to adopt a strategic approach to transfer pricing.”
Are you an international tax or transfer pricing specialist? If you want to grow your career or discuss your company’s talent needs, contact A.E. Feldman’s President, Mitch Feldman today.
