Google, Starbucks, Amazon - some of the biggest businesses in the Western world have been embroiled at some point in high-stakes tax disputes over transfer pricing. Yet, international tax woes are not confined to blue-chip corporations. Any business with corporate affiliates on foreign shores could become the target of a tax audit by the CRA.
What is transfer pricing? What do businesses risk? Why consult with a transfer pricing lawyer? Our post provides the basics - simplified and in plain English.
Transfer Pricing - What Is It?
Transfer pricing arises when two parties to a business transaction belong to the same corporate group, each operating in a different country. For example, a Canadian business sells a product or service to its affiliate in a lower-tax jurisdiction - say, in Ireland or Cayman Islands. The price charged is the transfer price.
Selling between affiliates is a common occurrence - and it's legal. When do problems arise? When the price charged does not reflect the "arm's length price".
Arm's Length Price - A Key Factor In Transfer Pricing Disputes
If two parties are not related, prices are subject to the forces of supply and demand. If the buyer finds better value elsewhere, it's free to purchase elsewhere. Between groups under the same corporate umbrella, transactions operate in a controlled environment, unaffected by these normal market forces.
In such transactions, all's well - so long as the price charged matches what unrelated parties might agree to under similar circumstances. But if the price does not match this arm's length price, tax authorities may come calling.
These transfers may be used as a tax-sheltering technique to lower the Canadian business's reported profits. Money is moved out of the country to the foreign affiliate - and away from the CRA's reach.
What's The Risk To Business?
Transfer pricing disputes can ignite when the authorities perceive that a company's tax filing has underreported its profits - and deprived the CRA of its fair share.
An audit can bring on an upward adjustment to correct the mispricing. This may result in increased taxation - and possible penalties. Disputes can become messy, time-consuming and financially impactful to a business's bottom line.
Do CRA claims have any merit? In some cases, yes. In others, not necessarily. Navigating a dispute is often only achieved with fresh perspectives and proper strategy. Documentation, timing, transparency and due diligence - they're all keys to making a successful defence before the CRA. How? Our next post will drill down further.
Meantime, if your business is at risk of an audit, move beyond the tax accountant. Resolving transfer pricing disputes is complex - involving combined expertise in pricing, international tax law and litigation. Seek legal counsel quickly. It may help your business avert, minimize or even avoid negative impacts altogether.