In our last post, we looked at the basic concept of transfer pricing. Any business that buys and sells to a foreign entity under its own corporate group may, at some point, be called upon by the CRA to defend the transfer price for those international transactions.
If that price doesn't match up with an amount that unrelated companies would normally agree to - the arm's length price - a transfer price dispute could ignite. Is your business at risk? Is it possible to successfully face the CRA and ward off increased taxation and penalties?
What Tax Authorities Want To Know
Tax authorities want to know that reported business profits are a true reflection of Canadian contributions and economic activity - and that the government receives it fair share in taxes.
To resolve a transfer pricing dispute, documentation is key, and many factors need to be analyzed, such as:
- Bona fide nature - Was the sale and resulting transfer in funds between the related entities legitimate, or was it used only for a tax benefit?
- Intangibles - What products or services were sold? Intellectual property is sometimes overlooked as a commodity - and one that often drives a proper price analysis.
- Transparency - Can the business demonstrate in a clear and thorough manner how the transfer price was determined?
- Reasonability - Even if a pricing mismatch exists, were the companies' efforts to determine an appropriate transfer price "reasonable" enough to satisfy the tax authorities?
- Pricing methodology - Were multiple methodologies used to analyse the transfer price? Are these endorsed by the CRA?
- Timeliness - Was documentation gathered at the time of the transaction - or only on tax-filing or audit? Were significant, material changes in the company documented?
- Dispute resolutions methods - What is the best route for resolving the pricing dispute - an internal CRA appeal? Competent Authority service? Arbitration? Court litigation?
Due Diligence Includes Assessing Your Advisors
Making a successful defence often requires moving beyond accountancy alone. Once the original pricing strategy is challenged, seeking new advisors and fresh perspectives is crucial. These may shed light on new data, overlooked elements and other insights that uphold the transfer price in dispute.
Working with a transfer pricing lawyer offers the advantage of counsel offered in a privileged environment - with disclosure protections that accounting firms do not have. A lawyer experienced in this niche field can provide combined skill in navigating international tax law, financial valuations, the tax appeal process, and strategically litigating the dispute with Depart of Justice lawyers if necessary.
Transfer Pricing Disputes - Prevention Better Than Cure
Typically, businesses seek legal advice when all else fails. The more prudent course: include a transfer pricing lawyer among your regular advisors. Early-stage, customized advice can set global inter-company sales transactions on solid footing - well before the tax authorities come calling.