26 February 2019 Toronto CRA & Tax Professionals - International Tax
This summarizes some of the remarks made by Blair Vokey (Senior Technical Field Advisor, International Tax Division) at a Toronto Centre Tax Professionals seminar on 26 February 2019. (We may add at a later date a summaryu of some of his comments on appeal procedures.) The other CRA presenters (whose comments are not summarized) were Venetia Putureanu (Director, International Tax Division) and Donna O'Connor (Director, Competent Authority Services Division), who discussed CRA's internal structure, progress on benchmarks, and procedural topics.
BEPS Actions 8-10 (revised transfer pricing guidelines)
The working party responsible for Actions 8-10 (“Working Party Six”) was the only BEPS party to operate on a consensus basis; that is, the soft language in those Actions was essentially by design – e.g. using “may” instead of “shall.”
It is our view that all that was really done with these Actions was to clarify the guidance that already existed at the time, and that they do not effect substantial changes. There are changes in wording, but in the end the underlying principles are the same as they have always been.
Work on Actions 8-10 continues to this day. We hope to have final guidance out by November 2019. Two of the principles we hope to clarify are the risk-free return and risk-adjusted return.
Regarding newly released guidance, Canada has not adopted the simplification measure concerning low-value-added intragroup services. If you have auditors saying “there should be a 5% markup on intragroup service-charges because of the OECD guidance,” that is not the case; conversely, we do not want taxpayers coming to us and saying “we have all these management fees, so its definitely 5%”. That is not a benchmark. We continue to rely on IC87-2R to govern intragroup pricing, and those arguments will not work until we adopt the actual measure. If and when the measure is adopted, we will need to implement it in a way for taxpayers to elect to have it apply. We have not looked at that yet.
We will release some policy in the near future regarding CRA’s views on the BEPS project and its related guidance. We have held off until now because the financial transactions project is not finalized – there may be some big changes coming out of that. Of course, there will also probably be crossover between what is finalized in the financial transactions project and prior guidance. Once that is ready, we will be in a position to give CRA’s perspective on how this all applies in Canada, such as the hard-to-value intangibles project, which BEPS provides a lot of guidance on.
In Canada, we have followed the precedent of looking at ex-post returns to ascertain what should have been taken into account at the time the valuation was made, so that the new guidance may not actually amount to much of a change.
Finally, the OECD is shifting focus to the digital economy. Working Party Six may or may not be involved in that process.
BEPS Action 13 (transfer-pricing documentation and CbC reporting)
In implementing Action 13, Canada did not implement anything regarding the local or master file. We are still considering the master file, and that requirement may still be introduced.
Regarding the local file, Canada feels that, effectively, our request for contemporaneous documentation satisfies that need. It has been suggested that our requirements for filing contemporaneous documentation are a lot more rigorous than what is in Action 13. We do not necessarily see that as the case – our penalty regime is based on reasonable efforts.
What is required in the filing of contemporaneous documentation is effectively outlined in s. 247(4)(a). Where penalties usually arise is from a failure to comply with subparagraphs (iv)-(vi) - i.e. the documentation is not complete and accurate regarding:
(iv) the functions performed, the property used or contributed and the risks assumed, in respect of the transaction, by the participants in the transaction,
(v) the data and methods considered and the analysis performed to determine the transfer prices or the allocations of profits or losses or contributions to costs, as the case may be, in respect of the transaction, and
(vi) the assumptions, strategies and policies, if any, that influenced the determination of the transfer prices or the allocations of profits or losses or contributions to costs, as the case may be, in respect of the transaction; ... .
We receive these studies, and they tell a story. That story is what we audit in a transfer pricing audit. Our analysis, interviews, and so forth, are all about confirming what was in that transfer pricing study. If the taxpayer represents that one of the parties is a low-risk distributor and our review demonstrates that it is a full-fledged distributor, creating value right across the board, penalties will probably be assessed (provided the $5 million threshold is exceeded). We see a lot of cases where the transfer-pricing study appears to have been done after the fact, and somebody is trying to put a square peg into a round hole. Those are the situations where we feel penalties are warranted.
In other words, it is not that the Canadian penalty regimes are more rigorous than Action 13 - it is that CRA's audit process is more rigorous than in most jurisdictions. Canada routinely does in-depth reviews that look at both sides of the transaction.