Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: 2010 OECD Transfer Pricing Guidelines
a) What is CRA's view of the 2010 Transfer Pricing Guidelines (TPG) with its de-emphasis of the hierarchy of methods vis-a-vis the stricter approach of the 1995 guidelines? Does CRA accept the 2010 TPG's de-emphasis of the hierarchy of methods?
b) What is CRA's view about using data segmentation approach for the tested party? Does CRA accept that data segmentation is more appropriate when available?
c) What is CRA's view about the use of statistical tools to enhance the reliability of a comparability analysis?
d) Does CRA subscribe fully to the 2010 version of the TPG or does CRA object to or have reservations about any of the guidelines or commentary in the 2010 TPG? What is CRA's position in respect of the guidelines or commentary to which it objects or has reservations about applying?
Position: See response.
2011 TEI-CRA Liaison Meeting
December 6, 2011
Question 12 - 2010 OECD Transfer Pricing Guidelines
In July 2010 the OECD Council approved revisions to Parts I-III of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. TEI invites CRA comments on the following aspects of the revised OECD transfer pricing guidelines (TPG):
a) "Most Appropriate" Method
The 2010 TPG move away from the strict hierarchy of methods set forth in the 1995 Guidelines in favour of selecting the "most appropriate method." Paragraph 2.2 of the 2010 Guidelines explains that -
the selection process should take account of the respective strengths and weaknesses of the OECD recognised methods; the appropriateness of the method considered in view of the nature of the controlled transaction, determined in particular through a functional analysis; the availability of reliable information (in particular on uncontrolled comparables) needed to apply the selected method and/or other methods; and the degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments that may be needed to eliminate material differences between them.
Paragraph 2.3 of the 2010 TPG states that, in circumstances where a traditional method and a transactional profit method can be applied in an equally reliable manner, the traditional method is preferred. What is CRA's view of the 2010 TPG with its de-emphasis of the hierarchy of methods vis-à-vis the stricter approach of the 1995 Guidelines? Does CRA accept the 2010 TPG's de-emphasis of the hierarchy of methods?
CRA Response
The 2010 Transfer Pricing Guidelines essentially suggest that there is no strict hierarchy to be applied to the selection of a transfer pricing method. Rather the focus should be on the quality of the data that is available and, consequently, what will be the most appropriate method. At the same time the Guidelines continue to suggest that there exists a natural hierarchy to the methods, as referred to in paragraph 2.3. The CRA agrees that the focus of determining the method to use should be the method that will provide the most direct view of arm's length behaviour and pricing. Information Circular 87-2R states that a natural hierarchy exists in the methods. Both Information Circular 87-2R and paragraph 2.3 of the 2010 Transfer Pricing Guidelines state that the traditional transaction methods (e.g. CUP) are preferred over a transactional profit method. For the CRA, it is not so much a de-emphasis on the hierarchy as a re-focusing on what is truly relevant: the degree of comparability available under each of the methods and the availability as well as reliability of the data.
b) Tested Party - Data Segmentation
Paragraph 2.78 of the 2010 TPG provides commentary about using an "appropriate level of segmentation of a taxpayer's financial data" when determining or testing the net profit from controlled transactions of the tested party. The 2010 TPG are more direct about the need to use data segmentation rather than company-wide data for testing net profit from a controlled transaction. What is CRA's view about using data segmentation approach for the tested party? Does CRA accept that data segmentation is more appropriate when available?
CRA Response
This is not a change in the guidance. The Guidelines have long stated that transfer pricing should be conducted on a transactional basis. This clearly requires transaction level data wherever possible. Where reliably available data is available at a transactional level it will provide a more direct view of arm's length behaviour and pricing than using a more aggregated level of data.
c) Statistical Tools
Paragraph 3.57 of the 2010 TPG states:
It may also be the case that, while every effort has been made to exclude points that have a lesser degree of comparability, what is arrived at is a range of figures for which it is considered, given the process used for selecting comparables and limitations in information available on comparables, that some comparability defects remain that cannot be identified and/or quantified, and are therefore not adjusted. In such cases, if the range includes a sizeable number of observations, statistical tools that take account of central tendency to narrow the range (e.g. the interquartile range or other percentiles) might help to enhance the reliability of the analysis.
What is CRA's view about the use of statistical tools to enhance the reliability of a comparability analysis?
CRA Response
The CRA view is that the use of statistical measures, such as an inter-quartile range, does not necessarily enhance the reliability of the comparable data considered in producing a range because they do not relate to comparability. The CRA does not endorse the use of statistical measures which are commonly used in the application of the transactional net margin method (TNMM). Instead, the CRA relies on the facts and circumstances of the case to determine a range, or the particular point in a range, that is the most reliable estimate of an arm's length price or allocation.
d) General View of the 2010 OECD TPG
Does CRA subscribe fully to the 2010 version of the TPG or does CRA object to or have reservations about any of the guidelines or commentary in the 2010 TPG? What is CRA's position in respect of the guidelines or commentary to which it objects or has reservations about applying?
CRA Response
The TPG is a consensus document that is developed by participating countries in Working Party 6 at the OECD. No objections or reservations can be placed on the TPG.
The 2010 changes to the TPG represent the Committee on Fiscal Affairs' continuing work in transfer pricing to reflect the experience gained. The OECD encourages countries to follow the 2010 version of the TPG when reviewing transfer pricing and encourages taxpayers to follow the 2010 version of the TPG in evaluating whether their transfer pricing complies with the arm's length principle.
The CRA endorses the application of the arm's length principle and the 2010 version of the TPG for the administration of the Income Tax Act in transfer pricing matters.
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