27 March 2019 CTF Seminar - Transfer Pricing

S. 247(10) states that a downward adjustment shall not be made unless it is “appropriate in the circumstances.” How is this discretion exercised?

CRA indicated that the focus was on avoiding double-non-taxation, so that CRA would want to see good evidence that there was a corresponding upward adjustment in the other jurisdiction (that respected the arm’s length principles). The International Tax or Audit Division will forward the request for downward adjustment to the Competent Authority Services Division where there is a treaty country on the other side of the transactions. If there is no Treaty country on the other side, then the demonstration of no double-non-taxation must be made to Audit.

In practice, where CRA concludes that there should be recharacterizion under ss. 247(2)(b) and (d), it considers itself to be implicitly finding that the taxpayer’s documentation of the transaction is willfully dishonest.

The Transfer Pricing Review Committee is chaired by the Director of the International Tax Division, and its members include all the managers in that Division, and representation from Justice. Most TPRC meetings concern s. 247(3), and some concern s. 247(4).

Recharacterization under s. 247(2)(d) entails a three-step process. First audit staff make a submission to the TPRC. If accepted, the taxpayer is notified.

The audit team then conducts more research on the matter, and makes a second submission to the TPRC, and a second review determines whether the auditor should be able to propose an adjustment under ss. 247(2)(b) and (d). The taxpayer is then notified and allowed to make a submission.

At the third stage, the TPRC meets, along with representatives from Justice, Abusive Tax Avoidance, and Finance, to make a final recommendation.

Canada has committed to the “appropriate use” of CbC reporting, namely, its use in assessing risk in transfer-pricing and other BEPS-related matters. A CbC report alone does not contain enough information to support a transfer-pricing adjustment.

BP is not a complete bar to access tax accrual working papers, as indicated by Atlas. The Communiqué contemplates reasonableness and restraint. It indicates that CRA need not always see the analysis behind transactions, as what is needed is the facts and (also, sometimes in a s. 247 context) the purpose of the transaction. If CRA is satisfied that it understands the facts and purpose of the transaction, it will make its own determination of its legal effects.

Headquarters is to be notified if auditors are seeking tax accrual working papers.