Proactive planning and preventative procedures can save big
headaches and expenses
Wthout proper policies and documentation in place, transfer
pricing audits can result in long and costly corporate headaches.
Even if the 10% pricing adjustment penalty (plus interest) is not
applied, a transfer pricing audit can be costly in terms of Part
XIII tax, remedial documentation costs, management time and
Transfer pricing continues to be an area of great concern to the
Canada Revenue Agency (CRA). In fact, to ensure that Canada
receives its fair share of tax on any international business
conducted by related parties, the CRA employs approximately 500
designated international tax auditors. As a result, companies of
virtually any size can find their international related party
transactions under review.
Corporations (as well as other legal entities) that have
non-arm's length transactions with non-residents are required
to file a Form T106: Information Return of
Non-Arm's Length Transactions with Non-
Question six of the Form T106 asks if the taxpayer has
contemporaneous documentation on hand pursuant to subsection 247(4)
of the Income Tax Act. A "no" answer would likely
increase the chances of a transfer pricing audit.
Routine CRA audits can also lead to transfer pricing audits,
particularly if contemporaneous transfer pricing
documentation cannot be provided when requested.
Although a company has 90 days from the date of the request to
provide the documentation, it may not be prudent to wait until
formally requested. From the auditor's perspective, the
appearance may not be good when companies have to scramble together
transfer pricing documentation which (technically) should already
be in place.
Aside from the normal trade in goods, routine audits commonly
highlight the following types of non-arm's length international
corporate transactions for further transfer pricing scrutiny:
Inter-company management fees
Inter-company service fees
International business restructuring
Intangible transfers to offshore jurisdictions
Guarantee fees on intercompany financing
Auditors also typically request the intercompany
agreements and transfer pricing
polices underpinning the cross border transactions.
The auditors check to ensure that the company is acting in
accordance with the provisions of the agreements and policies.
Other transfer pricing red flags which may be identified when
reviewing corporate information and transfer pricing documentation
Mischaracterized transactions or company roles
Large year-end transfer pricing journal entries which are not
Unreasonable/unexplainable operating results, such as chronic
losses and/or low profitability
Cross-border operations restructuring shifting profits to other
Payments of withholding taxes which do not reconcile with T106
disclosures or other transfer pricing documentation
Transactions with low-tax jurisdictions
The best way for a company to protect itself from the potential
headaches of an extended transfer pricing audit is to ensure, on an
annual basis, that: (1) proper transfer pricing policies and
agreements are in place; (2) the company operates in accordance
with said policies and agreements; and, (3) the company diligently
assembles (in advance) the annual contemporaneous documentation to
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Valuation & Litigation Support Group, or if you have any
questions relating to this article please contact the author.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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