Canada: Corportate Digest @ Gowlings - January, 2006

Last Updated: February 20 2006
This article is part of a series: Click Corportate Digest @ Gowlings - January, 2006 for the previous article.

Edited by Mr Rod Seyffert

Communications to Plan Members

On November 1, 2005 the Ontario Court of Appeal released its decision in Hembruff v. Ontario Municipal Employees Retirement Board. The key issue for the Court to decide was whether the administrator of a pension plan has a duty to advise plan members that it is contemplating making benefit improvements to the plan. In summary, the Court held that a pension plan does not have a duty to advise plan members that it is contemplating benefit improvements during the period while such changes are under consideration. This is a welcomed decision by plan administrators, who until this decision faced considerable uncertainty as to their disclosure obligations to members.

The Facts

As noted in a previous edition of Pensions@Gowlings (http://www.gowlings.com/resources/enewsletters/Pensions/Htmfiles/V1N02_200406.html#b) which discussed the lower Court's decision, the plaintiffs in this case were Toronto police officers who were members of the Ontario Municipal Employees Retirement System ("OMERS"). Upon retirement, each of the plaintiffs elected in accordance with available portability options to transfer the commuted value of his defined benefit pension to a locked-in account outside of the plan. Prior to 1998, OMERS was faced with an increasing surplus in its pension fund. Throughout 1998 and 1999, OMERS considered various alternatives to the use of surplus, including contribution holidays and benefit enhancements. In late November 1998 OMERS recommended benefit enhancements to the Ontario government, which had to consider and approve any such enhancements through the promulgation of regulations under the governing statute. It was not until May 1999 that the Ontario government finally approved the benefit enhancement, which amendments were made effective as of January 1, 1999. OMERS issued a member newsletter in November 1998, identifying the potential benefit improvements. The enhancements adopted by the Ontario government would have increased the commuted value of the benefits of each of the plaintiffs, if they had chosen to keep their money in the plan through the beginning of 1999.

The lower Court upheld the plaintiffs claims for negligent misrepresentation and breach of fiduciary duty on the basis that OMERS failed to inform them, in advance, of the potential changes to the OMERS plan. On appeal, the Court allowed the appeal, set aside the lower Court's judgment and dismissed the action, with costs to OMERS.

Claims for Negligent Misrepresentation

On the claim for negligent misrepresentation, the Court agreed that a pension plan administrator such as OMERS owes a duty of care to plan beneficiaries. However, the Court did not agree that one of the essential requirements of negligent misrepresentation had been established, i.e. that an untrue, inaccurate or misleading representation had been made by OMERS to the plaintiffs. The Court stated the administrator of a pension plan has a duty to disclose "highly relevant" information. The Court stated that the failure to disclose accurate and complete information regarding a pension plan's existing terms and options can amount to an untrue, inaccurate or misleading representation. However, the Court held that information on what a pension plan's terms potentially might be in the future is not highly relevant, rather it was speculative in nature, and is therefore not information on which it would be reasonable to rely. The Court stated that a representation, to be of effect in law, should be in respect of an ascertainable fact and not a mere matter of opinion, and therefore a statement of opinion, judgment, probability or expectation cannot sustain an action for negligent misrepresentation. Until OMERS formed a recommendation with respect to benefit enhancements, any statement as to what it might recommend was mere opinion or conjecture. Thus, the Court held that until OMERS decided to make recommendations to the Ontario government with respect to proposed amendments in late November, 1998, OMERS had no obligation to disclose anything to its members.

Claims for Breach of Fiduciary Duty

On the claims for breach of fiduciary obligation, the Court held, contrary to the findings of the lower Court, that OMERS did not breach its duty to inform members, its duty to act fairly or its duty to act in good faith to members.

(a) Duty to Disclose Potential Plan Amendment – The issue before the Court was not whether a plan administrator has a duty to disclose material information (which was admitted). Rather the issue was whether there was a duty to disclose pension plan changes that are under consideration. The Court held that no such duty existed, as changes that are under consideration are not "material" as they would not be likely to influence the conduct of plan members. Indeed, the Court stated that the imposition of such a duty would impose "an unmanageable burden" on OMERS. The Court stated that until OMERS finalized its recommendations in November 1998, it had no material information to disclose to plan members in this matter

(b) Duty to Act Fairly – the trial judge held that OMERS did not breach its duty to act fairly when it "arbitrarily" recommended a January 1, 1999 effective date for the plan amendment. The Court determined that this was a discretion vested in OMERS, and that benefits could be conferred on one set of beneficiaries to the exclusion of another set of beneficiaries, so long as the discretion was exercised reasonably. In this case, the decision was clearly exercised reasonably.

(c) Duty to Act in Good Faith – the trial judge held that OMERS failed to act in good faith to the plaintiffs, based on statements made roughly one year after OMERS made its recommendations to the Ontario government. The Court held that to find a breach of the duty to act in good faith, it would have to be established on the facts that bad motive (self interest; ill will; dishonest purpose) underlay the plan administrator's decision. The Court held that a simple failure to act with courtesy and respect in the heat of the circumstances did not amount to a breach of the duty of good faith.

********

Grow-in for Plan Members Outside Ontario

On November 1, 2005 the Ontario Court of Appeal released its decision in Hembruff v. Ontario Municipal Employees Retirement Board. The key issue for the Court to decide was whether the administrator of a pension plan has a duty to advise plan members that it is contemplating making benefit improvements to the plan. In summary, the Court held that a pension plan does not have a duty to advise plan members that it is contemplating benefit improvements during the period while such changes are under consideration. This is a welcomed decision by plan administrators, who until this decision faced considerable uncertainty as to their disclosure obligations to members.

The Facts

As noted in a previous edition of Pensions@Gowlings (http://www.gowlings.com/resources/enewsletters/Pensions/Htmfiles/V1N02_200406.html#b)which discussed the lower Court's decision, the plaintiffs in this case were Toronto police officers who were members of the Ontario Municipal Employees Retirement System ("OMERS"). Upon retirement, each of the plaintiffs elected in accordance with available portability options to transfer the commuted value of his defined benefit pension to a locked-in account outside of the plan. Prior to 1998, OMERS was faced with an increasing surplus in its pension fund. Throughout 1998 and 1999, OMERS considered various alternatives to the use of surplus, including contribution holidays and benefit enhancements. In late November 1998 OMERS recommended benefit enhancements to the Ontario government, which had to consider and approve any such enhancements through the promulgation of regulations under the governing statute. It was not until May 1999 that the Ontario government finally approved the benefit enhancement, which amendments were made effective as of January 1, 1999. OMERS issued a member newsletter in November 1998, identifying the potential benefit improvements. The enhancements adopted by the Ontario government would have increased the commuted value of the benefits of each of the plaintiffs, if they had chosen to keep their money in the plan through the beginning of 1999.

The lower Court upheld the plaintiffs claims for negligent misrepresentation and breach of fiduciary duty on the basis that OMERS failed to inform them, in advance, of the potential changes to the OMERS plan. On appeal, the Court allowed the appeal, set aside the lower Court's judgment and dismissed the action, with costs to OMERS.

Claims for Negligent Misrepresentation

On the claim for negligent misrepresentation, the Court agreed that a pension plan administrator such as OMERS owes a duty of care to plan beneficiaries. However, the Court did not agree that one of the essential requirements of negligent misrepresentation had been established, i.e. that an untrue, inaccurate or misleading representation had been made by OMERS to the plaintiffs. The Court stated the administrator of a pension plan has a duty to disclose "highly relevant" information. The Court stated that the failure to disclose accurate and complete information regarding a pension plan's existing terms and options can amount to an untrue, inaccurate or misleading representation. However, the Court held that information on what a pension plan's terms potentially might be in the future is not highly relevant, rather it was speculative in nature, and is therefore not information on which it would be reasonable to rely. The Court stated that a representation, to be of effect in law, should be in respect of an ascertainable fact and not a mere matter of opinion, and therefore a statement of opinion, judgment, probability or expectation cannot sustain an action for negligent misrepresentation. Until OMERS formed a recommendation with respect to benefit enhancements, any statement as to what it might recommend was mere opinion or conjecture. Thus, the Court held that until OMERS decided to make recommendations to the Ontario government with respect to proposed amendments in late November, 1998, OMERS had no obligation to disclose anything to its members.

Claims for Breach of Fiduciary Duty

On the claims for breach of fiduciary obligation, the Court held, contrary to the findings of the lower Court, that OMERS did not breach its duty to inform members, its duty to act fairly or its duty to act in good faith to members.

(a) Duty to Disclose Potential Plan Amendment – The issue before the Court was not whether a plan administrator has a duty to disclose material information (which was admitted). Rather the issue was whether there was a duty to disclose pension plan changes that are under consideration. The Court held that no such duty existed, as changes that are under consideration are not "material" as they would not be likely to influence the conduct of plan members. Indeed, the Court stated that the imposition of such a duty would impose "an unmanageable burden" on OMERS. The Court stated that until OMERS finalized its recommendations in November 1998, it had no material information to disclose to plan members in this matter

(b) Duty to Act Fairly – the trial judge held that OMERS did not breach its duty to act fairly when it "arbitrarily" recommended a January 1, 1999 effective date for the plan amendment. The Court determined that this was a discretion vested in OMERS, and that benefits could be conferred on one set of beneficiaries to the exclusion of another set of beneficiaries, so long as the discretion was exercised reasonably. In this case, the decision was clearly exercised reasonably.

(c) Duty to Act in Good Faith – the trial judge held that OMERS failed to act in good faith to the plaintiffs, based on statements made roughly one year after OMERS made its recommendations to the Ontario government. The Court held that to find a breach of the duty to act in good faith, it would have to be established on the facts that bad motive (self interest; ill will; dishonest purpose) underlay the plan administrator's decision. The Court held that a simple failure to act with courtesy and respect in the heat of the circumstances did not amount to a breach of the duty of good faith.

********

Grow-in for plan members outside Ontario

On November 10, 2005, the Supreme Court of Canada (the "Court") released its decision in Boucher v. Stelco Inc. At issue was whether Quebec members of an Ontario-registered national pension plan were entitled to "grow-in" benefits on a partial wind up because the plan stipulated that it was governed by the laws of Ontario. In summary, the Court dismissed the appeal on the grounds that, in the circumstances, the Quebec courts did not have jurisdiction to adjudicate the matter. The case is interesting for the comments of the Court concerning the memorandum of reciprocal agreement concerning pension regulation amongst Canadian provinces (the "Reciprocal Agreement"). In particular, this decision clarifies that one pension regulatory authority can, acting under the authority of the Reciprocal Agreement, make binding decisions with respect to pension benefits standards laws of other jurisdictions on behalf of other signatory pension regulatory authorities.

The Facts

Stelco Inc. ("Stelco") established a pension plan in 1940 for all of its employees in Canada, regardless of their place of work. The plan text stipulated that the plan was governed by the laws of Ontario and that any termination or wind up of the pension plan would be carried out in accordance with the Pension Benefits Act (Ontario) (the "PBA"). In accordance with the provisions of the Reciprocal Agreement, the Plan was registered with the Superintendent of Financial Services (Ontario) (formerly the Superintendent of Pensions) (the "Superintendent") on the basis that the plurality of members were employed in the Province of Ontario.

In 1990, as part of a reorganization of its operations, Stelco decided to close three plants in Quebec. The Superintendent, acting in accordance with the Reciprocal Agreement, then ordered a partial wind up of Stelco's pension plan in order to determine and guarantee the pension benefits of the laid-off employees.

The partial wind up report that was ultimately approved by the Superintendent in January 1987 did not provide "grow-in" benefits (i.e. right to grow into the plan's early retirement benefits if age and service at the time of wind up equals at least 55) to members outside of Ontario on the basis that these rights are provided by the PBA only for members employed in Ontario. Such benefits can materially increase the value of a member's pension. The partial wind up report applied Quebec law to Quebec members affected by the partial wind up ("Quebec members"). Therefore, their pension entitlements were computed without regard to Ontario's "grow-in" provisions.

Despite being advised that they would only receive deferred benefits, the Quebec members did not contest the Superintendent's approval of the wind up report. In October 1998 the Quebec members commenced an action in the courts of Quebec against Stelco based on contracts of employment claiming that they were entitled to early retirement benefits on the basis that the plan was subject to Ontario law.

Jurisdiction to overturn the Superintendent

The Quebec Superior Court decided that it had jurisdiction over the Quebec members' action but dismissed the claim on the grounds that the PBA limited "grow-in" benefits to pensioners who had been employed in Ontario.

In a majority decision, the Quebec Court of Appeal dismissed the Quebec members' appeal of the Superior Court decision. The majority differed on whether the Superior Court had jurisdiction to hear the action in the first place. One Justice dismissed the appeal on the basis of jurisdiction, the other on the grounds that Ontario legislation limited "grow-in" benefits to members employed in Ontario.

In a unanimous decision, the Court dismissed the appeal of the Quebec members. The Court stated that the central issue was the nature and effect of the Superintendent's decision.

The Court held that the action of the Quebec members was inadmissible in light of the principles of res judicata in civil law, issue estoppel at common law and the principles of public law applicable to the role of the courts. These principles discourage "collateral attacks" on judicial or quasi-judicial decisions in order to preserve the finality of decisions. In the alternative, the Court stated that the principle of forum non conveniens (which allows a court to decline jurisdiction if it considers a court in another jurisdiction to be in a better position to hear the action) would have led the Quebec Superior Court to decline jurisdiction. The Court noted that the Quebec members never contested in Ontario the Superintendent's approval of the partial wind up report.

The Court held that the claim in contract by Quebec members would only have legal basis if the employer were authorized and required to pay the benefits claimed. However, Stelco could not make such payments unless they were contemplated by a wind up report approved by the Superintendent. In order to consider the merits of the Quebec members' action, the Quebec courts would have to treat the Superintendent's decision as if it were non-existent or invalid, or quash it themselves.

The Court noted that as a result of the Quebec members' claim, Stelco could find itself in the "strange position" of having to comply with the Superintendent's decision under Ontario law while at the same time being required to execute a Quebec judgement to the contrary, at least with respect to Quebec members. Moreover, such a result could call into question the benefit calculations for all the retirees and the measures taken to ensure the plan's solvency.

The Reciprocal Agreement

In its decision, the Court placed significant emphasis on the existence and role of the Reciprocal Agreement. The Court noted that the Reciprocal Agreement "relates to an important aspect of Canadian federalism, namely the intergovernmental agreements designed to ensure that the provinces cooperate with each other in exercising their legislative powers so as to permit people to move and trade to flow freely within the Canadian political space." The Court stated that the Quebec members' action would reduce the effectiveness of the Reciprocal Agreement in terms of the exercise of provincial powers and the reciprocal delegation of administrative functions. The Court stated that the Reciprocal Agreement "conferred on Ontario's Superintendent of Financial Services the authority to make any necessary decisions for the administration and wind up of the plan." Therefore, his decision with respect to the partial wind up report applied to plan members employed in Quebec.

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New Guidance on Look-alike Sound-alike Health Product Names

Health Canada has finalized its Guidance on procedures for reviewing all proposed drug names as part of the drug review process. The Guidance, entitled "Drug Name Review: Look-alike Sound-alike (LA/SA) Health Product Names" comes into effect January 1, 2006. The final Guidance is substantially similar to the draft Guidance that was the subject of our report dated September 7, 2005 in Volume 4, no. 14 of Pharmacapsules.

The Guidance defines look-alike sound-alike health product names as those that have a similar written name or similar phonetics to that of another health product. The rationale behind the Guidance is Health Canada's concern that these similarities may pose a risk to health by causing errors in prescribing, dispensing or administering a health product. The Guidance will apply to all health products which are defined to include pharmaceuticals, biologicals, vaccines, medical devices, natural health products, radiopharmaceuticals and veterinary drug products.

Under the Guidance, all proposed brand names (ie. proprietary names) submitted will be reviewed to ensure that they are unlikely to cause medication errors with brand names or generic names. However, there will be a phased implementation of consistent use of the Guidance with priority being given to Schedule C, Schedule D (Biologics), Schedule F and prescribed drugs for human use before over-the-counter, natural health products, veterinary drugs and medical devices.

The Guidance will apply to all drug submission types received on or after January 1st, 2006, including New Drug Submissions, Supplements to New Drug Submissions, Abbreviated New Drug Submissions, Supplements to Abbreviated New Drug Submissions and Applications for Drug Identification Numbers.

According to the Guidance, the Food and Drug Regulations (eg. C.08.002.(1), C.08.002.(2), C.08.002.(3) and C.01.014.1(2)) allow the Health Products and Food Branch (HPFB) of Health Canada to adopt a pre-market requirement that the names of drugs not be confusing with one another. If confusion is considered likely and could result in safety concerns, then according to the Guidance, HPFB can refuse to issue a Drug Identification Number (DIN) and/or a Notice of Compliance (NOC). If the brand name is at issue, an NOC will be issued without indication of the brand name and the sponsor can then follow up with an administrative submission in order to obtain approval of a new brand name. However, if there is an outstanding issue regarding the proposed proper name or common name of the drug (both of which are defined in the Guidance), then a Notice of Noncompliance (NON) will be issued for the proposed product.

To facilitate the name review process, sponsors should submit the following, according to the Guidance:

1.

a proposed proprietary name and, if desired, a prioritized list of alternate name choices (maximum of 2); and

2.

a risk assessment and evaluation of the product's proposed brand name supported with studies, data and analysis

The Guidance acknowledges that the science for assessing drug names is developing and that it is not clear which assessment technique is the best at predicting the risk of LA/SA drug name errors.

According to the Guidance, HPFB will consistently review proposed drug names, initially screening the proposed product for similarities with the names of products that are currently on the market or have been submitted to HPFB for approval. HPFB will conduct a general name review in all cases but names that are flagged will scrutinized more carefully for specific similarities identified. It appears that names are "flagged" following the application of a complex computer application designed to screen LA/SA names for their potential for confusion. The Guidance does not indicate which computer application it has selected for this screening process.

In determining whether the degree of similarity in names is problematic, the following contributing factors will be taken into consideration, as applicable:

1.

the marketing status (Rx or OTC);

2.

therapeutic category;

3.

indication(s) and directions for use;

4.

the clinical setting for dispensing or use (inpatient or outpatient hospital or clinic v. retail pharmacy for use in home);

5.

the packaging and labelling;

6.

the strength;

7.

the dosage form or routes of administration;

8.

the proposed dose and dosing interval;

9.

similar patient populations; and

10.

storage

For self-care health products, applicable factors from the above list will be considered. As well, the location of the proposed product on the shelf will be taken into account. Factors such as dosing, dosage form, route of administration and strength are not as significant for self-care products as they are for Rx drugs.

When comparing one proposed name with another, the potential for harm will be assessed, for example, the consequences of a patient missing the intended drug and the pharmacological actions and toxicities of the unintended drug. The Guidance states that generally, if one or more of the above factors are sufficiently different to minimize the potential for confusion, there will be less concern with the name as the risk of medication error will be smaller.

If reviewers cannot come to a decision regarding a name's potential for confusion or if there is a dispute with the sponsors involved, the Guidance states that it is recommended that the name be considered further by an Interdirectorate Name Review Committee. No information is provided about the composition of this Committee.

Once a submission is received, an initial review of the proposed name will be completed within a target 90 day period, according to the Guidance. A second, abbreviated review will be completed within 90 days of the anticipated date of approval of the submission -- this review will focus on names that were approved by HPFB after the date of the first review.

The text of the Guidance may be found at the following link:
http://www.hc-sc.gc.ca/dhp-mps/brgtherap/activit/consultation/alike-semblable/lasa_premkt-noms_semblables_precomm_e.html

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Canada: National Do-Not-Call Legislation Enacted

In the pre-election activity in Canada's Parliament prior to the November 28, non-confidence vote, one "last minute" enactment was Bill C-37 which amended to the Telecommunications Act ("Act") to facilitate a national do-not-call list for telemarketing. The Canadian Radio and Telecommunications Commission ("CRTC" or "Commission") has been given the power to impose fines for telemarketing calls to numbers on the do-not-call list on a per call basis of up to $15,000 for corporations. Bill C-37 received Royal Assent on November 25, 2005, but comes into force on a day to be fixed by the Governor in Council. As of November 30, 2005, it was not yet in force.

The Amendments

Bill C-37 provides the legislative framework for a national do-not-call registry and gives the CRTC the power to administer information systems for a national do-not-call service (section 41.2), the operation of which may be delegated to a third party (section 41.3).

The regime contemplated by the legislation will permit exempted individuals or organizations, as set out in section 41.7(1), to make unsolicited calls until such time as the recipient requests placement on that individual's or organization's do-not-call list.

Section 41.7 contains the exemptions that permit unsolicited telecommunications by or on behalf of:

  • a registered charity within the meaning of section 248(1) of the Income Tax Act;

  • a political party that is a registered party as defined in subsection 2(1) of the Canada Elections Act or that is registered under provincial law for the purposes of provincial or municipal elections;

  • a nomination contestant, leadership contestant or candidate of a political party; or

  • an association of members of a political party.

Most importantly for businesses in Canada, communications made to a person with whom the caller has an existing business relationship and who has not made a do-not-call request of that caller are permitted. Telephone calls in connection with public surveys are also permitted. The terms "candidate," "leadership contestant" and "nomination contestant" and the key definition, "existing business relationship" are defined in s. 41.7(2).

Section 41.7 requires exempted callers to identify the purpose of their call and to state the person or organization on whose behalf the call is being made (s. 41.7(3)). Section 41.7(4) requires all exempt persons and organizations to maintain their own do-not-call list and to ensure that no call is made to a person who has asked to be placed on that list.

New Enforcement Provisions

Part V of the Telecommunications Act has been amended by adding a section entitled "Administrative Monetary Penalties" that permits the Commission to levy fines as an enforcement measure. The new section also gives the Commission the power to delegate various administrative, investigative, inspection and enforcement powers to a third party.

Each telemarketing call to a number registered on the do-not-call list is a violation of section 41 of the Telecommunications Act (s. 72.01) and may be subject to an administrative monetary penalty for individuals of $1,500 per offending call or, for corporations, $15,000 per offending call.

Search powers are also provided insofar as authorized persons may enter and inspect any place (s. 72.06(1)) upon reasonable grounds, where there is information relevant to the enforcement of section 41. If the place in question is a residence, an ex parte warrant is needed before entry (s.72.06(2)).

The Commission may designate persons for the administration of telemarketing regulations under section 41 of the Act, who may request from telemarketers periodic reports or other forms of information necessary for the administration of the Act (s. 72.06).

Defences

Due diligence (s. 72.1(1)) and justification (s. 72.1(2)) are two defences available against any allegation that s. 41 was violated. Due diligence here means that the individual or corporation took all reasonable efforts to ensure that the actions taken were within the law. Similarly, all common-law rules and principles governing justification or excuse are available unless they are specifically excluded by the Telecommunications Act or inconsistent with the Act.

Where a defence is raised, the CRTC must decide, on a balance of probabilities, whether the violation was committed (s. 72.08(2)) and, if it finds a violation to have occurred, may impose the penalty outlined in s. 72.01. There is a two-year limitation period - after the incident became known to the Commission - for the Commission to initiate an action concerning a violation (s. 72.12(1)), and a five-year time limitation on the right of the CRTC to commence an action to force payment of a fine (s. 72.09(2)).

Review

Parliament must undertake a review of the administration and operation of the national do-not-call list three years after the bill comes into force.

********

Growth of Sophisticated Chinese Economy Relative to Other Nations Also Apparent in New Transfer Pricing Rules

China has witnessed its economy transform over the last decade, with outside spectators commenting that it would be the next economic superpower to rival the United States. By all accounts this may be true. According to the The Economist , China Gross Domestic Product for 2005 was 1.78 trillion dollars with economic growth pegged at 8.1 percent. While China is still relatively poor on a per capita basis, its growth rates mean that it will catch up to many of the industrialized countries in a relatively short period of time. Impressive growth in both GDP and technological process has made China a more powerful and sophisticated economy relative to other developing economies.

China's sophistication can also be seen in its ever-evolving tax system. Often viewed as being very bureaucratic, the introduction of new regulations regarding working capital adjustments in August of this year, with the introduction of circular number 745, are quite impressive, to say the least. The circular suggests that adjustments should be made to the comparables when working capital intensities differ from those of the tested party and comparability between the tested party and comparables are relatively high.

While the adoption of working capital adjustments as a formal policy is not new within the transfer pricing world (found in such countries as the United States), it has not been formal policy in very many western nations (such as the European Union). While the need to perform working capital adjustments has basis in economic theory, we often witness that theory and practice rarely coincide. From a practical viewpoint, there is no consensus among tax authorities in much of the industrialized world as to whether working capital adjustments are required, let alone how we ought to perform them. For instance, member states of the European Union have not agreed on how or whether working capital adjustments need to be performed. Unlike the United States, where working capital adjustments are not only advocated by the Internal Revenue Agency, but are also incorporated in all economic analysis, the U.K. Inland Revenue Commission has taken a more broad based approach without explicitly stating whether working capital adjustments are required. The reasons for taking such an approach are not readily given but experience can point to many. The main reason surrounds the question of comparable quality. Proponents of this general view believe that by applying these adjustments to a set of comparables that truly are not similar (but nonetheless are used in order to obtain resolution), will only serve to increase the distortion given by the set of comparables. Taking this broad approach to comparables will firstly, require that the analyst determine whether the comparables in question give results that are "intuitively" sound and secondly, will require the analyst to ask whether the performing of working capital adjustments will improve this comparability and the associated profits.

The fact that the Chinese government is adopting a policy regarding a relatively minor but technical issue, serves as a testament to China's desire to build an efficient and well-detailed tax system. Comparing China to other emerging economies such as Russia, which embarked on a rapid form of marketization in the early 1990s, also illustrates how impressive the China evolution of the taxing system really is. Within the Russian context, the legislation regarding transfer pricing is relatively small, covering only one article in the tax code. On the other hand, China has a much more comprehensive transfer pricing legislation, with much more attention to details.

As China's economy grows, and the opportunity for foreign owned companies to enter the Chinese market using a wholly foreign owned enterprises (WFOE) as opposed to the traditional joint ventures increases, the government must ensure that there is a framework in place that allows for all economic activity to take place in an economic environment that is transparent. As the Chinese economy becomes more involved in the globalized economy, its interaction with the rest of the world will require it to become more sophisticated, forcing its tax system to be more encompassing. China's adoption of working capital adjustments as a formal policy serves as a testament that the State Administration of Taxation is attempting to achieve this goal.

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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This article is part of a series: Click Corportate Digest @ Gowlings - January, 2006 for the previous article.
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    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions