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Unexpected cross-border tax obligations

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A summary of the basics every taxpayer should know about transfer pricing

Transfer pricing challenges are among the most complex issues facing companies with international operations. At the same time, this complexity provides companies with the opportunity to optimize profits, increase cash flow, and moderate taxes. This summarizes the Canadian transfer pricing rules and the benefits of establishing proper transfer pricing policies and documentation.

Overview

Transfer pricing is the practice of establishing arm's length prices for related party cross-border transactions. The Canada Revenue Agency (“CRA”) requires Canadian companies to price their related party cross-border transactions at arm's length (i.e., price their related party cross-border transactions as if the parties were unrelated). These transactions include: (i) transfer of tangible products; (ii) provision of services; (iii) development, transfer or sharing of intangible property; and, (iv) extension of loans or financing arrangements that involve intercompany funds. Canadian companies are required to update the documentation annually, including any material changes from previous years.

Examples

  1. A foreign Parent Company's employees travelled to Canada and provided engineering and technical services for the benefit of a Canadian Subsidiary. BDO provided benchmarking and economic analysis to lend support to the arm's length nature of the service fee charged by the Foreign Parent Company to the Canadian Subsidiary for the provision of the engineering and technical services.
  2. A Canadian Subsidiary to a Foreign Parent Company in the oil engineering, manufacturing, and construction industry purchased various steel products from its Parent Company. BDO provided benchmarking and economic analysis to lend support to the arm's length nature of the price paid by the Canadian Subsidiary to the Foreign Parent Company for the steel products.
  3. A Canadian Subsidiary that provided software development and application hosting services to its Foreign Parent Company charged the Foreign Parent Company a service fee for the provision of these services. The service fee was calculated based on the fully loaded costs incurred by the Canadian Subsidiary, plus a mark-up. BDO provided analysis to determine the arm's length nature of the mark-up to remain compliant with the transfer pricing rules, and the SR&ED tax incentive consulting services to mitigate the additional Canadian tax burden.

Benefits of Transfer Pricing Documentation

The key benefits to establishing proper transfer pricing policies and documentation include:

When we conduct a transfer pricing analysis, we often find opportunities to improve a Company's after-tax cash flows by adopting more tax effective transfer pricing policies. When these opportunities are evident, the tax savings to be gained may far exceed the cost of preparing the transfer pricing analysis and documentation. Additionally, once tax obligations are known, we can investigate other mitigation strategies such as exploring Scientific Research and Experimental Development (SR&ED) tax credits for Canadian work that may already be ongoing within the company.

It will be important to establish transfer pricing policies up front to ensure there is global consistency in transfer pricing, manage tax risk, and reduce the overall global tax burden (as per the point above).

In the event the decision is made to sell a Company (in whole or in part), it will mitigate the possibility of a discount in the buyer's purchase price as it relates to any potential transfer pricing exposures.

The CRA has publicly stated that it expects Canadian companies to prepare transfer pricing documentation on an annual basis. By preparing transfer pricing documentation, a Company is prepared for that moment when it receives a letter from the CRA requesting its transfer pricing documentation. It is important to note that if a Canadian Company has not made reasonable efforts to determine and use arm's length prices or allocations, the CRA imposes a transfer pricing penalty that may equal 10 percent of the net result of certain transfer pricing adjustments.

BDO Canada LLP's Transfer Pricing Team consists of Accountants, Economists, Tax Practitioners, and Financial Analysts with specialized transfer pricing knowledge and experience. Our focus is to help companies develop transfer pricing policies that are defensible, flexible, and congruent with their overall tax planning, so that our clients can focus on other operational business objectives. Contact us if you require additional information on transfer pricing requirements in Canada. We would be happy to assist with your transfer pricing needs.

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The information in this publication is current as of March 1, 2017.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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