Global Tax Adviser
December 13, 2011

APA Program’s Report Card for 2011

François Vincent
Leader, Global Transfer Pricing Dispute Resolution

The CRA recently released its Advance Pricing Arrangement Program Report for 2010-2011. The report seems to indicate that the CRA is making the program more restrictive. The numbers of APAs accepted and completed are lower than in the past and more APA applications have been withdrawn. The CRA makes some new comments in the report that seem to indicate more stringent criteria for accepting APA applications. Though the CRA seems to be tightening its acceptance criteria, its comments may be useful for taxpayers who want to apply to the program because they help to clarify what the CRA is looking for in APA applications.

Background
An APA is an arrangement between a multinational enterprise and one or more tax authorities confirming, in advance, an appropriate transfer pricing methodology to be applied to one or more specific intercompany transactions for a specified term. Canada’s APA program is administered by the Competent Authority Services Division (CASD) within the CRA’s International and Large Business Directorate.

Highlights of the report
François Vincent, Leader, Global Transfer Pricing Dispute Resolution, points out the following highlights of the report:

The withdrawal of APA applications continues to be high with six applications withdrawn in 2010-2011 for a total of 17 over a two-year period between 2009-2011, compared to 16 for almost 20 years between 1990 and 2009. François believes this result reflects the CRA's new policy of restricting access to the APA program. The number of APA withdrawals post-acceptance also hit an all-time high at four.

The CRA accepted 20 cases into the APA program in 2010-2011, the lowest number since 2006-2007. A total of 16 APAs were completed, also the lowest number since 2006-2007. François notes that the CRA is closing fewer APAs even though it is stemming the input of new APAs.

The average time to complete a bilateral or multilateral APA increased again to 50.3 months (from 48.8 months) and the median time increased to 49.6 months (from 45.8 months).

New APA restrictions
François also selected the following as the most important new paragraphs in the APA program report, which indicate where the CRA seems to be tightening the program.

The report states on page 9:

More recently, there has been an influx [of] APA requests pertaining to specific transactions that are not well suited to the APA program. APAs are best suited for current transactions that will likely continue on into the future with little to no change to the transactions themselves, and where the underlying assumptions that form the basis of an APA transfer pricing methodology (TPM) do not change over the duration of both the immediate pre-APA period and the APA period itself. Transactions involving one-time events, such as corporate restructurings of a significant nature, reside outside of the intended scope of the APA program [emphasis added].

KPMG observation
This paragraph seems to set out the criteria the CRA will follow in accepting new APA applications:

• Transactions that continue into the future
• No change to the transactions into the future, and

• Underlying assumptions for TPM do not change.

The report states on page 26:

Our increased due diligence at the pre-file stage includes asking for more information on certain types of transactions, including transactions involving intangibles, to make an informed decision about whether to accept or reject an APA request. We are providing more feedback during and after the pre-file meeting with the intention of helping taxpayers come up with a balanced and complete submission with which the CRA can work.

Another example of the CRA’s increased pre-file scrutiny relates to business restructurings. We have recently confirmed in response to queries from accounting and legal representatives that the CRA will not accept business restructuring transactions or the valuation/ownership issues that result from a restructuring during or before the APA period. APAs are best suited for current transactions that will likely continue on into the future with little to no change to the transactions themselves, and where the underlying assumptions that form the basis of an APA transfer pricing methodology do not change over the duration of both the immediate pre-APA period and the APA period itself. Without this stability we are unable to conduct a proper analysis. The CRA requires a certain stable cycle or period of time without a significant event in order to work an APA file [emphasis added].

KPMG observation
These paragraphs seem to state the types of transactions the CRA will not accept (i.e., one-time events and business restructurings) and those that will be more difficult to get accepted into the APA program (i.e., intangibles).

Although the CRA says it does not favour one-time transactions, taxpayers who can demonstrate that their transaction is tied in to ongoing transactions may still be able to get their APA applications accepted.

If your company’s transactions don’t fit the criteria for an APA, there are other options for proactively managing your transfer pricing matters. For details, contact your KPMG adviser.

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