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. APAs have many significant advantages for taxpayers such as:
- The ability to avoid costly and time consuming audits
- No transfer pricing penalties
- Proactive double-tax avoidance
- The possibility to "rollback" the APA to prior open taxation years
- No need to maintain formal annual transfer pricing documentation.
Highlights of the report
According to the CRA's report, taxpayers had only nine applications to the APA program pending (i.e., where a pre-file meeting had occurred, but the taxpayer had not made an APA submission) in 2013-2014 and 39 APA applications were formally accepted into the program. The CRA accepted approximately 85% more applications in for 2013-2014 than in 2012-2013. The CRA also set a new record of 25 completed APAs, beating last year's record of 24.
KPMG observes that these statistics appear to reflect two underlying trends for 2013-2014. First, as the CRA had back-to-back record years completing nearly 50 APAs in total, capacity has opened up to accept new applications into the APA program. Second, the decrease in pre-file meetings and increase in application withdrawals reflects the success of the CRA's more rigorous pre-filing requirements to help it identify taxpayers that are suited to the APA program. The more rigorous pre-filing requirements allow taxpayers to better understand the requirements of the APA program early on, and opt out of the process if they discover it does not suit their needs.
The average and median times to complete a bilateral or multilateral APA decreased, respectively, to 48 months (from 52 months) and to 51 months (from 57 months). The CRA attributes these declines to its increased rigor early in the APA process, resulting in more efficient negotiations with other tax authorities.
The report indicates no changes in the following trends:
- Tangible property is the most common transaction covered
- The Transactional Net Margin Method continues to be the most popular method to establish transfer prices under an APA
- Participation in the APA program continues to reflect the pattern of Canadian trade
- The United States remains the largest treaty partner with approximately 60% of cases (down slightly from 61% in 2012-2013).
For the first time in fiscal 2013-2014, APA processes were initiated with China and Portugal.
APA program acceptance
The CRA has been limiting acceptance to the APA program to taxpayers willing to commit significant up-front resources and information, as indicated in the reduced number of pre-file meetings and increased number of withdrawn applications. The CRA hopes this approach will result in further reductions in the time to complete its due diligence and negotiation steps with its treaty partners. Notwithstanding the higher standards required to enter the APA program, APAs remain a very attractive dispute resolution option for eligible taxpayers.
For more information, contact your KPMG adviser.
Information is current to July 22, 2014. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500