August 21, 2013
The CRA’s 2012-13 Mutual Agreement Procedure Program Report shows that interest in the program continues to grow and that the CRA is making gains towards reaching its targeted completion times. This report will interest taxpayers with cross-border business or financial dealings as it offers valuable insights about trends in the CRA's administration of the mutual agreement procedure (MAP) program.
More cases concluded
The CRA concluded 114 MAP cases in 2012-13 (up from 97 cases in 2011-12), an 18% increase. It is interesting to note, however, that nine cases received no relief or partial relief from the program (up from eight in 2011-12).
The MAP program is a CRA program designed to help taxpayers resolve cases of double taxation or taxation not in accordance with a tax treaty. The MAP procedure is included in Canada's bilateral tax conventions; under these treaty provisions, residents of either country can ask for help in resolving an issue covered by the treaty. In Canada, authority for resolving tax disputes is delegated to senior CRA officials known as the Competent Authority.
The 2012-13 MAP report is for the CRA’s year ended March 31, 2013.
Improvement in average completion times
The MAP report indicates that the average time to complete competent authority negotiations has noticeably changed since 2011-12. For 2012-13, Canadian-initiated adjustments were completed in 26 months, whereas foreign-initiated adjustments were completed in 22 months. The CRA targets completion times of 24 months for both types of cases. For Canadian-initiated adjustments, which represent more than 90% of MAP cases, average completion time decreased to 26 months in 2012-13 (from 31 months in 2011-12).
The CRA’s MAP process has four phases: acceptance into the program, the CRA prepares its position, the foreign authority evaluates the CRA position, and the authorities negotiate. Average completion times decreased for Canadian-initiated adjustments, and completion times also decreased for all phases except negotiation. On Canadian-initiated adjustments, the foreign tax authorities reduced their time to respond to CRA position papers by half. This change is the primary cause of shorter average completion times.
On foreign-initiated adjustments, the negotiation phase took longer than in 2011-12, resulting in an overall increase to the average completion time. In all cases, acceptance into the program takes longer than the CRA’s one-month target.
It is encouraging to observe that the average completion times for Canadian-initiated adjustments have been substantially reduced, since they represent more than 90% of the CRA’s MAP case inventory. However, praise for this result should be shared between the CRA and foreign tax authorities.
We continue to see a diverging trend between Canadian-initiated and foreign-initiated adjustments. The shorter completion times for Canadian-initiated adjustments were countered by longer completion times for cases initiated by foreign tax authorities.
Negotiation times vs. other phases
The MAP report shows a slight increase in negotiation times for all adjustments. The CRA has met its targets on the two middle phases and has made progress in the acceptance phase, but struggles to achieve its 12-month target for the negotiation phase.
Inventories of files
Transfer pricing cases (which the MAP report calls “associated enterprises cases”) fall into the category of negotiable cases. These are cases for which negotiation is necessary to resolve the issue rather than simply applying the terms of the tax treaty. More than 80% of negotiable cases are transfer pricing cases.
The CRA accepted nine more transfer pricing cases into the program this year than it resolved, thus increasing the inventory of transfer pricing cases.
Inventory of non-negotiable MAP cases, where a foreign tax authority is not involved, declined to 80 (from 90). These cases largely concern withholding taxes.
Again, Canadian-initiated cases dominate the MAP process. In 2012-13, more than 90% of double tax cases were initiated in Canada compared to foreign territories. Single-year data can be somewhat deceiving since the numbers represent completed cases that would have commenced in prior years. The trend does not necessarily represent current cases entering the MAP program, although it is reasonable to expect that the large majority of new MAP cases were initiated in Canada.
|KPMG observation — Arbitration procedures|
The possibility of unresolved MAP cases going to binding arbitration has been a positive force in getting tax authorities to make compromises to resolve MAP cases within the prescribed two-year limitation period. Competent authorities appear to be pushing to resolve MAP cases before they are eligible for arbitration since such cases could otherwise be viewed as a failure of the relevant competent authorities. The MAP reports illustrate two successive years of increases in MAP cases resolved. However, the statistics include certain cases that were decided using arbitration. Data on arbitration cases is not publicly available.
Transfer pricing methodology
According to the MAP report, the transactional net margin method continues to be the dominant transfer pricing methodology used to resolve transfer pricing cases (44 out of 114 cases), followed by cost-plus (21 cases) and comparable uncontrolled price (CUP) (15 cases). The resale price method was used to resolved 10 cases in 2012-13, compared to only one case in 2011-2012.
Unresolved double taxation cases
The number of unresolved double taxation cases increased to seven cases from six in 2011-12. Interestingly, the CRA cited a new reason to explain two unresolved cases this year (i.e., the taxpayer was uncooperative or unable to provide the required information). In addition, the CRA notes that two cases only received partial relief from double taxation.
It is promising to see the CRA’s success in improving its completion statistics. In each of the past two years, the number of completed MAP cases has increased, but has not matched the increase in cases being accepted. However, if the CRA can continue to shorten completion times, it may be better able to balance its ending inventory.
Taxpayers considering the MAP process to resolve double tax cases should take note of the two unresolved cases cited above. Both the CRA and foreign tax authorities require reasonable cooperation and disclosure so they can resolve double tax issues on the taxpayer’s behalf.
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We can help
Your KPMG adviser can help you review your company’s transfer pricing policies and help you verify, support and document the existence of arm’s-length intercompany charges for transactions within your corporate group. For details, please contact your KPMG adviser.
Information is current to August 20, 2013. The information contained in this TaxNewsFlash-Canada 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.
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