November 16, 2012
Transfer Pricing News — 2012 Report Card on CRA’s Mutual Agreement Program
The CRA’s 2011-12 Mutual Agreement Procedure Program Report shows that interest in the program continues to be strong. 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. The CRA concluded 97 MAP cases in 2011-12, slightly more than its 95 completed cases in 2010-11. Eight cases received no relief or partial relief from the program, representing a notable decrease from 14 such cases in 2010-11.
No change to average completion times
The MAP report indicates that the average time to complete competent authority negotiations has not noticeably changed since 2010-11. Canadian-initiated adjustments are completed in 31 months, whereas foreign-initiated adjustments are completed in 20 months. The CRA targets completion times of 24 months for both types of cases.
There are four phases to the CRA’s MAP process: (1) Acceptance, (2) CRA prepares position, (3) Foreign authority evaluates CRA position, and (4) Negotiation. While average completion times were unchanged, there were trade-offs among the four phases. On Canadian-initiated adjustments, the CRA prepared its positions in fewer months while foreign authorities took more time to respond. On foreign-initiated adjustments, the CRA took more time to present its position and foreign authorities reduced their time to evaluate CRA positions. In all cases, acceptance into the program takes much longer than the CRA’s one-month target.
A tale of two inventories
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 90% of negotiable cases are transfer pricing cases.
The CRA resolved two more transfer pricing cases this year than it accepted into the program, thus slightly reducing the inventory of transfer pricing cases.
Inventory of non-negotiable MAP cases, where a foreign tax authority is not involved, rose from 22 to 91. These cases largely concern withholding taxes.
Again, Canadian-initiated cases dominate the MAP process. In 2011-12, 92% of double tax cases were initiated in Canada compared to foreign territories, up from 88% in 2010-11. Single-year trends 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.
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 (39 out of 97 cases), followed by cost-plus (19 cases) and comparable uncontrolled price (CUP) (nine cases). Profit splits were used to resolve three cases in 2011-12, compared to zero in 2010-11.
Unresolved double taxation cases
The number of unresolved double taxation cases decreased to 6% (six cases). In 2010-11, 14% (13 cases) of MAP cases were closed without any relief from double tax. Interestingly, the CRA added one new reason to explain four unresolved cases (i.e., the taxpayer’s request for a refund of withholding tax was filed outside the time limitation provisions in a tax convention and Canada’s Income Tax Act).
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 November 15, 2012. 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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