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November 21, 2006 No. 2006-08 |
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Valuation for Transfer Pricing and Customs — What’s the Difference? The Canada Revenue Agency (CRA) recently clarified why a transfer price used for income tax purposes cannot be used for customs duty purposes. The CRA’s new information circular on this issue details the factors that may cause divergent transfer pricing and customs values for the same goods because of different valuation methods used by the CRA and the Canada Border Services Agency (CBSA). Background The CRA issued its new Information Circular IC06-1, “Income
Tax Transfer Pricing and Customs Valuation”, following a three-year public
consultation on a draft release meant to clarify the differences in
calculating prices for transfer pricing and customs purposes. Comparable
uncontrolled price method vs. transaction value method The starting points for
calculation of the transaction value and CUP methods are different and the
methodologies for making adjustments, additions and deletions of expenses
vary significantly. The CRA says issues that arise when comparing the two
methods include: ·
Different definitions for
“purchaser in Canada” for customs purposes versus "the taxpayer"
for income tax purposes. These may not be the same parties. ·
Differences in determining the
“comparable price” (for transfer pricing) versus the “price paid or payable”
(for customs). ·
Different adjustments allowed to
the comparable price and the price paid or payable. ·
Different treatment of price
reductions after import for transfer pricing and customs purposes. Resale
price method vs. deductive value method Cost plus
method vs. computed value method Though both these methods
begin with production cost, different treatment of other factors may result
in differences in the prices determined by these methods. Other valuation
methods When none of the prescribed
transfer pricing methods can be applied, the CRA applies "transactional
profit methods", such as the profit split method and the transactional
net margin method (TNMM). The profit split method does not resemble any
methods used by the CBSA. The TNMM is somewhat similar to the computed value
method mentioned above. Nonetheless, since certain calculations differ
between these methods and those used by the CBSA, the prices they determine
may also differ. Advance
pricing arrangements KPMG observations The IC says that transfer pricing documentation may be suitable for
customs purposes and vice versa, though the overall tone of the IC suggests
that reasons for different values for transfer pricing and customs purposes
are abundant and varied. In practice, transfer pricing methods and
documentation are generally acceptable for customs purposes as long as the
required adjustments are made, for example, for royalties and assists. Further, as a cautionary note, the IC repeatedly states that downward
adjustments of import prices are not permitted for customs purposes as they
may be for transfer pricing purposes. Thus, it is imperative that taxpayers ensure their documentation for both
customs valuation and income tax transfer pricing purposes is sound and
consistent with the statute it is intended to satisfy. For details, please contact François Vincent, National Leader, Canada and Americas Leader, Global Transfer Pricing Services, Joseph Brick, National Leader, Trade & Customs, or your KPMG adviser, or any of the following:
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Information current to November 20, 2006. The information contained in this Transfer Pricing 60 Seconds 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.
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