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December 23, 2008 No. 2008-11 |
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Advisory Panel Calls for Changes to Transfer Pricing System
A special subcommittee of high-profile transfer pricing specialists has made more than 20 recommendations for improving the administration of Canada’s transfer pricing rules. The Subcommittee was formed by the Advisory Panel on Canada’s System of International Taxation to identify and comment on issues commonly arising under the administration of Canada’s transfer pricing regime. The Subcommittee’s final report, The Administration of Canada’s Transfer Pricing Rules: Issues and Recommendations, was made public on December 10, 2008.
Background The Advisory Panel, appointed in November 2007 to study ways to improve Canada’s international tax system, published its recommendations to the Minister of Finance on December 10, 2008. The Panel’s Final Report: Enhancing Canada’s International Tax Advantage runs about 115 pages and sets out 17 recommendations that aim to offer “pragmatic, balanced and actionable advice…toward improving Canada’s system of international taxation.” For details, see TaxNewsFlash-Canada 2008-33 dated December 18, 2008.
The Advisory Panel makes the general observation that “applying and administering a transfer pricing regime requires special expertise in many areas, including international tax, economics and the relevant industry. Given this challenge, the Panel believes that making improvements in this area will require continuous attention and consultation. The Panel believes the Report of the Transfer Pricing Subcommittee is a solid starting point for consultations in this area.”
Recommendations referred to by the Advisory Panel One of the Advisory Panel’s formal recommendations is that the government should improve administration of the transfer pricing rules in resolving disputes, centralizing knowledge for better consistency, and resolving technical issues. The Panel’s discussion in this area favourably refers to the following of the Subcommittee’s recommendations:
· The time limitation during which a taxpayer can file a waiver should be harmonized with the seven-year time limitation for transfer pricing transactions (Recommendation 3 of the Subcommittee report). · Notices of objection and appeal should automatically be held in abeyance pending resolution through the mutual agreement procedure (MAP) (Recommendation 5). · Businesses proceeding under a MAP should only have to post security for income and withholding taxes in dispute; alternatively, businesses should only have to post one-half of the amount in dispute (Recommendations 7 and 8). · Deficiency interest should not be charged on adjustments under a MAP, Advance Pricing Arrangement or other such proceeding, provided repatriation occurred within a reasonable period after the conclusion of the proceeding (Recommendation 9). · More guidelines should be provided on what constitutes “reasonable efforts” for the purposes of applying the transfer pricing penalty (Recommendation 10). · The threshold for imposing the penalty should be raised so that small start-up businesses are not caught by the penalties (Recommendation 11). · Concentration and centralization of transfer pricing expertise at the CRA should be increased (Recommendation 17). · A secondment program between the CRA and the private sector should be established for transfer pricing professionals (Recommendation 20).
In addition to endorsing these recommendations in the Subcommittee Report, the Panel also recommends the use of safe harbours for low-value services and encourages the government to examine how the transfer pricing rules apply to transfers of intangibles to ensure the rules properly measure Canadian-source income.
Other recommendations The Subcommittee also made the following recommendations which were not specifically referred to by the Panel but which the government may be reviewing:
· In seeking to resolve MAP cases, the Canadian competent authority, should not be restricted by findings made by the CRA’s Appeals Branch (Recommendation 1). · The Accelerated Competent Authority Procedure (ACAP) should cover taxation years that are not yet audited (Recommendation 2 — see below). · Issues that can be covered by the MAP should be segregated from those that cannot so that non-MAP issues can be processed domestically on a separate track (Recommendation 4). · The CRA should accept security in lieu of Canadian income or withholding tax where the taxpayer proceeds with the MAP (Recommendation 6). · Penalties should only be an extreme measure to punish and deter flagrant disregard of reporting responsibilities (Recommendation 12). · Recourse should be available when a request for downward transfer pricing adjustment is not acted on or refused, or such discretion should not be allowed (Recommendations 13 and 14) · The government should clarify how withholding tax applies to constructive dividends (Recommendation 15). · A mechanism should be introduced to allow for withholding tax interest refunds (Recommendation 16). · The dispute arbitration mechanism under the Canada-US tax treaty should apply to APAs (Recommendation 18). · The Canadian competent authority should accept to fully negotiate all transfer pricing adjustments, including re-characterization cases (Recommendation 19).
KPMG observation Some of the Subcommittee’s recommendations seem to have had an impact already. The CRA’s ACAP guidelines, released on December 12, 2008, reverse the CRA’s previous position by taking up the recommendation to include yet-to-be audited taxation years in the ACAP. For details, see Transfer Pricing 60 Seconds 2008-10 dated December 19, 2008.
For details, please contact your KPMG adviser, or any of the following:
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Information current to December 20, 2008. 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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