January 22, 2010
No. 2010-02

CRA Reports Growing Interest in Advance

Pricing Arrangements

The CRA’s 2008-2009 Advance Pricing Arrangement (APA) Program Report shows that interest in the program appears to be growing. The CRA concluded 10 APAs in 2008-09, up from eight completed APAs in 2007-08. The CRA also conducted 33 pre-file meetings with taxpayers last year, down from 38 meetings in the previous year but well above the historical average of 15 meetings a year.

Acceptances

According to the report, the number of cases accepted into the APA program jumped to an all-time high of 32 in 2008-2009. The previous highs had been reached in 2007-2008 with 23 cases and in 2006-2007, 2005-2006 and 1996-1997 with 18 cases each.

APA withdrawals
In this year's report, the CRA has changed the way it tracks APAs that are withdrawn after being formally accepted into the program. In the past, such APAs were simply shown as withdrawn. In this report, these APAs also form part of the “itemized outgoing inventory” and are shown as either “APAs Unresolved” or “Post". The CRA also reports separately the number of cases withdrawn before being formally accepted into the APA program.

APA completion time rises

The time needed to complete the APAs closed in 2008-2009 is also at an all-time high. Bilateral and multilateral APAs closed in 2008-2009 took an average of 42.2 months to complete while the two unilateral APAs closed in 2008-2009 took an average of 40.3 months to complete.

The report shows the time needed to conclude APAs based on their year of acceptance into the program. Two APAs accepted in 2001-2002 were still in progress at March 31, 2009. At that time, 30 APAs had already been in progress for more than two years.

Initiatives to speed the APA process
The report lists a number of initiatives that the CRA is considering to reduce the time needed to complete an APA:

·         making better use of technology to minimize CRA officials' time spent away from the office

·         possibly reducing or eliminating site visits on renewal APA applications where it can be reasonably ascertained that there has not been a material change to the functions, assets, and risks of the parties to the transaction

·         possibly extending the period of coverage to provide taxpayers with expanded prospective certainty

·         conducting more rigorous due diligence at the APA application stage to better assess the suitability of candidates and reduce the time needed to gather information during the APA process

·         using specialized expertise to expedite the resolution of APAs and ensure consistency in the treatment of issues and cases.

Transfer pricing methodologies
As in earlier years, the transactional net margin method (TNMM) continues to be the predominant methodology used in APAs, both completed and in-progress. The dominant profit level indicators are the operating margin and the total cost-plus.

The CRA used this annual report to elaborate on its views regarding the use of the profit-split methodology in cases involving intangible property and the payment of royalties:

The use of the profit split methodology in a significant number of cases reflects the CRA’s perspective that where both parties to the transaction are contributing to residual profits, a profit split will often provide a result that is more in keeping with the arm’s length principle. The profit split methodology is also often used when the operational characteristics of two non-arm’s length parties are highly integrated, making it difficult to clearly identify functions, risks, and assets undertaken by each respective party. Additionally, where it is appropriate and where possible, all covered transactions involving a royalty payment in one form or another, are initially analyzed utilizing the profit split methodology to evaluate the proposed royalty rate.

We can help

Your KPMG adviser can help you assess the potential benefits of entering into an APA with the CRA. We can also 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 current to January 15, 2010. 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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