Spotlight On...
Contact:
David Francescucci Partner, Tax
Email:
dfrancescucci@kpmg.ca
to deal with older years in the context of TP audits.
Lately, the CRA has adopted a more strategic approach to risk profiling, file identification and workload allocation.
TP disputes are very common in Canada, as evidenced by the very large reassessments being issued by the CRA (on occasion reaching hundreds of millions), and as reflected in the number of TP cases proceeding – post audit reassessments – at the level of CRA’s administrative appeals branch, CRA’s competent authority division to resolve double taxation under the relevant tax treaty, or ultimately in front of Canadian courts.
Q
What TP challenges do businesses face in your country?
It would be fair to say in general terms that the probability of going through a TP audit and similarly getting reassessed at the audit level is higher in Canada than in many other jurisdictions around the world.
The CRA is often perceived as taking rather aggressive positions in TP matters, and especially on some contentious TP issues such as transfers of intangibles, business restructurings resulting in the cross-border transfer of functions, risks and assets, and financial transactions (e.g. intercompany loans and guarantees) amongst others.
Canadian TP audits are known to be long and in many instances pretty adversarial. The CRA benefits from very broad powers to request information from taxpayers, and often does require the production of very large quantities of information located both in Canada and abroad in the conduct of a TP audit, including contemporaneous TP documentation.
Failure to provide sufficiently detailed and contemporaneous TP documentation can lead to a TP penalty amounting to 10% of a TP adjustment if such adjustment exceeds the lesser of CAD5 million or 10% of the taxpayer’s gross revenue.
The potential financial ramifications of a Canadian TP reassessment that is ultimately upheld can be substantial, including additional Canadian taxes, potential TP penalties, interest, penalties for failure to make appropriate tax instalments, potential risk of double taxation.
MNEs operating in Canada should also be aware of the fact that even if a CRA TP reassessment is successfully challenged by the taxpayer and reversed, taxpayers generally have to pay a minimum of 50% of the taxes due to avail themselves of the right to challenge their tax bill, which can trigger a very large negative cash flow impact over a number of years.
Q
How can these be overcome or managed effectively?
Sound TP planning aligning profits with the jurisdiction where the value is created is the first aspect that comes to mind.
Second is the need to prepare and maintain solid contemporaneous TP documentation that can provide TP penalty protection, help steer a TP audit and reduce the risk of TP adjustments and double taxation, and indirectly shift the burden of proof that TP are wrong to the tax authority.
Lastly, we always encourage taxpayers to prepare and maintain a TP audit strategy file where key information and documents are kept to provide background and support to the TP model employed for the year. The TP audit strategy file can include information
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such as the business purpose for a transaction, process maps, management organization charts, legal agreements, board of directors’ minutes, travel records, etc.
Canada also has a fairly mature Advanced Pricing Agreement (APA) program, which allows taxpayers to get certainty on TP for a number of years (typically 5 years) through a binding agreement with the CRA (unilateral APA) and more often than not with another tax authority (bilateral APA). In addition to providing tax certainty and avoiding double taxation, benefits of bilateral APAs allow for the avoidance of lengthy and contentious Canadian TP audits and prove useful to resolving potential disputes for past years that are not yet audited through a so-called rollback period (generally the past 3 years).
As in all other areas of tax, effectively managing the relationship with the CRA is key. A relationship based on open dialogue and communications, cooperation and trust will take a taxpayer a long way.
Q
Are there any changes in rules regulation (existing or upcoming) that
business should be especially aware of?
Canadian taxpayers will want to closely follow proposals and consultations announced in Canada’s 2014 federal budget that strengthen Canada’s intentions to address tax base erosion and profit shifting. These developments clearly indicate that Finance is laying the foundations for its own Canadian plan to align with the OECD Action Plan on BEPS.
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