Recent developments in Canadian transfer pricing

Tax Executive, The, May-June, 2003 by Nathan Boidman

(7) See Nathan Boidman, "Revenue Canada Releases Details of Advance Pricing Arrangements Program," 54 The Tax Executive 272 (July-August 2001).

(8) Paragraph 115 of IC 87-2R, supra note 5, provides that "CPM will be acceptable in Canada, subject to the natural hierarchy of methods (discussed in Part 3 of this Circular), and to the extent that its application conforms to the comparability standards set forth for the TNMM in the OECD Guidelines."

(9) The Canadian penalty was adopted on the basis of being roughly halfway between the effective amounts of the two-prong U.S. penalty approach (which are roughly equivalent to 7 percent or 14 percent of understated income, depending upon the degree of divergence from arm's-length prices but not computed as a percentage of income but rather as a percentage of the otherwise applicable tax). The dual-level U.S. penalties under section 6662 of the Code are (depending upon the circumstances) 20 percent of tax otherwise payable, say 35 percent (or 7 percent) or 40 percent of such tax (or 14 percent). The penalty provisions became effective February 6, 1996.

(10) Section 247(3) of the Act. In principle, the discussion should relate to roughly only 85 percent of multinationals to the extent that (1) there is accuracy to studies that show that 15 percent of multinationals, actually establish transfer prices through normal businesslike "hard bargaining" and (2) despite the absence of any case law on point in any country, a court would conclude, if convinced of the "hard bargaining" (which itself requires some substantial business reason for units of the same multinational to actually bargain with each other), that such prices constitute the most pristine form of arm's-length price. An informal survey by the author three years ago, involving 15 countries, indicated that there had been no evidence of such a matter going to a court. Those governments (e.g., Canada) or government-sponsored bodies (e.g., OECD) that have given the matter thought reject, without merit in the author's view, the notion that prices determined by real bargaining should preempt any further inquiry.

(11) For CCRA's view, see paragraphs 179 and 198 of IC-87-2R.

(12) "PATA Documentation Package available on CCRA's Website," Canada Customs and Revenue Agency, News Release, March 12, 2003.

(13) The word "intended" in the quoted materials is used, admittedly a potentially equivocal concept, and in the second excerpt there is reference to "all of the principles contained in this PATA Documentation Package," which itself should put the reader on alert.

(14) See sections 1082.3-1082.13 of the Act, basically duplicating federal section 247 and adding, among other things, a separate 10-percent penalty. (See Bill 138, Title I.2.)

(15) Quite apart from the need to radically change or drop the rule, there was also a mechanical deficiency in the initial approach to the rule which did not take into account the fact that a corporation carrying on business in Canada may pay tax to provinces other than Quebec. The deficiency was that the penalty would apply to all income, whether or not allocated to Quebec. The Quebec government did announce in February 2002 that this deficiency would be rectified.