Tax Question:
What is Transfer Pricing and what are the rules and policies in place?
Facts:
Transfer pricing is the method used to allocate a multinational group’s net profits or losses before tax to the countries where it does business. The transfer price is the rate charged for the goods or services between these related entities of the group.
Discussion:
Transfer pricing issues arise whenever goods and services are transferred between related parties across international borders because it becomes attractive to move profits to a jurisdiction with a more desirable tax rate. Often this is not done at fair market value. To prevent this, there are transfer pricing rules and regulations in place.
Transfer pricing rules state that an acceptable transfer pricing method must be applied to all transactions between the related parties across international borders including transactions such as related party loans and interest, sales, administrative/management fees and purchases. The transfer pricing method you are using must be an acceptable method and at prices comparable to those charged or paid to arm’s length parties (unrelated entities). According to Canadian transfer pricing policy, you have up to six months after your corporate year end to ensure that your transfer pricing policy is documented. This allows you time to review the transactions to ensure they were recorded at a fair price, and make any adjustments necessary. Section 247(4)(a) of the Income Tax Act discusses the transfer pricing policy and the requirements to document your transfer pricing policy within six months of your corporate year end.
CRA can adjust intercompany transfer prices to the extent that they determine that the terms and conditions of the transaction do not conform to the arm’s length principle. This could result in double taxation if profits are adjusted in Canada and not adjusted for accordingly, across the border. If CRA determines that an adjustment is required, penalties may also be assessed.
CRA may assess non-compliance penalties of 10% of any transfer pricing adjustment it makes which exceeds the lesser of 10% of your company’s gross revenue or $5,000,000. However, penalties will not be imposed if your company has shown reasonable efforts to determine and use an arm’s length transfer price. By preparing supporting documentation for your transfer pricing policy in a timely manner, you are providing evidence that you have made a reasonable effort to comply with transfer pricing policy. Therefore, this documentation is key.
Recommendation:
If you would like to discuss your transfer pricing method and documentation, please contact Gilmour Knotts Chartered Accountants.
