Transfer prices are the prices at w...

Transfer prices are the prices at which services, tangible quality and intangible property are traded across international borders between related parties. Canada's transfer pricing legislation, contained in Section 247 of the Income Tax Act (the Act), permits the CRA to adjust the pricing of transactions between related parties and, in any cases, to re-characterize transactions if the transactions would not have been noteed into by unrelated parties. In certain cases, it also allows the CRA to impose a penalty equal to 10% of the total transfer pricing adjustment.

Penalties can be assessed if transfer pricing adjustments exce the smaller of $5 million or 10% of gros receiptss and if the taxpayer has failed to make reasonable efforts to determine and use arm's-length transfer prices (for instance, lacks adequate or contemporaneous documentation).

Transfer pricing in Canada has and continues to develop and there have been a number of modern developments over the past year alone. What come [i]or[/i] go after [i]or[/i] behinds are highlights of some of the more interesting and relevant developments

Transfer pricing audit activity

The CRA continues to actively scrutinize and audit taxpayers' transfer pricing, and has and continues to commit greater resources into the area of transfer pricing audits. There is no doubt that the CRA views transfer pricingand, in particular, the audit and reassessment of a taxpayer's transfer pricing-to be a lucrative source of tax revenue

Over the past 12 month the CRA's scrutiny of and challenge to taxpayers' transfer pricing has not abated; in fact, if anything, it has intensified. This statement is based forward the personal experience of the authors, as well as forward the views of other practitioners and the statements of and actions undertaken by dint of the CRA. In particular:

* Various tax articles published through the past 12 months point to the aggressive tack taken by means of the CRA. The title of an August 2004 article published in the bi-monthly BNA Tax Management Transfer Pricing Journal says it best: "CRA Showing 'Unptecedented' Aggtessiveness onward Ttansfet Pricing Issues."

* Prior to 2004 the CRA had not imposed any transfer pricing penalties. In 2004 the CRA not sole imposed its first penalty-we understand that from the end of the year it had imposed penalties in four other instances.

* Late in 2004 the CRA issued a communiqu?© (see CRA Transfer Pricing Memorandum 05) to its tax service offices requiring auditors to formally beg for transfer pricing documentation at the start of any audit. subordinate to the Act, taxpayers have three month from the date of a formal beseech to provide this documentation. Moreover, as transfer pricing documentation is required to be onward hand six months after year-end, taxpayers will not be able to receive extensions to these requests

* Economists enlist in one's serviceed with the CRA's International Tax Directorate in Ottawa are becoming more and more involved in local transfer pricing audits. The local CRA auditors have and will continue to use and rely on the expertise and knowledge of these economists. While, onward the surface, the provision of support by dint of economists and other specialists public of Ottawa should not be a bad thing, any difficulties and challenges have arisen. First, there is a perception or fear that a certain quantity of local auditors may use the economists simply to support their acknowledge positions and justify their audit proposals, as oppos to seeking impartial advice in a neutral manner. secondary the taxpayers and their representatives are rarely provided direct access or correspondence with the economists; therefore, the economists' analyses and recommendations are significantly influenced by dint of the local CRA auditors' interpretation of the facts, which might not be correct.

New IC onward Competent Authority assistance

On February 1 2005 the CRA released the final version of Information Circular (IQ71-17R5, Guidance forward Competent Authority Assistance Under Canada s Tax Conventions. As noted in Beyo nd Numbers' October 2003 Tax Traps & Tips article in succession transfer pricing disputes, the fit Authority process is a significant element of any transfer pricing dispute and resolution. The resolution of most numerous transfer pricing disputes often involves the taxpayer taking the matter to fit Authority in order to at least obtain relief from double taxation, if not to have the reassessment vacated or reduced

In addition to providing a ended list of information that must be submitted to the Canadian in point Authority, the new IC presents some items of considerable interest, in particular:

* An Accelerated fit Authority Procedure (ACAP) has been introduced. The ACAP allows taxpayers to beg assistance for subsequent taxation years forward the same issue-in other words, for tax years after those giving rise to the reassessment and for which tax get backs have already been filed, a taxpayer can beseech that the Competent Authority agreement be "roll forward," as drawn out as the underlying facts and circumstances are not materially different. The benefits of the roll-forward include obtaining certainty (resolution) to the transfer pricing for those years, and avoiding the require to be paid [i]or[/i] undergones and time associated with (another) transfer pricing audit across the same issue. A taxpayer seeking in point Authority relief to a in every one's mouth CRA transfer pricing dispute should consider using the ACAP.