On July 12, 2018, the Canada Revenue Agency (CRA) published Advance Pricing Arrangement: Program Report 2017. See BEPS Action 14.
The CRA offers the program to assist taxpayers in preventing future transfer pricing (TP) disputes, and to provide increased certainty for transfer pricing methodologies for future intercompany TP transactions (e.g., to establish a transfer price that is arm’s length).
88% of in process cases on December 31, 2017 involved taxpayers seeking an APA on a bilateral or multilateral basis, as opposed to 12% of taxpayers seeking an APA on a unilateral basis. Tax jurisdictions with which Canada engaged in bilateral and multilateral APA discussions included Chile, China, Denmark, France, Germany, Hong Kong, India, Ireland, Japan, the Netherlands, South Korea, Sweden, Switzerland, the UK, and the U.S. In 2017, the average time to conclude a bilateral APA from acceptance into the program to completion was 48.5 months.
Cases involving transfers of tangible property comprised more than half of APAs in process (58%). Cases involving intangible property represented 19%, intra-group services represented 19%, and financing represented 4%. The transactional net margin method (TNMM) continued to be the most frequently employed TP methodology (e.g., 70% of APAs in process).
Taxpayers must provide a pre-file package before the CRA will grant a pre-file meeting. The package should include significantly detailed information pertaining to financial statements, business operations, and industry.
After considering the nature of the request, the availability of information, and the taxpayer’s willingness to address potential issues identified during or after the pre-file meeting, the CRA will decide whether to accept the taxpayer into the next stage of the APA process. A taxpayer invited to continue in the process must prepare a detailed APA submission on the covered transaction(s), including a detailed TP analysis, and all relevant information necessary for the CRA to review and complete its own TP analysis. After the CRA has reviewed the taxpayer’s APA submission for completeness, it will decide whether to accept or reject the taxpayer’s APA request.
Once a case has been accepted into the program, an APA goes through three stages:
- Due diligence – includes reviewing taxpayer materials, site visits, issuing information requests, and forming a position for competent authority negotiations.
- Negotiations (for bilateral and multilateral APAs only) – CRA negotiates with foreign tax administrations on TP methodologies and positions.
- Post-negotiations – signing of a bilateral / multilateral understanding between the CRA and a foreign tax administration, or the signing of a domestic APA between the CRA and the Canadian taxpayer.
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