Welcome to the June edition of the ONESOURCE Transfer Pricing Newsletter, your monthly source for the latest transfer pricing news. Each edition will feature articles and insight to keep you apprised on current events in the transfer pricing industry, as well as exciting things we are working on at ONESOURCE.
We hope you find this piece informative and enjoyable! Know someone who would also be interested in this information? Click here to share access.
Practitioners from the IRS, U.N., and Mexican Tax Administrative Services shared insights on the latest transfer pricing trends, for developing nations in particular, at the first Transfer Pricing Innovation Forum on June 10 in New York City.
Marzen Artistic Aluminum manufactured windows in Canada and originally had its US distribution affiliate sell them to US customers, with the US affiliate receiving a gross margin equal to 18 percent. In 1999, the gross margin was increased to 25 percent and paid not to the US affiliate but to a Barbados subsidiary. The Canadian Revenue Agency was successful in challenging the new transfer pricing arrangement in part because the taxpayer failed to provide a convincing rationale for the change.
Several states are discussing ways to coordinate their transfer pricing enforcement efforts.
Sifto is a producer of rock salt in Canada with some of its products being sold to its US distribution affiliate. Sifto, through a voluntary disclosure program, had petitioned to increase the intercompany price paid by the US distribution affiliate to the Canadian manufacturing affiliate. While Sifto believed that the two tax authorities had agreed upon the revised transfer pricing position and that no penalty should attach, the Canadian Revenue Agency continues to assert a transfer pricing penalty is due.
The European Commission is investigating whether three particular transfer pricing rulings by three members of the EU are such aggressive stances in terms of profit shifting as to be considered state aid.
Question: In the recent Canadian Tax Court decision involving Marzen Artistic Aluminum, I noticed that the US distribution affiliate incurred significant operating losses in 1998 when its operating margin was 18 percent but the distributor of records over the next three years enjoyed very high operating margins when the gross margin was raised to 25 percent. The issue seems to be that operating expenses relative to sales dropped rapidly after 1998. In such situations, how would one reliably establish a reasonable gross margin for the distribution affiliate?
Do you have a question for our transfer pricing expert?