The Lexpert Guides to the Leading US/Canada Cross-Border Corporate and Litigation Lawyers in Canada profiles leading business lawyers and features articles for attorneys and in-house counsel in the US about business law issues in Canada.
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TRANSFER PRICING "It's very hard to say how CRA will apply that because in Canada we have a 'reasonable effort' standard, and reasonable effort is not black and white. It's somewhat subjective and relative. That's very different from the US, which has much more prescriptive limits." WHILE NOT AS momentous as Glaxo, there have also been some noteworthy developments outside the courtroom in recent months. The CRA's accelerating use of a previously little-used provision on re-characterization is one of them. The re-characterization provision "is definitely coming more into vogue," says Ed Kroft, who leads the tax controversy & litigation group at Blake, Cassels & Graydon LLP. "And not every country has them." The provision says that notwithstanding the legal form of a transaction, the CRA can re-characterize it from an economic being watched." Darrel Pearson, co-chair of the international trade and investment practice at Bennett Jones, says multinationals doing business in Canada also need to remember that if they are sending goods or service into the country that there is also a duty and sales-tax element to transfer pricing. Canada Border Services Agency, or CSBA, does its own evaluations independent of the CRA. The CSBA's agents look at the way companies price not just their goods between related entities but also their services. They examine the intra-company pricing assigned to services such as management, corporate, legal, accounting and marketing, as well as at IT, research and development and license fees — all of which may also be subject to duty. "It's always been part of the legislation but in the last two years, the Canada Border Services Agency has begun to increase the enforcement and verification of these elements," says Pearson. "And it's escalating rapidly. So from a customs point of view, transfer pricing has become very important." It's imperative to understand that the two agencies have different priorities and objectives when it comes to valuation and transfer pricing, he says. "Each agency is dealing with diametrically opposed concerns. An importer might want to have a low transfer price of goods for customs purposes but a high pricing level for tax purposes in order to reduce Canadian profits." Do the two agencies talk to one another to exchange views on a taxpayer's transfer pricing? "They will tell you that they don't speak except at the highest level, that they don't talk about individual taxpayers," says Pearson. "But the information that is gathered by a customs official during an audit would include the very same information being produced for the tax authorities. "The two statutes demand the same thing: that the pricing be arm's-length, and the tests are very similar. The subtle difference is the tax people are looking at overall profitability for a period of time whereas the customs authority is looking at the specific pricing attributed to each of these functions and will do so for potentially each import transaction." Companies would be wise to take both agencies into account when setting transfer prices, he concludes. "What I see from clients are, frankly, transfer-pricing studies that look at the tax consequences only and don't appreciate the different treatment for custom's purposes. "The risk is you might satisfy the tax authorities but, at the same time and with the same information, you could be reassessed." "WHERE THEY SEE ANY KIND OF SUBSTANTIAL ACTIVITY YOUR AUDIT WILL ROUTINELY INCLUDE AN INTERNATIONAL TAX AUDITOR. AND THEY HAVE SEVEN YEARS TO COMPLETE THE AUDIT COMPARED TO THE FOURYEAR LIMITATION ON DOMESTIC ISSUES." perspective if the terms and conditions would never be those used by an unrelated party, and the primary reason underpinning them was tax planning. "To give you a concrete example, say you're doing your thing out of Canada but you decide to set up a company outside of Canada in order to hive off some of your operations to a company located in a low-rate jurisdiction. That's a common type of tax planning. "CRA can come in and say there's no way that company outside of Canada would ever do those activities in the absence of you getting a tax break for doing them, and they can 're-characterize' that legal relationship even though you might have contracts in place and have done everything correctly. "CRA has the authority to import all the profit of the offshore company back to Canada as if it were all made in Canada. That's quite a big stick. The efficacy, the legal effectiveness of it, hasn't yet been tested. We've had no jurisprudence on this but there are cases that are progressing through the courts — and they are Sandra Rubin is a freelance legal affairs writer. 32 | LEXPERT • June 2013 | www.lexpert.ca B-00-Features.indd 32 13-05-17 9:36 AM