Transfer Pricing in Canada, the United States and around the World

Transfer Pricing  in Canada, the United States and around the World

Catégorie: BEPS Transfer Pricing Method

Total 12 articles

Canada’s Approach to Implementing OECD Documentation Rules

This article reviews in detail the transfer pricing documentation rules in Canada.

We analyse how Canada implemented the OECD’s transfer pricing documentation recommendations, that provide for a country-by-country report, a master file, and a local file, to combat base erosion and profits shifting.

Read “Canada’s Approach to Implementing OECD Documentation Rules”, Tax Management Transfer Pricing Report, Vol. 25, No. 14, October 5, 2017, The Bureau of National Affairs Inc., pp. 532-28, available here.

Reproduced with permission. Copyright Tax Management Transfer Pricing Report, The Bureau of National Affairs Inc., http://www.bna.com.

The complete library on Transfer Pricing in Canada is available here.

The complete library on BEPS and Transfer Pricing is available here.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Fiscalité / Tax (RBRT inc.)
514-742-8086
robertrobillard@rbrt.ca
rbrt.ca

The information in this blog post is general information only. Data and information come from sources believed to be reliable but accuracy cannot be guaranteed. RBRT Inc., RBRT Concepts Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. RBRT Inc., RBRT Concepts Inc. or the author are not responsible or liable with respect to the content appearing on external sources nor regarding the language of this content. The opinions expressed in this blogpost are those of the author. Readers should seek advice from RBRT Inc. as required.

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RBRT Comments on Transactional Profit Splits in the BEPS Context

The OECD recently released the comments received on its latest discussion draft on transactional profit splits in the context of the Base Erosion and Profit Shifting initiative (BEPS).

These comments along with the comments received on the latest discussion draft on the attribution of profits to permanent establishments are available here.

RBRT Fiscalité/Tax suggested specific changes to the wording included in the discussion draft on transactional profit splits in the context of the Base Erosion and Profit Shifting initiative (BEPS).

These suggestions are reproduced below.

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Comments on the Public Discussion Draft

BEPS Action 10: Revised Guidance on Profit Splits

August 21st, 2017

Tax Treaties, Transfer Pricing and Financial Transactions Division
OECD/CTPA
By email: TransferPricing@oecd.org

We are pleased to provide comments on public discussion draft BEPS Action 10: Revised Guidance on Profit Splits (the draft) through the consultation taking place from June 22, 2017 to September 15, 2017.

This document may be posted on the OECD website. Full credit goes to Robert Robillard, RBRT Inc. [1]

1.      Profit Split Methods Remain Methods of Last Resort

On one hand, paragraphs 7 and 19 of the draft suggest that the “transactional profit split methods” offer a “solution for highly integrated operations”. This assumption is also found in earlier drafts on the profit split methods released in 2014[2] and 2016.[3] Likewise, this idea is found in previous editions of the guidelines released in 2010 and 1995/1997.[4] Paragraphs 20 and 21 of the draft, as well as Example 6 provide occurrences that may allegedly justify the use of profit split methods according to the OECD.

This guidance remains to this day at best debatable and at worst incorrect in light of the typical franchise business model. Franchisor and franchisees do not “split profits”. More broadly, profit split methods are rarely, if ever, encountered in arm’s length commercial dealings. The guidance included in paragraphs 7 and 19-21 of the draft as well as Example 6 should be revised accordingly.

On the other hand, another option is available to the OECD editors or writers. As it was indicated in the 1995 edition of the guidelines, profit split methods are oftentimes considered as methods of “last resort” in transfer pricing. This specific overarching guidance is missing from the draft with respect to profit split methods. Paragraph 1 of the draft should therefore be improved as follows (suggested additions are in bold characters):

“1. The transactional profit split method seeks to establish arm’s length outcomes or test reported outcomes for controlled transactions by determining the division of profits that independent enterprises would have expected to realise from engaging in a comparable transaction or transactions. Enterprises rarely, if ever, use a transactional profit split method to establish their prices.[5] It should always be considered as a method of last resort. The method first identifies the profits to be split from the controlled transactions—the relevant profits—and then splits them between the associated enterprises on an economically valid basis that approximates the division of profits that would have been agreed at arm’s length. As is the case with all transfer pricing methods, the aim is to ensure that profits of the associated enterprises are aligned with the value of their contributions.”

2.      “Unique and Valuable Contributions”

Paragraphs 6, 13 and 16-18 of the draft put forward that profit split methods are more than welcome in cases where each party brings “unique and valuable contributions” to the controlled transaction. There is little doubt based on previous BEPS guidance that “unique and valuable contributions” is meant here to be defined in terms of “contributions to intangible property”.

However, this “guidance” basically goes against what typical arm’s length parties would do in their business dealings. Case in point, every Subway franchisees, McDonald franchisees, Starbuck franchisees, etc., provide “unique and valuable contributions” on top of the marketing campaign, business processes, etc., provided by the franchisor. Each franchisee brings its expertise into the fold. It is usually a prerequisite to actually becoming a franchisee. This know‑how is a central component for the success of the franchisee. It is indeed “intangible property” in the broadest sense of the concept.

However, none of these business arrangements between franchisors and franchisees ever lead to a “split of the profits”. This guidance should therefore be removed from the draft.

Another option available to the OECD editors or writers would be to clearly state the intent behind that construed guidance on profit split methods where it is deemed that every party has “unique and valuable contributions”. In short, profit split methods where each party brings “unique and valuable contributions” to the controlled transaction serve as a mechanism to allocate taxable profits between tax authorities without having to resort to global formulary apportionment. As such, paragraph 6 of the draft should therefore be improved as follows to bring it into line with the arm’s length principle (suggested additions are in bold characters and suggested subtractions have been struck off):

“6. Although it is a method of last resort, the main strength of the transactional profit split method is that it can offer a solution to tax authorities for cases where both parties every party to a transaction is deemed to make unique and valuable contributions (e.g. contribute unique and valuable intangibles) to the transaction. In such a case independent parties might effectively share the profits of the transaction in proportion to their respective contributions, making a two-sided method more appropriate. Furthermore, since those contributions are deemed “unique” and “valuable” by tax authorities there will likely be no reliable comparables information which that could be used to price the entirety of the transaction in a more reliable way, through the application of another method. In such cases, the allocation of profits under the transactional profit split method by tax authorities may be based on the contributions made by the associated enterprises, by reference to the relative values of their respective functions, assets and risks, as well as available external market data. See section C.2.2 below on the nature of the transaction.”

3.      “External Market Data”

The relevance of “external market data” in profit split methods is erroneously underlined throughout the draft. Paragraph 14 of the draft suggests that a “lack of information on closely comparable, uncontrolled transactions […] should not per se lead to a conclusion that the transactional profit split is the most appropriate method.” Paragraph 28 of the draft indicates that “if information on reliable comparable uncontrolled transactions is available to price the transaction in its entirety, it is less likely that the transactional profit split method will be the most appropriate method.” This is inaccurate.

The suitability of the profit split method should not be grounded in the availability or lack thereof of “external market data”. Any transfer pricing method starts with the “comparability analysis”, which is at the “heart of the application of the arm’s length principle.”[6] In other words, proper application of the arm’s length principle requires external market data. Without external market data, a profit split method shows no distinctive feature in comparison to global formulary apportionment.

Paragraph 14, 28 and 101-102 should be revised accordingly by the OECD editors or writers to match with the guidance included in paragraph 35 of the draft with the following minor improvements (suggested additions are in bold characters and suggested subtractions have been struck off):

“35. Under a contribution analysis, the relevant profits, which are the total profits from the controlled transactions under examination, are divided between the associated enterprises in order to arrive at a reasonable approximation of the division that independent enterprises would have achieved from engaging in comparable transactions. This division must can be supported by comparables data, where available whether in the comparability analysis or through the implementation of the profit split method. In the absence thereof, It should not be solely based on the relative value of the contributions by each of the associated enterprises participating in the controlled transactions, determined using information internal to the MNE group (see section C.5.2). In cases where the relative value of the contributions can be measured directly, it may not be necessary to estimate the actual market value of each party’s contributions.

4.      The “Contribution Analysis”

Although profit split methods are transfer pricing methods of last resort, they may indeed be some rare occurrences where they should and must be used to determine the respective arm’s length profit margin of each party involved in the controlled transaction. The guidelines have a long-standing tradition regarding the role of the “contribution analysis” to determine each party right to a share of the profits, which dates back to the 1995/1997 edition of the guidelines.[7]

The absence of any reference to the value chain analysis in the draft is nonetheless regrettable, especially in light of the excellent 2013 OECD study on the matter.[8] The value chain analysis is one of the most important features that allow for the arm’s length application of the profit split method in comparison to global formulary apportionment.

Paragraphs 24-27 of the 2016 draft on profit split methods[9] should be included in the guidance after paragraph 33 in the draft (i.e., they would be numbered paragraphs 34-37). These four paragraphs should be included with the following improvements (suggested additions are in bold characters and suggested subtractions have been struck off):

24.34. A value chain analysis, undertaken as part of the broad-based analysis of the taxpayer’s circumstances (see 1.34), may be useful in helping to identify when theis required to use the transactional profit split method. may be appropriate. Such an analysis may also assist in determining how the method, if indeed it is the most appropriate method, should be applied, including the profits to be split and the relevant splitting factors. It should be emphasised however, that such a value chain analysis is merely a tool to assist in delineating the controlled transactions, in particular in respect of the functional analysis, and thereby determining the most appropriate transfer pricing methodology.

    1. 35. All business operations can be expressed through a value chain and many MNE groups operate through a global value chain. This alone does not imply that the transactional profit split should be applied. If that were the case, then a profit split would apply in almost every case and risk producing results contrary to the arm’s length principle. Instead, the purpose of the value chain analysis is to identify the features of the commercial or financial relations between the parties described in the paragraphs below which are indicators that the transactional profit split method may be the most appropriate method for a particular case under the guidance in paragraph 2.2. For a transactional profit split of actual profits those features include a sharing in the outcomes of the business activities and associated risks involving highly integrated operations or unique and valuable contributions by the parties.
    2. 36. A value chain analysis should consider where and how value is created in the business operations, including in particular: (i) consideration of the economically significant functions, assets and risks, which party or parties perform the functions, contribute the assets and assume the risks, as well as whether and how the functions, assets, and risks of the parties may be interdependent or otherwise interlinked; and (ii) how the economic circumstances may create opportunities to capture profits in excess of what the market would otherwise allow, such as those associated with unique intangibles, first mover advantages, or other unique contributions. The starting point of the value chain analysis will generally be the written contracts between the related parties. In considering where and how value is created, the analysis should also consider whether such value-creation is sustainable, for instance, whether market advantages are protected due to barriers to entry to potential competitors or the impact of valuable intangibles. The analysis thus both contributes to the process of accurately delineating the transaction, and also determines the level of integration (which may determine the level at which profits or revenues should be split), and the economically relevant contributions (which may determine the factors to use to split the profits). It is important to note, however, that the value chain analysis is simply a tool to assist in accurately delineating the transaction. Moreover, it does not, of itself, indicate that the transactional profit split is the most appropriate method, even where the value chain analysis shows that there are factors which contribute to the creation of value in multiple places, since all parties to a transaction can be expected to make some contributions to value creation.
  • 37. A value chain analysis might usefully provide information about the following aspects of the business activity, relevant to determining whether the transactional profit split is the most appropriate method:
  • The key value drivers in relation to the transaction, including how the associated enterprises differentiate themselves from others in the market;
  • The nature of the contributions of assets, functions, and risks by the associated enterprises to the key value drivers, including consideration of which contributions are unique and valuable;
  • Which parties can protect and retain value through performance of important functions relating to the development, enhancement, maintenance, protection and exploitation of intangibles;
  • Which parties assume economically significant risks or perform control functions relating to the economically significant risks associated with value creation;
  • How parties operate in combination in the value chain, and share functions and assets in parallel integration as described in paragraph 21 [of the draft which refers to highly integrated operations].”

5.      Contractual terms and contractual arrangements

Paragraph 12 and 17 of the draft basically indicate that the “accurate delineation of the transaction” must take into account “the commercial and financial relations between the associated enterprises, including an analysis of what each party to the transaction does, and the context in which the controlled transactions take place.”

Contractual terms are only alluded to in paragraph 46 of the draft as a “reminder”. It is finally acknowledged in paragraph 46 that the “starting point in the delineation of any transaction will generally be the written contracts” for the purpose of the profit split method.

This is incorrect from an arm’s length transfer pricing standpoint. Contractual terms and contractual arrangements are both essential components in the actual delineation of the “commercial and financial relations between the associated enterprises”. Paragraph 12 of the draft should therefore be improved as follows (suggested additions are in bold characters):

“12. The accurate delineation of the actual transaction will be important in determining whether a transactional profit split is potentially applicable. The starting point in the delineation of any transaction will generally be the written contracts, which may reflect the intention of the parties at the time the contract was concluded. See paragraph 1.42. In addition, this process should have regard to the commercial and financial relations between the associated enterprises, including an analysis of what each party to the transaction does, and the context in which the controlled transactions take place. That is, the accurate delineation of a transaction requires a two-sided analysis (or a multi-sided analysis of the contributions of more than two associated enterprises, where necessary) irrespective of which transfer pricing method is ultimately found to be the most appropriate. (See paragraphs 1.33-1.35)”

We are available to discuss these suggested changes at your convenience.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Economics., M.A.P.
Senior Partner, RBRT Fiscalité / Tax (RBRT Inc.)
Université du Québec à Montréal
514-742-8086
robertrobillard@rbrt.ca

August 21st, 2017

[1] Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Economics, M.A.P., is Senior Partner at RBRT Fiscalité / Tax (RBRT Inc.) in Canada and blogger on transferpricinghub.com. He teaches at Université du Québec à Montréal; 514‑742-8086; robertrobillard@rbrt.ca. Robert is a former Competent Authority Official and Audit Case Manager at the Canada Revenue Agency.

[2] OECD (2014), Public Discussion Draft. BEPS Action 10: Discussion Draft on the Use of Profit Splits in the Context of Global Value Chains, public consultations from December 16, 2014 to February 6, 2015, see par. 5‑8 and par. 22-25.

[3] OECD (2016), Public Discussion Draft. BEPS Actions 8-10. Revised Guidance on Profit Splits, public consultations from July 4, 2016 to September 5, 2016, see par. 21 and par. 24-27.

[4] See par. 2.115 of the 2010 edition of the guidelines, which is a partial duplicate of par. 3.5 of the 1995/1997 edition of the guidelines.

[5] This wording comes from par. 3.2 of the 1995/1997 edition of the guidelines.

[6] See par. 1.6 of the 2017 edition of the guidelines.

[7] See par. 3.6-3.8.

[8] OECD (2013), Interconnected Economies. Benefiting from Global Value Chain.

[9] OECD (2016), op. cit.

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The complete library on BEPS and Transfer Pricing is available here.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Fiscalité / Tax (RBRT inc.)
514-742-8086
robertrobillard@rbrt.ca
rbrt.ca

The information in this blog post is general information only. Data and information come from sources believed to be reliable but accuracy cannot be guaranteed. RBRT Inc., RBRT Concepts Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. RBRT Inc., RBRT Concepts Inc. or the author are not responsible or liable with respect to the content appearing on external sources nor regarding the language of this content. The opinions expressed in this blogpost are those of the author. Readers should seek advice from RBRT Inc. as required.

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Profit Split Methods and the OECD: Leaning Toward Formulary Apportionment?

Profit split methods have had global formulary apportionment inclines lately…

Read our latest piece on profit split methods titled “Profit-Split Methods and the OECD: Leaning Toward Formulary Apportionment?”, Tax Notes International, Sept. 4, 2017, pp. 1005-1011, available here.

This article is reproduced with permission from the editor.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Fiscalité / Tax (RBRT inc.)
514-742-8086
robertrobillard@rbrt.ca
rbrt.ca

The information in this blog post is general information only. Data and information come from sources believed to be reliable but accuracy cannot be guaranteed. RBRT Inc., RBRT Concepts Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. RBRT Inc., RBRT Concepts Inc. or the author are not responsible or liable with respect to the content appearing on external sources nor regarding the language of this content. The opinions expressed in this blogpost are those of the author. Readers should seek advice from RBRT Inc. as required.

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OECD Transfer Pricing Guidelines 2017 Available

On July 10, 2017, the OECD released its 2017 Edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

This 2017 edition of the OECD Transfer Pricing Guidelines contains all the changes and modifications stemming from the BEPS initiative which officially started in 2013.

The end result is a whopping 600-plus pages document which now includes the latest OECD guidance on comparability, transfer pricing methods, intangibles and transfer pricing, to name a few. History buffs may recall that it all started with a 100-pages document in 1979.

At this time, the OECD Transfer Pricing Guidelines now comprises 9 fully-packed chapters with “guidance” and added examples.

Will the upcoming Chapter 10 pertains to formulary apportionment when everything else fails? Only time will tell.

But with more significant changes expected in the upcoming years regarding hard-to-value intangibles and the use of profit split methods for transfer pricing, this may not really be a stretch of the imagination after all…

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 are available here.

To know more about BEPS, check the library on BEPS and Transfer Pricing which is available here.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Fiscalité / Tax (RBRT inc.)
514-742-8086
robertrobillard@rbrt.ca
rbrt.ca

The information in this blog post is general information only. Data and information come from sources believed to be reliable but accuracy cannot be guaranteed. RBRT Inc., RBRT Concepts Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. RBRT Inc., RBRT Concepts Inc. or the author are not responsible or liable with respect to the content appearing on external sources nor regarding the language of this content. The opinions expressed in this blogpost are those of the author. Readers should seek advice from RBRT Inc. as required.

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Practice Makes Perfect: IRS Releases New International Practice Units

This blogpost originally appeared on rbrt.ca.

The IRS has been busy releasing 10 new practice units:

03-18-2016 Inbound Resale Price Method Routine Distributor
03-18-2016 Computing Foreign Base Company Income for US Individual Shareholders
03-17-2016 Concepts of Foreign Personal Holding Company Income
03-17-2016 Verifying Refund Request of IRC 1445 Withholding on Dispositions of U.S. Real Property Interests
03-14-2016 Interest Expense Limitation Computation under §163(j)
03-09-2016 Allocation and Apportionment of Deductions for Nonresident Alien Individuals
03-09-2016 FDAP Income
03-07-2016 Residual Profit Split Method – Outbound
03-04-2016 Review of Transfer Pricing Documentation by *Outbound Taxpayers
03-04-2016 Outbound Services by US Companies to CFCs

IPUs Outbound Services by US Companies to CFCsReview of Transfer Pricing Documentation by *Outbound TaxpayersResidual Profit Split Method – OutboundFDAP Income, and Inbound Resale Price Method Routine Distributor should be of particular interest to transfer pricing professionals around the world.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Inc.
514-742-8086; robertrobillard “at” rbrt.ca
www.rbrt.ca

The convergence of RBRT’s tax, accounting and economics expertise makes a difference. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. The opinions expressed in this blogpost are those of the author. Readers should seek advice and counsel from RBRT Inc. as required.

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Canada: CRA releases TPM-17 The Impact of Government Assistance on Transfer Pricing

This blogpost originally appeared on rbrt.ca.

On March 2nd, 2016, the CRA issued TPM-17 The Impact of Government Assistance on Transfer Pricing.

The new TPM-17 is available here.

Paragraph 3 explains:

“A Canadian resident corporation (CanCo) provides products or services to a non-arm’s length non-resident corporation (ForCo);
CanCo is considered the tested party [3] and the transfer price for this transaction is tested using a cost-based method;[omitted]
CanCo receives financial assistance from one or more government agencies or programs;
In calculating the cost base for transfer pricing purposes, CanCo reduces the cost base by an amount equal to the government assistance received.”

Paragraph 4 indicates:

“When a cost-based transfer pricing methodology is used to determine the transfer price of goods, services, or intangibles sold by a Canadian taxpayer to a non-arm’s length non-resident person and the Canadian taxpayer receives government assistance, the cost base should not be reduced by the amount of the government assistance received, unless there is reliable evidence that arm’s length parties would have done so given the specific facts and circumstances. Refer to the Appendix for an example that illustrates this policy.”

The Appendix of TPM-17 illustrate the CRA administrative position on this fairly contentious matter in Canada:

As filed by the taxpayer – markup applied on net costs

A.3  The MNE establishes the transfer price between CanCo and ForCo by applying a mark-up to CanCo’s costs (net of the government assistance received) incurred to perform the R&D services.

A.4  For example, CanCo incurs R&D costs of $60 and other costs of $40, receives government assistance of $10, and applies a 10% mark-up to the net cost base. The MNE determines the transfer price as follows:

Example of a transfer price and net income calculation as determined by a taxpayer
Transfer price calculation CanCo income statement
R&D costs  $60 Revenue (transfer price to ForCo)  $99
Less: government assistance  $(10) R&D costs  $60
Other costs  $40 Government assistance  $(10)
Total costs  $90 Other costs  $40
Add 10% mark-up  $9 Total costs  $90
Transfer price to ForCo  $99 Net income  $9

A.5  The issue is whether the tax credits received or receivable should reduce the transfer price by reducing the cost base by the amount of tax credits. When there is no evidence to support independent enterprises allocating government assistance, it is presumed that CanCo, the company that received the assistance, will keep the assistance.

A.6  The following shows the CRA‘s approach when it has determined that the government assistance should not be netted against the R&D costs incurred. It also shows the impact on the transfer price CanCo receives from ForCo when government assistance is included in the cost base.

CRA approach – markup applied on gross costs

A.7  In the context of a transactional net margin method, using return on total costs as a profit level indicator, this presumption translates into the use of gross costs as shown below:

Example of a transfer price and net income calculation as determined by the CRA
Transfer price calculation CanCo income statement
R&D costs  $60 Revenue (transfer price to ForCo)  $110
Other costs  $40 R&D costs  $60
Total costs  $100 Government assistance  $(10)
Add 10% mark-up  $10 Other costs  $40
Transfer price to ForCo  $110 Total costs  $90
Net income  $20

A.8  In this situation, the transfer pricing adjustment would be $11, which is the difference between the transfer price used of $99 (as filed by the taxpayer) and the revised transfer price of $110 (as calculated by the CRA).”

From a transfer pricing audit perspective, TPM-17 is indeed a meaningful development in Canada.

Based on our past life as a CRA official, we can unfortunately states that TPM-17 clearly signals blurry waters ahead.

A meaningful number of Canadian companies may have to revisit their current transfer pricing arrangements to ensure proper structuring, implementation, documentation and justification of their transfer pricing policies.

The library on Transfer Pricing in Canada is available here.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Inc.
514-742-8086; robertrobillard “at” rbrt.ca
www.rbrt.ca

The convergence of RBRT’s tax, accounting and economics expertise makes a difference. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. The opinions expressed in this blogpost are those of the author. Readers should seek advice and counsel from RBRT Inc. as required.

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Canada-European Union: Comprehensive Economic and Trade Agreement (CETA)

This blogpost originally appeared on rbrt.ca.

Recently, Global Affairs Canada indicated that:

[“o]n February 29, 2016, Canada’s Minister of International Trade, Chrystia Freeland, and the European Union’s Commissioner for Trade Cecilia Malmström announced the completion of the legal review of CETA. As part of the legal review, Canada and the EU agreed on modifications related to investment protection and investment dispute resolution provisions. The Agreement is currently undergoing translation into French, and the other 21 EU Treaty languages. Following translation, the process required to approve the agreement in Canada and the EU along with the steps necessary to bring policies, regulations and legislation into conformity with the obligations under CETA will begin.”

Learn more about the CETA by reviewing the FAQ here.

An overview is available here.

A technical summary is available here.

The complete text of the CETA is extensive (this is a 1,598 pages document!). It is available here.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Inc.
514-742-8086; robertrobillard “at” rbrt.ca
www.rbrt.ca

The convergence of RBRT’s tax, accounting and economics expertise makes a difference. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. The opinions expressed in this blogpost are those of the author. Readers should seek advice and counsel from RBRT Inc. as required.

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Slap Me in the Face: Altera Corp. & Subs. v. Commissioner (Cost Sharing Arrangement)

This blogpost originally appeared on rbrt.ca.

In Altera Corp. & Subs. v. Commissioner, the IRS got slapped in the face.

TaxProf Blog (Paul L. Caron, Editor) writes in “Hickman: The Tax Court Delivers An APA-Based Smackdown”:

“In Altera Corp. & Subs. v. Comm’r,, 145 T.C. No. 3 (July 27, 2015) the Tax Court unanimously invalidated regulations under Section 482 requiring participants in qualified cost-sharing arrangements to include stock-based compensation costs in the cost pool in order to comply with the arm’s length standard, on grounds that the regulations were not the product of reasoned decisionmaking as required by Administrative Procedure Act (APA) § 706(2)(A) and Motor Vehicle Manufacturers Association of the United States v. State Farm Mutual Automobile Insurance Co.,, 463 U.S. 29 (1983), known in administrative law circles as State Farm.  From top to bottom, the Altera opinion reads like a treatise on general administrative law requirements and norms.  Without delving into the policy details of the regulation at issue, the following paragraphs summarize the Tax Court’s opinion and its potential implications.”

See the full analysis here: http://taxprof.typepad.com/taxprof_blog/2015/07/hickman-altera-corp-subs-v-commissioner-the-tax-court-delivers-an-apa-based-smackdown.html

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Inc.
514-742-8086; robertrobillard “at” rbrt.ca
www.rbrt.ca

The convergence of RBRT’s tax, accounting and economics expertise makes a difference. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. The opinions expressed in this blogpost are those of the author. Readers should seek advice and counsel from RBRT Inc. as required.

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Use of More than one Transfer Pricing Method

This blogpost originally appeared on rbrt.ca.

Paragraph 2.11 of the OECD Transfer Pricing Guidelines explains:

“The arm’s length principle does not require the application of more than one method for a given transaction (or set of transactions […]), and in fact undue reliance on such an approach could create a significant burden for taxpayers. Thus, these Guidelines do not require either the tax examiner or taxpayer to perform analyses under more than one method. While in some cases the selection of a method may not be straightforward and more than one method may be initially considered, generally it will be possible to select one method that is apt to provide the best estimation of an arm’s length price. However, for difficult cases, where no one approach is conclusive, a flexible approach would allow the evidence of various methods to be used in conjunction. In such cases, an attempt should be made to reach a conclusion consistent with the arm’s length principle that is satisfactory from a practical viewpoint to all the parties involved, taking into account the facts and circumstances of the case, the mix of evidence available, and the relative reliability of the various methods under consideration.”

In Canada, paragraphs 61 and 62 of IC 87-2R International Transfer Pricing suggests:

“61. The most appropriate method in a given set of circumstances will be the one that provides the highest degree of comparability between transactions. Once a taxpayer establishes comparability at a particular level within the hierarchy of methods, the taxpayer is not required to consider or apply a lower-ranking method. On the other hand, if the taxpayer cannot establish comparability at any level, other methods should be considered in order to determine the most appropriate method.

62. In certain cases, taxpayers may have some doubts about the reliability of the results produced by a particular method. Because the results produced by each of the recommended methods should have some consistency, taxpayers may wish to confirm their results by applying another method.”

In the United States, item (c)(2)(iii) of section 482, §1.482-1  Allocation of income and deductions among taxpayers, explains:

“Confirmation of results by another method. If two or more methods produce inconsistent results, the best method rule will be applied to select the method that provides the most reliable measure of an arm’s length result. If the best method rule does not clearly indicate which method should be selected, an additional factor that may be taken into account in selecting a method is whether any of the competing methods produce results that are consistent with the results obtained from the appropriate application of another method. Further, in evaluating different applications of the same method, the fact that a second method (or another application of the first method) produces results that are consistent with one of the competing applications may be taken into account.”

The use of more than one method may therefore depend of the facts and circumstances surrounding the transaction. However, it is not prescribed neither in Canada nor the United States.

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard “at” rbrt.ca
www.rbrt.ca

RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.

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The Transfer Pricing Methods

Paragraph 2.1 of the OECD Transfer Pricing Guidelines indicates that “traditional transaction methods” and “transactional profit methods” can be used to establish whether the conditions imposed in the commercial or financial relations between associated enterprises are consistent with the arm’s length principle.”

In Canada, paragraph 48 of IC 87-2R International Transfer Pricing states:

“The OECD Guidelines recommend a number of transfer pricing methods (known as “the recommended methods”) that, when applied correctly, result in an arm’s length price or allocation. These methods are divided into two groups:

· traditional transaction methods:

  • the comparable uncontrolled price (CUP) method;
  • the resale price method; and
  • the cost plus method;

and

· transactional profit methods:

  • the profit split method; and
  • the transactional net margin method (TNMM).”

Paragraph 2.1 of the OECD Transfer Pricing Guidelines explains:

“The selection of a transfer pricing method always aims at finding the most appropriate method for a particular case. For this purpose, the selection process should take account of the respective strengths and weaknesses of the OECD recognised methods; the appropriateness of the method considered in view of the nature of the controlled transaction, determined in particular through a functional analysis; the availability of reliable information (in particular on uncontrolled comparables) needed to apply the selected method and/or other methods; and the degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments that may be needed to eliminate material differences between them. No one method is suitable in every possible situation, nor is it necessary to prove that a particular method is not suitable under the circumstances.”

In the United States, Item (b)(2) of section 482, §1.482-1 Allocation of income and deductions among taxpayers, suggests:

“Arm’s length methods—(i) Methods. Sections 1.482-2 through 1.482-7 and 1.482-9 provide specific methods to be used to evaluate whether transactions between or among members of the controlled group satisfy the arm’s length standard, and if they do not, to determine the arm’s length result. This section provides general principles applicable in determining arm’s length results of such controlled transactions, but do not provide methods, for which reference must be made to those other sections in accordance with paragraphs (b)(2)(ii) and (iii) of this section. Section 1.482-7 provides the specific methods to be used to evaluate whether a cost sharing arrangement as defined in §1.482-7 produces results consistent with an arm’s length result.”

For instance, in the case of transfer of tangible property, §1.482-3 Methods to determine taxable income in connection with a transfer of tangible property states:

“(a) In general. The arm’s length amount charged in a controlled transfer of tangible property must be determined under one of the six methods listed in this paragraph (a). Each of the methods must be applied in accordance with all of the provisions of §1.482-1, including the best method rule of §1.482-1(c), the comparability analysis of §1.482-1(d), and the arm’s length range of §1.482-1(e). The methods are—

(1) The comparable uncontrolled price method, described in paragraph (b) of this section;

(2) The resale price method, described in paragraph (c) of this section;

(3) The cost plus method, described in paragraph (d) of this section;

(4) The comparable profits method, described in §1.482-5;

(5) The profit split method, described in §1.482-6; and

(6) Unspecified methods, described in paragraph (e) of this section.”

Any transfer pricing method which abide by the arm’s length principle is relevant to the determination of the transfer price of a controlled transaction.

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard “at” rbrt.ca
www.rbrt.ca

RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.

The content of this article first appeared at https://cantransferpricing.wordpress.com maintained by Robert Robillard.

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