Transfer Pricing in Canada: CbC Reporting is Here; and it’s not alone

Par Robert Robillard - 22 mars 2016

This blogpost originally appeared on rbrt.ca.

Note pour nos lecteurs francophones : tous les détails de ce billet sont disponibles en français sur cet hyperlien : http://www.budget.gc.ca/2016/docs/tm-mf/si-rs-fr.html

The March 22, 2016 Federal Budget indicates:

« Consistent with the recommendations of the BEPS project, Budget 2016 proposes to implement country-by-country reporting. This measure will apply only to MNEs with total annual consolidated group revenue of €750 million or more. Where such an MNE has an ultimate parent entity that is resident in Canada (or a Canadian resident subsidiary in the circumstances set out above), it will be required to file a country-by-country report with the Canada Revenue Agency within one year of the end of the fiscal year to which the report relates. First exchanges between jurisdictions of country-by-country reports are expected to occur by June 2018. Before any exchange with another jurisdiction, the Canada Revenue Agency will formalize an exchange arrangement with the other jurisdiction and will ensure that it has appropriate safeguards in place to protect the confidentiality of the reports. Draft legislative proposals will be released for comment in the coming months. [our emphasis]

Consistent with the BEPS project recommendations released in autumn 2015, country-by-country reporting will be required for taxation years that begin after 2015. »

The Budget also explains:

« The recommendations arising from the BEPS project include revisions to the Transfer Pricing Guidelines. These revisions provide an improved interpretation of the arm’s length principle, and are intended to better ensure alignment of the profits of MNEs with the economic activities generating those profits. The clarifications provided in the revisions generally support the Canada Revenue Agency’s current interpretation and application of the arm’s length principle, as reflected in its audit and assessing practices. These revisions are thus being applied by the Canada Revenue Agency as they are consistent with current practices.

In two areas, however, where the revisions to the Transfer Pricing Guidelines are not yet complete, the Canada Revenue Agency will not be adjusting its administrative practices at this time. The BEPS project participants are still engaged in follow-up work on the development of a threshold for the proposed simplified approach to low value-adding services. Work is also continuing to clarify the definition of risk-free and risk-adjusted returns for minimally functional entities (often referred to as “cash boxes”). Canada will decide on a course of action with regards to these measures after the outstanding work is complete. »

With respect to alleged « treaty abuse », the Budget states:

« Budget 2016 confirms the Government’s commitment to address treaty abuse in accordance with the minimum standard. Canada currently has one treaty that has adopted a limitation-on-benefits approach as well as several treaties that have adopted a limited principal purpose test. Going forward, Canada will consider either minimum standard approach, depending on the particular circumstances and discussions with Canada’s tax treaty partners. Amendments to Canada’s tax treaties to include a treaty anti-abuse rule could be achieved through bilateral negotiations, the multilateral instrument that will be developed in 2016, or a combination of the two. The multilateral instrument is a tax treaty that many countries could sign modifying certain provisions of existing bilateral treaties. Canada is actively participating in international work to develop the multilateral instrument, which would streamline the implementation of treaty-related BEPS recommendations, including treaty abuse. »

Spontaneous Exchange of Tax Rulings are also discussed in the Budget:

« The BEPS project developed a framework for the spontaneous exchange of certain tax rulings that could give rise to BEPS concerns in the absence of such exchanges. The framework covers six categories of rulings: (i) rulings related to preferential regimes; (ii) cross-border unilateral advance pricing arrangements; (iii) rulings giving a downward adjustment to profits; (iv) permanent establishment rulings; (v) conduit rulings; and (vi) any other type of ruling agreed to in the future.

The Canada Revenue Agency has an established exchange of information program and exchanges information under Canada’s tax treaties, tax information exchange agreements and the multilateral Convention on Mutual Administrative Assistance in Tax Matters. These agreements include provisions to restrict the use of the exchanged information, typically limiting its use to the enforcement of tax laws, and to ensure the confidentiality of the information. Any information exchanged with respect to the targeted tax rulings will be subject to the confidentiality provisions in the relevant agreement and therefore protected in the same manner as taxpayer information.

Budget 2016 confirms the Government’s intention to implement the BEPS minimum standard for the spontaneous exchange of certain tax rulings. The Canada Revenue Agency will commence exchanging tax rulings in 2016 with other jurisdictions that have committed to the minimum standard. »

On Cross-Border Surplus Stripping, the Budget indicates:

« Budget 2016 proposes to amend the exception in subsection 212.1(4) to ensure that it applies as intended. In particular, it will be clarified that, consistent with the policy of the anti-surplus-stripping rule, the exception does not apply where a non-resident both (i) owns, directly or indirectly, shares of the Canadian purchaser corporation, and (ii) does not deal at arm’s length with the Canadian purchaser corporation.

Transactions that misuse subsection 212.1(4) are currently being challenged by the Government under existing provisions of the Income Tax Act, including the general anti-avoidance rule; these challenges will continue with respect to transactions that occurred prior to Budget Day. This measure is intended to promote certainty and clarify the intended scope of the existing exception.

To address the possibility of situations where it may be uncertain whether consideration has been received by a non-resident from the Canadian purchaser corporation in respect of the disposition by the non-resident of shares of the lower-tier Canadian corporation, Budget 2016 also proposes to clarify the application of the anti-surplus-stripping rule by deeming the non-resident to receive non-share consideration from the Canadian purchaser corporation in such situations. The amount of this deemed consideration will be determined by reference to the fair market value of the shares of the lower-tier Canadian corporation received by the Canadian purchaser corporation.

This measure will apply in respect of dispositions occurring on or after Budget Day. »

Finally, the Budget 2016 « proposes to build on the existing back-to-back loan rules by:

  1. amending the existing back-to-back loan rules in Part XIII to extend their application to rents and royalties;
  2. adding character substitution rules to the back-to-back rules in Part XIII;
  3. adding back-to-back loan rules to the existing shareholder loan rules in the Income Tax Act; and
  4. clarifying the application of the back-to-back loan rules to multiple-intermediary structures. »

More details on all these measures are available here in English: http://www.budget.gc.ca/2016/docs/tm-mf/si-rs-en.html

Tous les détails sont également disponibles en français sur cet hyperlien : http://www.budget.gc.ca/2016/docs/tm-mf/si-rs-fr.html

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.