2013 Global Transfer Pricing Survey - Ernst & Young

2013 Issue No. 36 30 July 2013

Tax Alert — Canada

2013 Global Transfer Pricing Survey The shift toward risk management EY Tax Alerts cover significant tax news, developments and changes in legislation that affect Canadian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor.

Transfer pricing remains the number-one tax issue facing multinational companies, but their focus has shifted toward risk management. That’s the primary observation from EY’s 2013 Global Transfer Pricing Survey. This latest survey of tax directors and international tax practitioners, which EY has conducted regularly since 1995, was conducted with 878 multinationals from 26 countries. You can explore the full survey report at ey.com.

Background Transfer pricing continues to be a significant source of controversy between the world’s tax authorities and multinational enterprises. Since the publication of EY’s last transfer pricing survey in 2010, the pace of globalization has increased, and businesses have been working hard to adapt by better managing their crossborder activities. They’re struggling to comply with unfamiliar and frequently changing tax and statutory requirements in new markets, examining the tax efficiency of supply chains and administering a vast array of indirect taxes, including valueadded taxes (VATs), customs duties and goods and services taxes (GSTs). At the same time, tax authorities worldwide have stepped up their enforcement, and they are paying special attention to transfer pricing. Transfer pricing has also taken on a bigger profile with non-tax stakeholders who are acutely aware that, according to the OECD, “around 60% of world trade actually takes place within multinational enterprises.”

The current survey documents a clear shift toward prioritizing risk management in transfer pricing. The report identifies three sources of risk that may be contributing to this new, more cautious posture: 

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More tax authorities say they view transfer pricing as a “high risk” tax issue worthy of closer examination. Tax administrations in rapid-growth markets are increasingly willing to challenge transactions.

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The news media and social justice organizations are focusing on international taxation generally and on transfer pricing specifically, both amplifying the pressure and creating “reputational risks” for companies.

Companies are also well aware that the Organisation for Economic Co-operation and Development’s (OECD’s) project on base erosion and profit shifting (BEPS) is likely to have substantial influence on the further development of transfer pricing rules.

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Global trends 

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In our latest survey, 66% of companies identified “risk management” as their highest priority for transfer pricing, a 32% increase over surveys conducted in 2007 and 2010. Correspondingly, the percentage of companies identifying cash tax or effective tax rate optimization as their highest transfer pricing priority fell by nearly one-third — to 17% — from the 2010 survey. Taxpayers are shifting their focus to emerging markets. Nearly 30% of parent companies with operations in the BRIC (Brazil, Russia, India, China) and African countries identified those regions as their first or second most important transfer pricing jurisdictions. Transfer pricing reviews in India more than doubled from 2007 to 2012.

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Transfer pricing is receiving greater scrutiny from tax authorities in most markets: 

28% of respondents reported unresolved transfer pricing examinations, up from 17% in 2010 and 12% in 2007.

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24% were subject to a penalty in the past three years, in comparison with 19% in 2010 and 15% in 2007.

Transactions involving intangibles were a significant and growing area of concern, with one-third of companies reporting that intangibles were their most important area of controversy in the last three years, and 41% expecting it to be their most important area of controversy in the next two years. There is a growing trend toward alternative or parallel challenges including anti-abuse provisions and permanent establishments: 

13% of respondents faced an assertion of a permanent establishment in the last three years.

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14% faced a dispute on the amount of profit attributed to a permanent establishment.

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33% of challenges resulted in a final adjustment.

A minority of respondents factored indirect taxes into transfer pricing decisions: 

21% took customs issues into account.

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27% took VAT issues into account.

In monitoring transfer pricing compliance, many respondents indicated that their system capabilities lagged behind their transfer pricing needs, with 41% indicating their systems are not set up for tax and transfer pricing. A quarter of respondents cited insufficient headcount as a barrier to effective implementation of their transfer pricing policies:

2013 Global Transfer Pricing Survey

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58% rely on Microsoft Excel spreadsheets.

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7% have “highly automated” systems.

period — 64% of Canadian-based respondents indicated that financial arrangements (e.g., loans, guarantees) constituted the most important area of tax controversy in the last three years. This compares to 44% of global respondents. Anecdotally, this result rings true — our recent experience suggests the CRA has a far greater focus on financial transactions than ever before.

Canadian observations Since the last survey, the transfer pricing environment in Canada has continued to evolve. Significantly, the Supreme Court of Canada rendered a decision in the GlaxoSmithKline case in 2012, and the arbitration provision of the Canada-US Tax Treaty has come into force, which has had a generally positive effect on the competent authority process between Canada and the United States.

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Canada-specific observations from the 2013 survey include the following: 

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Fully 100% of Canadian-based respondents indicated that their transfer pricing policies had been examined by a tax authority since 2009. This compares to 82% for all companies surveyed. The Canadian result is likely in part a reflection of the Canada Revenue Agency’s (CRA’s) focus on transfer pricing and its recently implemented new Approach to Large Business Compliance. However, only 11% of Canadian respondents indicated that transfer pricing audits had led to adjustments. On transfer pricing penalties, 14% of Canadian-based respondents indicated that transfer pricing adjustments were subject to penalties. Historically, transfer pricing penalties are applied in over 50% of the cases referred to the CRA’s internal Transfer Pricing Review Committee (TPRC). The survey results likely indicate that documentation efforts for respondents are generally better than the general population. The CRA has increased scrutiny of financial transactions, establishing a specialized financial services audit team in its Ottawa headquarters. The survey results reflect this emphasis in Canada through the survey

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20% of Canadian respondents indicated that transfer pricing adjustments resulted in double taxation despite the use of the mutual agreement procedure, compared to 23% globally. The Canadian result is somewhat surprising given that historically the CRA’s annual Mutual Agreement Procedure (MAP) report indicates that only about 10% of MAP requests result in unresolved double taxation, most of which seem to fall into the non-transfer pricing category (e.g., dual residency). Advance pricing arrangements (APAs) are a significant controversy management tool in Canada, with 36% of Canadian respondents indicating that they had used an APA as a controversy management tool. Globally, 26% of respondents indicated they had used APAs in this manner. More fundamentally, 21% of global respondents indicated they had APAs in Canada, up sharply from 9% in the 2007 survey.

Summary In light of these global and domestic trends, it remains prudent for Canadian taxpayers to take a proactive and strategic approach to transfer pricing matters. Companies should take a systematic, risk-based approach to the transfer pricing process, and actively monitor global and national transfer pricing developments to mitigate potential exposures. Canadian taxpayers should also consider the various controversy management options available for resolving transfer pricing disputes, including APAs.


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Learn more For more information, please contact your EY or Couzin Taylor advisor or one of the following professionals: John Oatway Leader Transfer Pricing Services +1 613 598 4809 | [email protected]

Toronto

Prairies

Andrew Clarkson +1 416 943 2146 | [email protected]

Lawrence Greer +1 403 206 5031 | [email protected]

Sean Kruger +1 416 941 1761 | [email protected]

Vancouver

Ken Kyriacou +1 416 943 2703 | [email protected]

Greg Noble +1 604 891 8221 | [email protected]

Lori Whitfield +1 416 943 7199 | [email protected]

Matthew Sambrook +1 604 899 3559 | [email protected]

Quebec and Atlantic Canada

Couzin Taylor LLP

Rachel Spencer +1 514 879 8214 | [email protected]

David Robertson +1 403 206 5474 | [email protected]

Alfred Zorzi +1 514 874 4365 | [email protected]

Daniel Sandler +1 416 943 4434 | [email protected]

Ottawa

Louis Tassé +1 514 879 8070 | [email protected]

Rene Fleming +1 613 598 4406 | [email protected] Phil Fortier +1 613 598 4291 | [email protected]

Roger Taylor +1 613 598 4313 | [email protected]

Sandy Goldberg +1 613 598 4810 | [email protected] Paul Mulvihill +1 613 598 4339 | [email protected] Fred O’Riordan +1 613 598 4808 | [email protected] Tony Wark +1 613 598 4322 | [email protected] Gary Zed +1 613 598 4301 | [email protected]


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EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY’s Tax Services EY’s tax professionals across Canada provide you with deep technical knowledge, both global and local, combined with practical, commercial and industry experience. We offer a range of tax-saving services backed by in-depth industry knowledge. Our talented people, consistent methodologies and unwavering commitment to quality service help you build the strong compliance and reporting foundations and sustainable tax strategies that help your business achieve its potential. It’s how we make a difference. For more information, visit ey.com/ca/tax. About Couzin Taylor Couzin Taylor LLP is a national firm of Canadian tax lawyers, allied with EY, specializing in tax litigation and tax counsel services. For more information, visit couzintaylor.com. © 2013 Ernst & Young LLP. All Rights Reserved. A member firm of Ernst & Young Global Limited. This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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