BDO Canada: Transfer Pricing

CANADA

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Transfer Pricing

Transfer pricing (TP) describes all aspects of international inter-company pricing arrangements between related entities. They encompass tangible goods, intangibles, services, and cost sharing arrangements.

Transfer pricing is often viewed as an expensive exercise in compliance carried out to avoid penalties. But a transfer pricing study actually offers a lot more: It is a value-added service that can help you save money by maximizing your potential for an increase in after-tax income, and reduce risk by minimizing the likelihood that you'll endure adverse tax adjustments and penalties.

Read our latest publications on Transfer Pricing issues or learn about the following Transfer Pricing services offered by BDO:

Comprehensive Diagnostic TP Risk Assessment

This risk assessment will highlight how your business is being exposed to TP adjustments and penalties. Then help you decide whether an advance pricing agreement is right for you and your business.

A comprehensive diagnostic TP risk assessment encompasses:

Identifying all transactions subject to TP, including tangibles, services, intangibles, and qualifying cost contribution arrangements.
Reviewing reporting forms (T106) to make sure that all related party transactions and TP methodologies are properly disclosed.
Evaluating current deficiencies in policies, practices, and documentation.

Existing TP Policy Documentation

BDO assist you in documenting the TP policies you already have in place and uncovering how they were developed to comply with contemporaneous documentation. If we note deficiencies, we can work with you to update your documentation to comply with the law.

Functional and Risk Analyses

It's common that a company with more functions and risks reports a higher group profit share. A BDO analysis indicates the characteristics of the operating unit for TP purposes, and the relative importance of operational functions, financial risks, and intangible assets in intra group profit allocations. What this all means is simple: When you know the characteristics of an operating unit, you can easily identify the best TP method - acceptable to Canadian and other tax authorities - for your operation.

Contemporaneous documentation is not complete unless you document your efforts to determine arm's length prices. We use various databases to search a broad cross section of comparable transactions that will form a defensible position for TP goods, services, and income from intangibles, such as royalties.

To undertake a full TP study, BDO assumes the responsibility to do everything that is required by Canadian law in terms of contemporaneous documentation. A full study includes:

A description of the company, its business, and those of the related companies
A description of the flow of goods and services
An overview of the industry
A description of the competitors' functional and risk analyses
Characterization of the entity for TP purposes
A description of the chosen TP methodology and reasons for rejecting other methods
A comprehensive search for comparables, including a description of the search process, the filtering methods used, the selected comparables and their financial data and ratios
Economic and statistical analyses
Development of a TP model
Testing and confirming methods, including an assessment of the financial impact of the proposed transfer prices on the affected parties
Testing the reasonableness of conclusions from the tax authorities' perspectives
Preparing comprehensive supporting documentation required by the CCRA
Qualifying cost contribution arrangements

To minimize worldwide taxes, formulating comprehensive TP policies and practices is key. Accomplish it by restructuring or shifting certain functions and risks to low tax jurisdictions. At BDO, we provide the appropriate tax planning to meet your objectives.

Choosing a TP method could have a significant impact on your taxable profits. While entity functions and risks will influence choice, there is no single recommended methodology. Keep in mind though that the CCRA has indicated a hierarchy of methods.

Practical considerations may favour one method over another. At BDO, we understand our clients' business strategies and requirements. Using our in-depth client knowledge, we match their requirements with the CCRA's to develop defensible TP strategies and policies that work.

Our experience in defending and supporting client positions in CCRA audits runs deep and wide. From both an income tax and customs TP perspective, we have a proven track record of success. BDO helps you avoid TP adjustments at the proposal level and obtain favourable settlements at the post assessment level. While a TP study is not a guarantee against reassessments, we stand behind our work and support our clients 100%.

When two or more taxing jurisdictions take different positions on TP of the same transactions, you get double taxation. Luckily, Canada's tax treaties include a competent authority procedure to avoid double taxation. And at BDO, we have the expertise, experience, and know-how to deal with the competent authorities and help you reach bilateral settlements on TP issues.

An Advance Pricing Agreement (APA) almost always requires a full TP analysis and strategy development. To help you negotiate effective APAs, BDO gathers the required information from all taxing jurisdictions and submits a final application to address both client and tax authority concerns, then we engage in an open negotiation process. Our global TP specialists work with the tax authorities to evaluate the APA. BDO then obtains agreements from all relevant authorities and finalizes the contractual language of the APA.

Canadian subsidiaries of foreign parent companies often experience difficulties obtaining the information they need to prepare contemporaneous documentation. BDO resolves this by obtaining information from the foreign company's executives on a confidential basis, which is disclosed only to the CCRA if a need arises. We keep all confidential information separate from contemporaneous documentation in our files.

Businesses are often reluctant to spend significant professional fees in the US and in Canada to prepare contemporaneous documentation. We help our clients reduce costs by preparing an addendum to the US study while still satisfying the requirements of Canadian tax law.

Our TP team includes partners with extensive international tax experience who, in the course of a TP engagement, often identify and reveal international tax and commodity tax issues that would otherwise go unnoticed. Appropriate international planning can often result in significant worldwide tax savings.

At BDO our valuations experts prepare valuation reports to support transfers of intellectual property (software, licenses, patents, copyrights, etc.) and will ascertain reasonableness of royalty rates, executive compensation, etc.

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