Presentation re Transfer Pricing Documentation Pricing Documentation...  Transfer Pricing Documentation

  • View
    241

  • Download
    0

Embed Size (px)

Text of Presentation re Transfer Pricing Documentation Pricing Documentation...  Transfer Pricing...

  • Transfer Pricing Documentation Requirements

    Michael Friedman, PartnerTodd A. Miller, Partner

    Presented at:Federated Press Basics of International Tax & Transfer Pricing

    Metropolitan Hotel, Toronto, OntarioNovember 16, 2010

    5280164_4

  • Agenda

    Contemporaneous Documentation: An Overview [Michael 5m]

    Statutory Requirement for Contemporaneous Documentation [Todd 10m]

    Transfer Pricing Preparation Process [Michael 10-1m]

    PATA Model Documentation Package [Todd 5m]

    Key Areas of CRA Review [Michael 15m]

    Common Errors/Pitfalls [Todd 15m]

    5280164_4

  • Contemporaneous Documentation: An OverviewWhat is Contemporaneous Documentation?Why do you need to create and maintain it?

    Protection from penalties [to be discussed in more detail]

    Management of tax risk (certainty/predictability identify areas ofexposure (e.g., FIN-48 IDENTIFICATION OF APPROPRIATE RESERVE)

    Basis for audit responses (makes audit processmuch more smoothly); CRA more likely to go away ifthey dont smell blood in the water!

    Inter-affiliate/global coordination

    Strategic/Operational planning/Tax SavingsTAX PLANNING /OPTIMIZATION FUNCTION eg. Contract Manufacturing Strategy, commissionairearrangement, moving IP offshore

    Institutional memory

    Facilitating future sale transactions

    5280164_4

  • Statutory Requirement for Contemporaneous Documentation

    (i) History

    Prior to the introduction of section 247 of the Income Tax Act (effective for tax years beginning after 1998) (Canada) (the Act), transfer pricing requirements were largely governed by former subsections 69(2)/(3) of the Act.

    Brief overview of some of the cases in s. 69 and reasons for introducing new s. 247: Primarily, (i) to bring Canada in line with other MAJOR OECD Countries in formally recognizing arms length principle (as contained in the 1995 and 1996 OECD GUIDELINES) and (ii) PROVIDING FOR cd penalties IN RECOGNITION OF the importance of protecting the tax base (particularly based on international economic developments in the 80s and 90s (i.e. globalization))

    Former subsections 69(2)/(3) Section 247

    Reasonable amount in the circumstances test -GLAXO, GE Capital, IRVING and other cases

    Informal documentation requirements (no hard timing deadlines, guidance)

    However CRA effectively applied these provisions by endorsing OECD Guidelines and required (per IC-87-2) a comprehensive intercompany pricing policy based on a thorough functional analysis; consistently rejected comparable profits method (CPM)

    Comparative Arms Length test for each inter-affiliate transaction

    247(3) Imposes transfer pricing penalties based on TP adjustments under 247(2) for years beginning after 1998

    247(4) Contemporaneous documentation requirement to avoid penalties (or at least minimize the likelihood of application)

    5280164_4

  • Statutory Requirement for Contemporaneous Documentation

    (ii) Penalty Provision Subsection 247(3) of the Act

    Penalty of 10% of:

    the total transfer pricing income and capital adjustments for the year

    minusthe total transfer pricing income and capital adjustments and the total transfer pricing income and capital setoff adjustments relating to transactions in respect of which reasonable efforts have been made to determine and use arms length transfer prices (the Penalty Base)

    Penalty applies in respect of the portion of the Penalty Base that exceedsthe lesser (A) of 10% of the taxpayers gross revenues (as defined in 248(1); subsection 247(9): transaction deemed not to have occurred if purpose was to increase not revenue; 247(5) attributes partnership revenue; 247(6) deals with tiered partnerships and (B) $5 million [THRESHOLD]

    5280164_4

  • Statutory Requirement for Contemporaneous Documentation(ii) Penalty Provision Subsection 247(3) of the Act (contd)

    CRA: The penalty imposed under subsection 247(3) is intended to be a compliance penalty (not mandatory).

    If a taxpayer made reasonable efforts to use arms length transfer prices, the penalty will not apply.

    CRA in TPM-09 (September, 2006): A reasonable effort means the degree of effort that an independent and competent person engaged in the same line of business or endeavour would exercise under similar circumstances. What is reasonable is based on what a reasonable business in the taxpayers circumstances would do, having regard to the complexity and importance of the transfer pricing issues that arise in the tax payers case

    5280164_4

  • Statutory Requirement for Contemporaneous Documentation

    (iii) Reasonable Efforts Deeming Rule

    Unless a taxpayer makes or obtains documentation (records or documents)containing the items listed in paragraph 247(4)(a) of the Act by the relevant documentation-due date (defined in section 247(1)), for the taxation year in which the transaction was entered into (filing due date in case of person, s. 229 due date in case of partnerships) the taxpayer is deemed not to have made reasonable efforts to determine and use arms length transfer prices.

    Under subsection 247(4), the taxpayer must also:

    update contemporaneous documentation for subsequent taxation years or fiscal periods to account for material changes; and

    Provide contemporaneous documentation to the Minister of National Revenue within three months of a valid written request.

    5280164_4

  • Statutory Requirement for Contemporaneous Documentation

    (iii) Reasonable Efforts Deeming Rule (contd)

    Documentation must provide an accurate and complete description (in all material respects) of:

    i. the property or services to which the subject transaction relates;ii. the terms and conditions of the transaction and their relationship, if any, to the terms and

    conditions of each other transaction entered into between the same parties [what about other related parties?];

    iii. the identity of the participants to the transaction and their relationship to each other at the time the transaction was entered into;

    iv. the risks the participants assumed, the functions they performed and the property they used or contributed in respect of the transaction;

    v. the data and methods considered and the analysis performed to determine the transfer prices, allocation of profits or losses or contributions to costs, as the case may be; and

    vi. the assumptions, strategies and policies that influenced the determination of the transfer prices, allocation of profits or losses or contributions to costs, as the case may be.

    CRA, per IC-87-2R and TPM-09, views the above items as the basic framework for documentation necessary to satisfy the reasonable efforts test; additional CRA expectations are set out in TPM -09 and IC-87-2R

    5280164_4

  • Statutory Requirement for Contemporaneous Documentation

    (iii) Reasonable Efforts Deeming Rule (contd)

    CRA: A taxpayer will be deemed not to have made reasonable efforts if contemporaneous documentation is not received within three months of the taxpayers receipt of a written request. (TPM05, Oct. 13/04: CRA tells auditors no extensions to this deadline because it is a statutory requirement; says however, to nevertheless accept late filed documentation for purpose of completing audit)CRA: The documentation list set out in paragraph 247(4)(a) is not exhaustive; compliance with the list does not preclude a finding that the taxpayer has not made reasonable efforts to determine arms length transfer prices or that such prices in fact meet the arms length standard. (i.e., penalties and adjustments could still apply)Part 7 of IC 87-2R as well as TPM-09 (September, 2006) sets out certain of the CRAs expectation with respect to contemporaneous documentation practices. [see attached]

    5280164_4

  • Canadian Transfer Pricing Statistics

    As suggested in private sector [source?] reports: The CRA has levied approximately $300 million in penalties pursuant to subsection 247(3) [since the rule was enacted?].

    Failure on the part of the taxpayer to prepare contemporaneous documentation, or to provide documentation to the CRA within three months of a request, occurred in approximately 53% of the files that were subject to penalties pursuant to subsection 247(3). [does this mean complete lack of documentation or documentation that was considered to be of inferior quality?]

    2007 auditor general report highlights

    5280164_4

  • Transfer Pricing Preparation Process

    Accurately characterize and

    describe the subject

    transaction

    Determine the most appropriate transfer pricing methodology

    and the proper arms length transfer price

    Identify the documentation requirements in each relevant

    jurisdiction

    Develop a documentation strategy/plan

    noting any specific areas of risk/uncertainty

    Assemble documentation providing full

    support for the transfer pricing

    approach

    Establish a review process

    to ensure timely, accurate

    adjustments are made and

    documented

    5280164_4

  • Transfer Pricing Documentation Preparation Process

    Developing a Documentation Strategy:Description of the transaction

    Define what type of product or service is being transferred/delivered and the terms of the transaction (consider breaking down by product, product line, transaction type, geographical)

    Industry overview

    Conduct analysis of industry-specific data and statistics (Explain your industry, how you operate globally and in each local market)

    Functional Analysis

    Describe the functions and risks associated with the transaction (Functions performed, risks a