Classic Transfer Pricing Case: Saipem Luxembourg S.A. v. Canada 2005Par Robert Robillard - 18 août 2014
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In Saipem Luxembourg S.A. v. Canada (Customs and Revenue Agency), 2005 FCA 218 (CanLII), the taxpayer states that the requirement pursuant to subsection 231.6(2) of the Income Tax Act is too broad, therefore unreasonable. Appeal dismissed: the requirement is reasonable.
«  In the course of assessing Saipem Luxembourg S.A.’s (Saipem) liability for income tax, the Canada Customs and Revenue Agency (the Agency) served upon it a notice of requirement (the Requirement) pursuant to subsection 231.6(2) of the Income Tax Act, R.S.C. 1985, c. 1, (5th Supp.) as amended from time to time (the Act). The Requirement demands that Saipem produce for the Agency’s inspection the whole of its corporate records for its fiscal years ending July 31, 1999 and 2000. The issue in this appeal is whether the Requirement is so broad as to be unreasonable and therefore liable to be set aside pursuant to subsection 231.6(5) of the Act.
 Saipem is incorporated under the laws of Luxembourg and maintains its head office in that country. It owns and operates very specialized vessels which are used for marine construction. In 1998 and 1999, Saipem contracted to employ one of its vessels, the S7000, the most powerful heavy lift vessel in the world, in the procurement, transportation and installation of the Venture, Thebaud, and Triumph jackets and topsides for the Sable Offshore Energy Project (the Sable Project). The 1998 work was done pursuant to a contract dated August 4, 1998, between Saipem and Saipem UK Limited, a related company, which had in turn contracted with the owners of the Sable Project, Mobil Oil Canada Properties. The work itself was done over a period of 53 days in September and October 1998. At the completion of the contract, the S7000 left Canadian waters to carry out contracts in other parts of the world.
 The contract for the work done in 1999 is dated December 14, 1998. The work itself was done in Canadian waters between August 15, 1999 and September 16, 1999. Given Saipem’s July 31 fiscal year end, the 1998 work fell into the fiscal year ending July 31, 1999, and the work done in 1999 fell into the fiscal year ending July 31, 2000, hence the notice of requirement to produce documents for those two fiscal years.
 The Canada-Luxembourg Tax Convention provides that a resident of one contracting state is not liable to pay tax on business income earned in the other contracting state, unless the business in question is carried on through a permanent establishment in the other state. Saipem filed income tax returns for each of the taxation years in which it had business income in Canada, but claimed that since it had no permanent establishment, it was not taxable on its Canadian business income. The Minister has not yet issued notices of assessment in respect of those taxation years, insisting that he is unable to do so until he can make an independent determination as to whether or not Saipem had a permanent establishment in Canada during the relevant period.
 Saipem has offered to produce to the Agency all of the documents relevant to its Canadian operations. The Agency’s position is that this makes Saipem the judge of the relevance of the documents it produces. It argues that it has no means of verifying information provided by Saipem other than by carrying out an audit of Saipem’s books and records. In its Memorandum of Fact and Law, the Agency says:
29. …the Minister seeks information in order to carry out a general audit of the Appellant’s affairs for 1999 and 2000 with a view to determining its Canadian tax liability, if any.
 The element which is present in section 231.6, and which is lacking in section 231.2, is the availability of judicial review of the notice of requirement on the ground of unreasonableness. Such a review lacks any substance if a notice of requirement is reasonable simply because the information requested is, or may be, relevant to the administration and enforcement of the Act. Given that Parliament took the trouble to provide for a review on the basis of reasonableness, I conclude that Parliament intended that a notice of requirement in respect of a foreign-based document must not only relate to a document which is relevant to the administration and enforcement of the Act but that it must also not be unreasonable.
 What does “reasonable” (and by extension, “unreasonable”) mean in these circumstances? In Law Society of New Brunswick, [Law Society of New Brunswick v. Ryan, 2003 SCC 20 (CanLII),  1 S.C.R. 247, 2003 SCC 20] the Supreme Court said at paragraph 47:
The standard of reasonableness basically involves asking « After a somewhat probing examination, can the reasons given, when taken as a whole, support the decision? »
Given that the reviewing Court under subsection 231.6(5) is reviewing a decision (the content of the notice of requirement) on a standard of reasonableness, I find that this is an appropriate statement of the test to be applied. To apply that standard to this case, one needs some understanding of the extent of the demand and the reasons for which it is made.
 The Agency justifies the breadth of the notice of requirement on the basis that it requires production of all of Saipem’s documents in order to conduct an audit for the purpose of verifying information submitted by Saipem. This position is well summarized at paragraph 29 of the Agency’s Memorandum of Fact and Law:
In the present case the Minister seeks information in order to carry out a general audit of the Appellant’s affairs for 1999 and 2000 with a view to determining its Canadian tax liability, if any. As stated in McKinlay, one of the purposes of an audit is to verify information. The fact that information has been provided by the taxpayer or is possibly available from another source is irrelevant. It is the CCRA’s interest in verifying the Appellant’s tax liability that compels the production of the Appellant’s books and records. All of the Appellant’s books and records are relevant to an audit even if some of them only serve to verify, after being examined, that they have no impact on its Canadian tax liability. »
«  For those reasons, applying the test which the applications judge should have applied, I find that the notice of requirement issued to Saipem is not unreasonable, and therefore, I would dismiss the appeal with costs and, pursuant to paragraph 231.6(5)(a) of the Act, confirm the notice of requirement. »
Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard « at » localhost
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