Highlights and Comments About the CRA APA Report 2013-14

Par Robert Robillard - 24 juillet 2014

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The Canada Revenue Agency (CRA) has published its annual APA Program Report for 2013-14 on July 4, 2014. The complete report can be viewed here. As a former Competent Authority Economist, here are some facts that caught our eyes.

« The transactional net margin method (TNMM) continued to be the most frequently employed transfer pricing methodology. A TNMM was proposed in 63% APAs in process. The comparable uncontrolled price (CUP) was the next most popular method being proposed in 14% of cases. The profit split, cost plus and resale price methodologies were proposed in 13%, 6%, and 5% of cases, respectively. »

Obviously not a surprise since most of the cases are bilateral cases involving the USA (60 % at this time according to the report which is slightly under the historical average). In fact, TNMM should probably read as CPM in that sentence…

« In fiscal year 2013-14, there were total 11 withdrawals from the APA process. 8 of them occurred during the application stage and 3 were after CRA has received taxpayers’ APA submissions. From an efficiency standpoint, the withdrawal of an APA during the application stage instead of during the post submission stage can represent a significant saving of resources for both taxpayers and tax administrations. During the fiscal year 2013-14, in an effort to reduce the inventory, the CRA conducted close review of all the applications pending. Withdrawals have increased as a result of previous APA applications that are not well suited to the APA program. »

Withdrawals were exceptionally rare ten years ago. The accrued rate of withdrawals reflects the fact that transfer pricing issues have become more and more complex in the last few years. It also derives from the fact that the CRA has had some serious challenges in replacing departing members in the last few years. This is not simply about « APA suitability »…

The « closing APA balance » was at an all-time high of 110 cases in 2013-14 according to the report. For sake of comparison, this compares with 37 cases in 2003-04. The Competent Authority had 24 officers dedicated to cases in 2003-04 allocated in three units. Although not publicly made available, we can suggest that these numbers have at best not decreased since that time. Hence this all-time high closing APA balance.

« The continued popularity of the APA program does create specific challenges pertaining to the overall manageability of the program, on both an immediate and long-term basis. To overcome these challenges, taxpayers are now being asked to provide the pre-file package prior to being granted a pre-file meeting. Applicants are required to provide to the CRA, on good faith, significantly detailed information pertaining to their financial statements, business operations, and industry, during the application phase of the APA process. It should be emphasised that this information is generally similar, if not the same, to that which taxpayers have historically been asked to provide during later stages of the APA process. »

That deeper level of information is also generally required in the first steps of a transfer pricing audit following the C-doc request as per subsection 247(4) ITA. In other words, as resources have become scarcer and scarcer, it would seem that the APA program has developed an expanded audit component that was inexistent ten years ago.

Nowadays it would seem that the APA program is more inclined to risk-assess taxpayers than to provide a viable alternative to tax uncertainty. Nonetheless an APA may remain an attractive option in some transfer pricing cases.

For pdf format: click here

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
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RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. 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. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.