Restructuring of the Transfer Pricing Transaction UndertakenPar Robert Robillard - 28 mai 2014
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Paragraph 1.64 of the OECD Transfer Pricing Guidelines explains:
« A tax administration’s examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer […] Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. »
The OECD Transfer Pricing Guidelines recognize two situations where a tax administration may restructure a transaction.
A transaction may be restructured “where the economic substance of a transaction differs from its form” which would result, in the Canadian context, in some sort of tax avoidance. To that effect, paragraphs 247(2)(b) and (d) of the Income Tax Act state:
« Where a taxpayer or a partnership and a non-resident person with whom the taxpayer or the partnership, or a member of the partnership, does not deal at arm’s length (or a partnership of which the non-resident person is a member) are participants in a transaction or a series of transactions and
[…] (b) the transaction or series
(i) would not have been entered into between persons dealing at arm’s length, and
(ii) can reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit,
any amounts that, but for this section and section 245, would be determined for the purposes of this Act in respect of the taxpayer or the partnership for a taxation year or fiscal period shall be adjusted (in this section referred to as an “adjustment”) to the quantum or nature of the amounts that would have been determined […]
(d) where paragraph 247(2)(b) applies, the transaction or series entered into between the participants had been the transaction or series that would have been entered into between persons dealing at arm’s length, under terms and conditions that would have been made between persons dealing at arm’s length. »
Paragraph 1.65 of the OECD Transfer Pricing Guidelines suggests that a transaction may also be restructured “where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price.”
In Canada, TPM-13 Referrals to the Transfer Pricing Review Committee explains:
« Paragraphs 46 and 178 of Information Circular IC87-2R, International Transfer Pricing, state that before an assessment under paragraphs 247(2)(b) and (d) is issued or a penalty under subsection 247(3) is levied, the file will be referred to the TPRC for review to ensure the law is applied fairly and consistently:
46. All proposed assessments to recharacterize a transaction under paragraph 247(2)(b) will be referred to the Transfer Pricing Review Committee before the assessment is issued, to ensure fair and consistent application. (emphasis added)
178. Tax services offices are responsible for identifying taxpayers who may have failed to make reasonable efforts to determine and use arm’s length prices as part of the normal audit review. However, the Department (CRA) recognizes the importance of applying the transfer pricing penalty provisions in a fair and consistent manner. Thus, before a penalty is assessed, tax services offices will refer all cases to the Transfer Pricing Review Committee for review. (emphasis added)
The concept of reasonable efforts is contained in the definition of a qualifying cost contribution arrangement (QCCA) found in subsection 247(1) of the Income Tax Act. A cost contribution arrangement (CCA) will not be determined to be a QCCA if the taxpayer does not make reasonable efforts to match the contributions of the participants to their respective expected benefits. Transfer pricing adjustments made to CCAs are aggregated with other transfer pricing adjustments for purposes of the penalty calculation. Therefore, only CCA audit issues that exceed the penalty threshold under subsection 247(3), by themselves or in combination with other transfer pricing adjustments, will be included in the penalty referral to the TPRC for review.
The TPRC is coordinated by the International Tax Division (ITD) within the International and Large Business Directorate of the Compliance Programs Branch. »
The remainder of TPM-13 Referrals to the Transfer Pricing Review Committee describes the referral procedures including the three-stage approach in case of a potential recharacterization.
It is noteworthy that the auditor must seek assistance from the appropriate International Advisory Services Sections as soon as a recharacterization is considered in a case.
Moreover, “the auditor must provide the taxpayer a copy of the fact section of the referral report before the formal referral is presented to the TPRC and during the audit phase. This will allow the taxpayer to submit additional information in order to seek agreement on the facts of the case. The taxpayer’s representations and the additional information will be considered when completing the formal referral report.”
Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
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