Taxpayers should keep these considerations and checkpoints in mind during year end
The year-end close is an opportune time for taxpayers to consider reviewing their transfer pricing priorities. You may need to evaluate whether to adjust related-party payments or transactions, amend existing transfer pricing policy or agreements, or establish transfer pricing policies for new transactions or lines of business.
It is important to take a holistic approach when reviewing related-party payments and transactions or transfer pricing policies and examine them from both an income tax and a customs perspective. When considering customs, remember that the CRA and the Canada Border Services Agency (the CBSA) administer their own distinct set of rules for income taxes and custom duties. Unfortunately, as a result, some approaches may be beneficial from an income tax perspective while having a detrimental effect from a customs duties perspective (or vice versa).
In light of this, we have prepared a set of transfer pricing considerations that taxpayers should keep in mind when completing year-end tasks and wrapping up projects.
Transfer pricing considerations
Consider early on whether it is necessary to make a transfer pricing adjustment to transactions in the year, since such adjustments may also affect customs duties and GST/HST.
Identify all relevant transactions
Confirm financial results are consistent with transfer pricing policies
It is also important to determine whether the relevant documentation (e.g., benchmarking analyses, external comparables, etc.) supports the arm's length price used. In addition, it may be prudent to revisit a transfer pricing policy and related supporting documentation to support arm's length pricing if the following have changed:
Exceptional and/or new costs
Review any exceptional/new costs in your financial statements to:
Payment of intercompany amounts
Keep in mind that some jurisdictions require certain intercompany charges to be paid before the payer can be entitled to a tax deduction.
Attribution of profits to a permanent establishment
In cases where a non-resident entity has a Canadian branch, or a Canadian entity has a foreign branch, make sure the attribution of profits to the permanent establishment(s) is determined using the principles of the relevant, applicable bilateral treaty, if any.
Prior year exposures
It is important to identify any tax exposures that may have arisen in past taxation years, which need to be addressed. Consider, for example, issues in prior year Form T106, "Information Return of Non-arm's Length Transactions with Non-residents", prior year true-ups, etc.
After finishing a review, it may be worthwhile to step back and assess the big picture of your financial results. It is not unusual for CRA auditors to ask taxpayers why they did not think of the above noted issues at the time of their transactions, so it is helpful to be proactive.
If you are unsatisfied with the numbers being reported in the accounts after your review, it may be appropriate to revisit the transactions and amend the underlying transfer pricing policies used, to be consistent with the review's conclusions.
Customs considerations resulting from transfer pricing adjustments
Companies that transfer physical goods between Canada and the U.S. (or other countries) must deal with two revenue collection authorities (the CRA and the CBSA) and satisfy each authority's distinct transfer pricing rules.
The CBSA is generally concerned with unduly low prices for imported goods (which could reduce customs duties). It often examines the relevant agreements for other payments made between the related parties to determine whether those payments should be included in the price of the goods for customs valuation purposes. When the CBSA reviews an incomplete or limited agreement, it commonly determines that management fees, royalties, or other amounts to be paid to related parties, should be added to the value for customs purposes.
Conversely, the CRA is concerned with unjustifiably high prices for imported goods (which result in larger deductions that can reduce income tax).
When establishing an intercompany agreement with transfer pricing implications, some issues to consider for customs purposes include:
Taxpayers may need to make year-end adjustments to related-party transactions to bring their transfer price within an arm's length range, usually in accordance with their transfer pricing policy. These adjustments are made for income tax purposes and may take the form of a lump-sum adjustment to sales or the cost of goods sold, depending on the inbound or outbound nature of the transaction. From a customs' perspective, such an adjustment may be considered part of the customs value of the previously imported goods. Remember that year-end adjustments require further analysis in order to determine whether additional duties are payable.
It is important to also consider GST/HST implications when revising related-party payments, intercompany transactions or transfer pricing policies. Adjustments that increase prices or costs may mean that additional GST/HST must be collected, while decreases may necessitate a refund of previously charged GST/HST, depending on the circumstances.
KPMG expertise is available
To help identify any gaps that may exist and to assist in mitigating adverse transfer pricing and customs findings in the event of an audit, consult a trusted transfer pricing or customs professional, especially before:
Our transfer pricing and customs experts are ready to answer your questions and provide you with the benefit of our worldwide network of transfer pricing and customs practitioners.
For more information, contact your KPMG advisor.
Information is current to December 10, 2019. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500
© 2020 KPMG LLP, a Canada limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.