The year-end is an opportune time for taxpayers to consider reviewing their transfer pricing and customs priorities.
Taxpayers 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 Canada Revenue Agency (CRA) and the Canada Border Services Agency (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, consider the following set of transfer pricing items when completing year-end tasks and wrapping up projects.
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 goods and services tax (GST) / harmonized sales tax (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 the financial statements to:
Payment of intercompany amounts
Attribution of profits to a permanent establishment
Prior year exposures
Companies that transfer physical goods between Canada and the United States (or other countries) must deal with two revenue collection authorities (CRA and 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 need to 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 must 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.
Taxpayers also need to 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.
Read a December 2019 report prepared by the KPMG member firm in Canada
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