Canada: APA cost-recovery charges cancelled

Canada: APA cost-recovery charges cancelled

The Canada Revenue Agency (CRA) on 5 February 2021 announced that it will no longer require taxpayers to provide a cost-recovery charge when entering the advance pricing arrangement (APA) program.

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Taxpayers will not have to pay this recovery charge to cover the CRA's estimated out-of-pocket costs for completing the APA process. The CRA indicated that this change follows a detailed review of its cost-sharing model under the APA program, an analysis of other tax authorities’ best practices, and experience using online remote collaboration tools during the coronavirus (COVID-19) pandemic.

The CRA's cancellation of this cost-recovery charge is just one of several recent trends and developments that may make APAs an attractive option for many taxpayers.

Background

APAs are a taxpayer-initiated process in which an agreement is reached governing the pricing of intercompany transactions for a prospective period, typically covering five tax years. Primarily, APAs are conducted on a bilateral basis and involve the negotiation and agreement of the transfer pricing between the local tax authority (i.e., the CRA) as well as the local tax authority of the related party involved in the transactions.

When transactions involve multiple jurisdictions, taxpayers can pursue a multilateral APA process. Tax years that have already been completed can also be incorporated into APA processes via the rollback provision that allows for the inclusion of completed tax years provided a CRA transfer pricing audit has not been initiated.

APA cost-recovery charge cancelled

Previously, the CRA required taxpayers to pay a recovery charge to cover the CRA's estimated expenses to complete the APA process, including travel to taxpayer locations to conduct site visits and functional interviews, as well as travel to engage in in-person negotiations with the opposing tax authority. This payment was viewed as a deposit (rather than a user charge) because any amount not spent by the CRA was typically refunded to taxpayers at the end of the APA process.

The CRA noted that for APAs currently in process, it will continue to issue recovery charge refunds at the end of the process.

Trends and developments

Many multinationals as well as smaller taxpayers may want to consider the benefits of the APA program to pursue tax certainty.

  • OECD endorses APAs: The work of the Organisation for Economic Cooperation and Development (OECD) on BEPS Action 14: Making Dispute Resolution Mechanisms More Effective, encourages tax authorities across the globe to use bilateral APAs. In the OECD's view, bilateral APAs provide an increased level of certainty for both jurisdictions involved, lessen the likelihood of double taxation, and may proactively prevent transfer pricing disputes.
  • Time and cost savings: There may be an increase in transfer pricing audit activity in the upcoming years, due to the CRA's view that government assistance provided during the COVID-19 pandemic is not to be shared with non-resident affiliates through intercompany transactions. This audit activity in the upcoming years may lead to multiple lengthy dispute processes, resulting in possible double taxation and penalties. However, by entering into an APA process, taxpayers can skip the audit process altogether and proceed directly to the Competent Authority to obtain certainty and faster relief from double taxation on their intercompany transactions. Specifically, reaching certainty in an APA rather than achieving the same outcome through an audit and Mutual Agreement Procedure (MAP) can save taxpayers up to four years of time. Further time savings can be gained during the APA renewal process following the completion of the original APA, provided no significant changes have occurred in the taxpayer's intercompany transactions.
  • Increasing transfer pricing penalties: Tax years covered by an APA are not subject to transfer pricing penalties. In Canada, these penalties are equal to 10% of an audit adjustment when the adjustment is above the required threshold for consideration and adequate documentation does not exist. At a recent Canadian Tax Foundation transfer pricing conference, CRA officials indicated that the application of penalties is increasing (penalties applied now in over 50% of referrals), according to CRA statistics.
  • Changes in transactions or operations: The CRA has shown willingness to consider an APA when there are changes in transactions or operations. These will be evaluated on a case-by-case basis. Previously, the CRA viewed such transactions as covering a restructuring of the operations of the taxpayer, which were not suited for the APA process. Given the effect of COVID-19 on taxpayers' operations and transactions, the APA process may help obtain certainty on any changes to policies on a prospective and retroactive (when possible) basis. 
  • Collaboration: The APA process is more collaborative in reaching an agreement on an arm's length outcome for a taxpayer’s intercompany transactions. Conversely, the audit process can be an adversarial and time-consuming process.
  • Smaller taxpayers: While large multinationals have historically pursued APAs, the CRA’s continued focus on audit activity has increased costs and uncertainty for taxpayers of all sizes. As a result, smaller companies have increasingly viewed APAs as a path towards certainty.

Read a February 2021 report prepared by the KPMG member firm in Canada

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