Canada: Transfer Pricing – Top 10 Tips
29 November 2013
Posted by: Author: Angeline Zioulas
Author: Angeline Zioulas (Mondaq)
Base erosion and profit shifting have recently made news
headlines around the world. As such, transfer pricing is an area
where all tax authorities continue to focus their resources. The
consequences of a transfer pricing reassessment can create some
sleepless nights for owner managers, CFOs and controllers
everywhere. Here are the Top 10 Tips for transfer pricing
today:1. Recognize there may be new risk in different places.
Market volatility can radically change the risk profile of a
business. Increasing debt, supplier issues and problems with key
customers are all signs that a business risk profile may have
shifted and that intra-group pricing arrangements may need to be
reviewed.2. Beware the impact of currency movements.
Actual currency results may be substantially different to those
anticipated when the transfer pricing policy was set up. Consider
the impact of currency movements on your profits before year-end to
help identify whether adjustments should be made.3. Update intercompany debt pricing.
Debt prices will carry a particularly high risk of challenge in
situations where a single flat rate is being applied across
different entities, where rates have not been regularly tracked and
updated or where losses have eroded the equity base.4. Scrutinize new country operations.
Companies that have opened operations in new territories should
review arrangements to ensure the pricing is appropriate. Current
transfer pricing hot spots include Italy, Spain, China, India and
Brazil.5. Look for the big items.
Major one-off events such as stock option exercises, winning a
large customer contract, closures or mergers and acquisitions are
all transfer pricing red flags. Adjustments and updates to your
pricing arrangements may be necessary in order to recognize the
impact of events that alter the cost base, revenue streams or risk
profile of the business.6. Keep an eye on cost reduction exercises.
The more effective your cost reduction exercises are, the more
likely the need for an adjustment and price change. Also, consider
which entities should be awarded any resulting savings.7. Match people moves with pricing moves.
When roles or functions are moved to different entities, there
are often pricing consequences. Moves that involve strategic
management, marketing, sales or R&D roles or functions
frequently trigger the need for pricing adjustments. The more
important the roles or functions are in the business' overall
value generation, the greater the risk of audit and potential
adjustments.8. Follow the money.
Keep track of significant investments such as those in
marketing, new products or brand building and most importantly,
which part of the business bears the cost. When they begin to
create value, appropriate pricing arrangements will need to be in
place.9. Recognize intangible assets.
Intangibles - which include patents and trademarks as well as
unpatented technology, know how, brands and customer contracts -
are often powerful, invisible drivers of profit so it's
important to identify them and ensure they are being transfer
priced appropriately.10. Plan to minimize adjustments.
With increased market volatility, transfer pricing adjustments
are more common and often more substantial than in the past. Where
possible, adjustments should be posted before year-end so they are
reflected in management and local statutory accounts. Post year-end
adjustments can be problematic and costly due to differences in tax
authority approaches and can result in having to pay tax on the
same profit in more than one jurisdiction as well as giving rise to
indirect tax and duty issues.
This article first appeared in mondaq.com.