Transfer Pricing in Canada and the United States

Robert Robillard

Description

In this day and age, international expansion or simply conducting commercial dealings across borders, without too many hassles, is a taxing proposal. Without a strong understanding of the laws ruling international taxes, peace of mind is, at best, elusive. This book focuses on the rules of transfer pricing within the international tax regime, as they stand in Canada and the United States. Commercial enterprises large and small will benefit from the expert advice in this book.
Author Robert Robillard brings his years of experience as an economist, accountant, and teacher to this work. He explains the background of pricing cross-border transactions between related parties, and offers a “Transfer Pricing Tool Kit” for the design, implementation, and documentation of the value chain for business and taxation purposes. Robillard covers the expected and unexpected relationships that will emerge from the cross-border transactions: the transfer pricing audit and the mechanisms available to remedy double taxation, as well as the usefulness of an advisor with respect to the handling of cross-border transactions.
1 What is transfer pricing?. 8
1.1 How this book will help. 8
1.2 International dealings 101. 8
1.3 The value chain and transfer pricing. 9
1.4 The OECD’S Base Erosion and Profit Shifting Initiative. 10
1.5 Value chain and complexity. 10
1.6 Enterprise Resource Planning (ERP) 10
1.7 Making transfer pricing operational 11
2 Fair market value and transfer pricing. 13
2.1 The arm’s length principle. 13
2.1.1 Overview.. 13
2.1.2 Canada. 14
2.1.3 United States. 15
3 Documentation of the value chain. 17
3.1 Functional and comparability analysis of the value chain. 17
4 Intangible property in controlled transactions. 20
4.1 Overview.. 20
4.2 Categories of intangible property. 20
4.3 Transactions where there is intangible property. 21
4.4 Special situations. 22
4.4.1 Government assistance in Canada. 22
4.4.2 Marketing intangibles in Canada. 23
4.4.3 Legal ownership. 23
4.4.4 Withholding tax regimes. 24
5 Intragroup services. 26
5.1 Overview.. 26
5.2 Categories of intragroup services. 26
5.3 Recent controversies in intragroup services. 28
5.4 Additional features of intragroup services. 29
5.4.1 Whether intragroup services have been rendered. 29
5.4.2 The nature of the arm’s length compensation. 30
5.5 Special situations. 32
5.5.1 Apportionment methods. 32
5.5.2 Low value-adding intragroup services. 34
5.5.3 Market-based methods. 34
5.5.4 “Management fees”. 35
6 E-commerce tax trends. 37
6.1 Introduction. 37
6.2 Taxation of income derived from e-commerce. 37
7 The selection of a transfer pricing method. 39
7.1 Overview.. 39
7.2 The transfer pricing methods. 39
7.2.1 Comparable Uncontrolled Price/Comparable Uncontrolled Transaction Method (CUP/CUT) 40
7.2.2 Resale Price Minus Method (RPM) 40
7.2.3 Cost Plus (CP) Method. 41
7.2.4 Transactional Net Margin Method / Comparable Profits Method (TNMM/CPM) 41
7.2.5 Profit Split Method (PSM) 42
7.2.6 Unspecified methods. 43
8 Quantifying the cross-border transactions of the value chain. 44
8.1 Comparison: where the rubber meets the road. 44
8.2 Comparison through prices, values or margins. 44
8.2.1 Prices or values. 44
8.2.2 Margins. 45
8.3 Search process. 45
8.4 Arm’s length range. 46
9 Documentation design for tax compliance. 47
9.1 Overview.. 47
9.2 Background of the OECD three-tiered approach. 47
9.3 The OECD three-tiered approach. 49
9.3.1 The Master file. 49
9.3.2 The Local file. 50
9.3.3 The Country-by-Country Report 50
9.4 The three-tiered approach in Canada. 53
9.4.1 Overview.. 53
9.4.2 T106 Reporting. 53
9.4.3 RC4649, Country-by-country reporting. 54
9.4.4 Documentation. 57
9.5 The three-tiered approach in the United States. 59
9.5.1 Forms 5471 and 5472. 59
9.5.2 Form 8975, Country-by-Country Report 60
9.5.3 Documentation. 63
10 Audit mechanisms. 65
10.1 Canada. 65
10.2 United States. 66
11 Reasonableness and penalties. 69
11.1 Overview.. 69
11.2 Canada. 69
11.2.1 Penalties. 69
11.2.2 Reasonable efforts. 70
11.3 United States. 72
11.3.1 Penalties. 72
11.3.2 Adequacy and reasonableness of documentation. 73
12 Mutual agreement procedure. 75
12.1 Background. 75
12.2 Canada and the United States. 76
12.3 Competent Authority assistance. 78
13 Advance pricing arrangements. 81
13.1 Background. 81
13.2 The APA process. 81
13.3 APA rollbacks. 83
14 Do you need an advisor?. 85

Sujets

• Tax
• Economics
• Imposition (fiscalité)
• International

Informations

• Publié par: Self-Counsel Press
• Date de parution: 15 septembre 2020
• Nombre de lectures: 2
• EAN13: 9781770405189
• Langue: English
• Poids de l'ouvrage: 1 Mo

Extrait

Transfer Pricing in Canada and the US
Determining the fair market value of cross-border transactions for business
Robert Robillard, PhD, CPA, CGA, MBA, MSc Econ, MAP
Self-Counsel Press (a division of) International Self-Counsel Press Ltd. USA Canada

Copyright © 2020

International Self-Counsel Press All rights reserved.
Contents

Cover

Title Page

Part I: Cross-Border Pricing Background

Chapter 1: What is Transfer Pricing and How Does It Work? An Introduction

1. How This Book Will Help You Understand and Implement Transfer Pricing Strategies

2. International Dealings 101

3. The Value Chain and Transfer Pricing

4. The OECD’s Base Erosion and Profit Shifting Initiative

5. Value Chain and Complexity

6. Enterprise Resource Planning (ERP)

7. Making Transfer Pricing Operational

Chapter 2: Fair Market Value and Transfer Pricing

1. The Arm’s Length Principle

Chapter 3: Documentation of the Value Chain

1. Functional and Comparability Analyses of the Value Chain

Part II: Transfer Pricing Tool Kit

Chapter 4: Intangible Property in Controlled Transactions

1. Categories of Intangible Property

Chapter 5: Intragroup Services

1. Categories of Intragroup Services

2. Special Situations

Chapter 6: E-commerce Tax Trends

1. Taxation of Income Derived from E-commerce

Chapter 7: The Selection of a Transfer Pricing Method

1. Transfer Pricing Methods

Chapter 8: How to Quantify the Cross-Border Transactions of Your Value Chain

1. Comparison: Where the Rubber Meets the Road

2. Comparison through Prices, Values, or Margins

Chapter 9: Documentation Design for Tax Compliance

1. Background of the OECD Three-Tiered Approach

2. The Three-Tiered Approach in Canada

Sample 1: Information Return of Non-arm's Length Transactions with Non-residents T106 Summary Form

Sample 2: RC4649 — Country-by-Country Report

3. The Three-Tiered Approach in the United States

Sample 3: Form 5471 — Information Return of U.S. Persons with Respect to Certain Foreign Corporations

Sample 4: Form 5472 — Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

Sample 5: Form 8975 — Country -by-Country Report

Part III: Dealing with Tax Authorities

Chapter 10: Audit Mechanisms

1. Canada

2. United States

Chapter 11: Reasonableness and Penalties

1. Canada

2. United States

Chapter 12: Mutual Agreement Procedure

1. Canada and the United States

2. Competent Authority Assistance

Chapter 13: Advance Pricing Arrangements

1. The APA Process

2. APA Rollbacks

Part IV: Going Forward

Chapter 14: Do You Need an Advisor?

About the Author

Notice to Readers

Self-Counsel Press thanks you for purchasing this ebook.
Part I
Cross-Border Pricing Background
Chapter 1
What is Transfer Pricing and How Does It Work? An Introduction


1. How This Book Will Help You Understand and Implement Transfer Pricing Strategies
In this day and age, international expansion or simply conducting commercial dealings across borders, without too many hassles, is a taxing proposal. Without a strong understanding of the rules of the international tax regime, peace of mind is, at best, elusive.
This book focuses on the rules of transfer pricing within the international tax regime, as they have come to life between Canada and the United States.
Part I includes Chapters 1–3 and provides some meaningful contextual background on the matters of pricing cross-border transactions between related parties. Part II includes Chapters 4–9 and contains what may be considered the “Transfer Pricing Tool Kit” for the design, implementation, and documentation of the value chain for business and taxation purposes. Part III, including Chapters 10–13, focuses on the expected and unexpected relationships that will emerge from the cross-border transactions: the transfer pricing audit and the mechanisms available to remedy double taxation are discussed. Part IV, Chapter 14, provides some insight into the usefulness of an advisor with respect to the handling of cross-border transactions.

2. International Dealings 101
First and foremost, international expansion or the continuity of commercial dealings across borders is about business, not taxes. Numerous successful businesses endeavor to expand their dealings globally or to consolidate their current position. Commercial expansion is usually performed gradually through time within the limits of the financial resources available. A sudden burst of growth or a significant acceleration of growth may, in some cases, be within reach where e-commerce and web-based activities are successfully implemented on a relatively small-scale budget.
International expansion typically follows the Business Expansion Ladder as shown in Table 1. Business expansion often starts with exports, then partnerships with independent distributors or agents. This may lead to licensing or franchising deals. When market penetration is fruitful, more permanent fixtures may be considered, including storage facilities or other similar remote facilities. At some point comes formal implementation through either incorporation of a legal entity in the new country or market or even by merger and acquisition.
Table 1: Business Expansion Ladder

It is through the incorporation or acquisition of one or more legal entities that the most significant business opportunities and challenges of international expansion arise. Stakes rapidly become higher where cross-border transactions occur between what are labeled related parties. Entities of a corporate group are then expected to abide by higher standards whether for commercial, legal, or tax purposes. It becomes necessary to design and manage the value chain of the corporate group. This may be performed on an ad hoc basis or, better yet, in a proactive and timely manner.

3. The Value Chain and Transfer Pricing
The nature of the commercial relationships between the entities of a corporate group needs to be addressed to ensure efficiency. This relates to the design and the management of the value chain of the corporate group. The value chain relates to the commercial activities such as marketing, financing, customer service, manufacturing, etc. These activities may be allocated between several companies when a corporate group is present in more than one country.
It is the division among supplier firms that gives rise to the multiplication of inter-company transactions. Modern economic globalization is chiefly explained by inter-company cross-border transactions that represent an ever-increasing percentage of global trade. Rough estimations by the Organisation for Economic Co-operation and Development (OECD) suggest that inter-company trade value now exceeds 50% of aggregate international trade value.

4. The OECD’s Base Erosion and Profit Shifting Initiative
Industrialized countries have individually expressed worries for their perceived loss of corporate tax revenues. The OECD Base Erosion and Profit Shifting Initiative (“BEPS initiative”), officially launched in 2013, is the most comprehensive effort to fight back against this alleged corporate income tax gap. At its core, the BEPS initiative intends to counter the information asymmetry that permeates the international tax regime. Any successful business’s international expansion consequently must deal with the principles of the international tax regime.
Tax treaties and tax information exchange agreements provide tax authorities with an ever-increasing number of tools aimed at fighting the relative opaqueness of certain cross-border transaction arrangements. The OECD’s Master file, Local file and Country-by-Country reporting mechanisms have paved the way to a heightened level of scrutiny of cross-border transactions within a corporate group.

5. Value Chain and Complexity
As time goes by and domestic tax regimes get more complex, the taxpayer gains access to more options and opportunities. Value chain design and management opportunities are thus created for the corporate group from the complexity in its voluntary or involuntary interactions with domestic tax regimes and the international tax regime.
Moreover, opportunities in the value chain design and management may also originate from the business activities themselves. In such instances, inherent or self-conceived complexity of the business activities may provide opportunities to revamp the value chain of the business. In other words, value chain management may lead to newfound complexity. Said complexity may in turn lead to new legitimate value chain design and management opportunities.
Within the scope of the international transfer pricing rules, all these value chain design and management opportunities will ultimately lead to the determination of international transfer prices to deal with this complexity.
Table 2: Value Chain Design/Management


6. Enterprise Resource Planning (ERP)
Best practices in operatio