The CRA wants a piece of the $1.5 trillion transfer pricing pie: Ernst & Young

Canada among countries to see increased audit activity and penalties

TORONTO, Feb. 18 /CNW/ - Transfer pricing transactions between Canadian companies and their related parties outside of Canada are valued at more than $1.5 trillion annually. With transfer pricing rules essentially dictating how much of a company's profit will remain in each country, it's no wonder the Canada Revenue Agency (CRA) and other global tax authorities are focused on raising revenues through taxation, says Ernst & Young.

"In the recent leave to appeal GlaxoSmithKline Inc. v. Canada to the Supreme Court of Canada, the Crown stated that the volume of transfer pricing transactions in 2005 was more than $1.5 trillion," said Greg Noble, Partner in Ernst & Young's national Transfer Pricing practice. "With this much trade moving between related companies, it's easy to understand why transfer pricing has remained the number-one tax issue for multinational companies for more than a decade."

Ernst & Young's 2010 Global Transfer Pricing Survey reveals that, faced with a slowly recovering global economy and record fiscal deficits, governments are increasingly focused on raising revenues through taxation. As a result, more jurisdictions are ramping up enforcement efforts - not only in developed nations but in emerging markets such as China, India, Russia and Brazil.

The findings reveal that 74% of parent companies and 76% of subsidiaries believe that transfer pricing will be either critical or very important to their organizations over the next two years. In fact, 68% of the 877 global survey respondents (from 25 countries) say they have undergone a transfer pricing audit, compared with 52% in 2007.

Canada is currently ranked the fifth-most-vigilant country with respect to transfer pricing audit enforcement. Despite increased scrutiny, only 22% of the Canadian parent companies surveyed by Ernst & Young indicate that they prepare their related transfer pricing documentation by the legislated due date. This level of compliance is well behind the global average (79%), and ranks Canada among countries such as Japan, France, Germany and Italy that have no contemporaneous documentation requirements at all.

According to Noble, Canada's non-compliance is difficult to understand given that the CRA publicly maintains that it has 100% coverage of transfer pricing transactions of large-case taxpayers.

Globally, 66% of respondents have full-time internal staff dedicated exclusively to transfer pricing, and 62% report an increase in use of external consultants. It is clear that the increasing dominance of international trade through multinational companies will be accompanied by an intensity around transfer pricing enforcement, planning and documentation.

"Globalization has resulted in a shift in international trade that's dominated by multinational corporations," said Noble. "And given the significant number of cross-border transactions happening in Canada, companies need to work harder to adopt a more proactive stance in defending their transfer pricing policies and practices."

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