Don’t let transfer pricing cost you

If your business is a multinational enterprise (MNE), you may be impacted by transfer pricing. Specifically, if you and another entity within your MNE buy or sell goods or services, use the same brand and trademarks, access or grow the group’s intellectual property and have intercompany funding with each other, these transactions must be priced properly to ensure the appropriate profit is reported in Canada.

Transfer pricing legislation stipulates such transactions must occur under “arm’s length” terms and conditions. For tax purposes, the arm’s length principle means the terms and conditions should be identical whether you are dealing with parties at arm’s length or not.

Size and transfer pricing complexity

When it comes to transfer pricing compliance, enterprise size does not always impact the complexity of your transfer pricing matters. In fact, small- and medium‑sized MNEs face many of the same complex transfer pricing requirements and challenges as the largest global MNEs do, including:

• Double taxation risk when one tax authority makes an adjustment to the price of a cross‑border transaction
• Duty to demonstrate to penalty‑giving tax authorities your cross‑border related‑party transactions follow prices, terms and conditions that occur (or could occur) between two non‑related parties
• Overzealous financial statement auditors and scrutinous owners, shareholders or potential investors
• Annual filing and disclosures of certain cross‑border transactions and activity

Your strategic transfer pricing partner

At Baker Tilly Windsor, our value‑focused approach is perfect for businesses that do not have the same transfer pricing compliance budgets large global MNEs do. We work with clients to prioritize where valuable and limited resources should be allocated to yield the greatest return.

With extensive experience serving a wide range of small- and medium‑sized MNEs, our specialists employ a comprehensive array of proven strategies to maximize value for clients. The following outlines key aspects and considerations of our strategic transfer pricing approach.

1. When Canadian revenues for a MNE are less than $5 million, transfer pricing penalty risk decreases. If there is a very low penalty risk for your business, annually prepared formal transfer pricing reports may not be the best use of your compliance budget. A transfer pricing memo or letter may be a better and less expensive option to satisfy your core transfer pricing requirements and objectives.
2. As the Canada Revenue Agency (CRA) and the Internal Revenue Service have indicated, pragmatic solutions are appropriate and expected for small- and medium‑sized enterprises. We have a robust and continually expanding playbook of such solutions that have been successfully implemented and defended.
3. We customize questionnaires to collect relevant business and client information cost‑effectively. In some cases, these surveys form part of the transfer pricing documentation provided to tax authorities, auditors and investors.
4. To increase the shelf life of formally prepared transfer pricing reports or letters, we have prepared an annual form that collects relevant business information and financial information.
5. We offer a range of empirical data and support for key profit targets and prices in our clients’ transfer pricing methods. This ranges from rules‑of‑thumb to safe harbours to reasonable ranges based on our experience and industry observation. Next, function or industry specific studies, benchmarks and surveys are used. Our highest level of support is client‑customized economic analysis and benchmarking.
6. We align transfer pricing maintenance schedules with our clients’ business milestones. For example, we may recommend an additional analysis and review to be performed to verify the transfer pricing method followed remains the best method ⁠–⁠ not on an annual basis, but once the U.S. subsidiary of a Canadian parent exceeds $1 million in operating expenditures in the U.S. market, for instance. 
7. For clients with transactions or transfer pricing methods at higher risk of recharacterization by the CRA, we perform an analysis to determine if a formal intercompany legal agreement is prudent or if a term sheet can be used in the short term.
8. Finally, we review the results of your transfer pricing method at your yearend to verify your objectives have been achieved. 

We apply these strategies and more to provide our clients the most appropriate solution to their transfer pricing challenges at the appropriate time in their business lifecycle. When it comes to transfer pricing, our multi‑pronged and customized approach represents a smart and cost‑effective way to put and keep MNEs ⁠–⁠ regardless of size or compliance budget ⁠–⁠ on solid ground.

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