Transfer pricing: Tax avoidance & implications

Is your company interested in setting up a group captive insurer? Are you concerned about the risks associated with an existing offshore captive?

A captive insurance company is typically used as a vehicle to improve risk management, decrease insurance costs and increase cash flows. With the right planning, a captive may also generate certain tax benefits. Our captive insurance team includes risk managers, actuaries and Canadian and international tax specialists and can provide holistic consideration of the viability of a captive and how your company can generate maximum benefits from using one.

In addition, the foreign affiliate rules are complex and it can be difficult to identify potential material tax risks in an existing offshore captive insurance structure from a corporate tax, transfer pricing and international tax services perspective. Companies may be overlooking these risks or not addressing them comprehensively. Our team can help you identify potential tax risks of your existing offshore captive insurance structure at a high level.

Does your company have formal or informal arrangements involving loans or debt guarantees within a group?

A company that borrows funds from a related party must be able to show that the amount and terms of the debt are arm’s length. This requires consideration of numerous factors, including current market conditions and the financial position of the borrower. Companies may not have easy access to the data required to perform a robust analysis.

We help your company determine an acceptable level of debt, for which tax relief on interest should be available, together with appropriate terms. We also help determine arm’s-length interest/factoring rates and guarantee fees and prepare related reports and analyses that can be tailored to your company’s needs (through either a high-level review or a more in-depth analysis).

Is your company engaged in related-party cross-border transactions involving intellectual property such as patents, know-how, trademarks and other intangibles?

Pricing intellectual property (IP) that may be used by numerous companies in a group presents a difficult scenario that requires expertise and judgment, especially where prices may need to change over time (if, for example, the IP is gradually becoming obsolete and its value is falling). IP pricing and analysis will need to consider current guidance from the Organisation for Economic Co-operation and Development on ownership and valuation, which includes important changes to IP valuation.

We can help by reviewing and discussing your company’s IP transactions and possible approaches to pricing methodologies. The discussion may be followed by detailed analysis of the transactions to develop appropriate pricing strategies.

Enabling tax-efficient business change

In order to remain competitive, companies need to continually evolve and re-examine their business models, expand their geographic footprint, integrate acquisitions and transform their operational structures. Further driving the need to change are legislative adjustments, a mobile labour force and new technology developments. Our Value Chain Transformation™ (VCT) services are designed to help you transform your business in a tax-efficient manner so you can stay ahead of the competition, increase shareholder value and improve cash flow.

Adopters of the procurement buy-sell model could see a 50% increase in profit margin resulting from a 5% reduction in purchase costs. 

VCT is designed to help multinational corporations transform the way they do business at every step of the journey, from initial strategy through final delivery, in a tax-advantaged manner. So whether you’re expanding to another region, centralizing services into shared-service centres, moving your manufacturing operations, considering IP strategies or restructuring your supply chain, our VCT team can help. Our experience, industry knowledge and expertise in supply chain management, cross-border personal taxes, transfer pricing, value-added tax (VAT) and customs duties and the intricacies of the international tax system will help you meet your business transformation goals in a timely and cost-efficient manner.

Does your company engage in intercompany transactions and want to avoid possible penalties? The extent of the documentation will depend on the size and complexity of the entity and materiality of the transactions

Failure to maintain adequate transfer pricing documentation can result in penalties and audit challenges, and in many cases companies can’t or don’t prepare these documents themselves. Global Coordinated Documentation (GCD) and TP Elements let us help companies of all sizes, both by preparing your transfer pricing documentation and providing a framework that helps you understand the requirements so you can do it yourself.

We prepare transfer pricing documentation to demonstrate that the arm’s-length nature of your intercompany transactions meet the requirements in Section 247 of the Income Tax Act. Services vary depending on your company’s needs: Global Coordinated Documentation is an option for multinational enterprises with more complex requirements, while smaller companies can take advantage of our TP Elements service, which offers several alternatives depending on needs and budget.

Is your company facing potential tax risks (material errors) or does it have inefficiencies (i.e. manual, ad hoc practices, accounting policy or data mismatches and insufficient mechanisms for reconciliation) or breakdowns in the wider transfer pricing execution chain?

The practical execution of transfer pricing can be much more challenging than expected. While transfer pricing compliance is principally a matter for the tax team, responsibility for the execution of intercompany transactions requires shared responsibility with many other internal functions. This becomes even more difficult in practice as there is rarely someone with oversight of the entire process.

We review the execution of your company’s intercompany transactions and help you align your transfer pricing strategy and policies with other key functions, including controllership, accounting, technology, legal and tax.

Are you concerned with understanding risk exposure and prioritizing efforts to mitigate risk?

The CRA can review and challenge your company’s offshore structures and/or transactions, and you should be prepared for these challenges.

We review your company’s overall transfer pricing exposure and develop options for managing and mitigating transfer pricing risk. This includes a factual review of your material tax audits, controversies and disputes, including proposed adjustments and assessments. We also discuss your company’s structure, transactions, operations and audit history, including an analysis of all competent authority cases, advance pricing arrangements or other tax rulings and existing documentation.

Did you receive a three-month documentation request or are you experiencing issues with an ongoing audit?

Transfer pricing audits can be time-consuming and difficult. They can also drain internal resources, particularly for companies that don’t have a coordinated dispute resolution strategy in place, and can have significant tax, interest and penalty implications.

We offer support at all levels of a CRA audit, including strategizing, responding to a request for documentation, replying to audit queries, meeting with auditors and officials and preparing submissions, appeals, notices of objection and competent authority submissions.