On June 7, 2017, Canadian officials announced that they had entered into a new “competent authority agreement” (CAA) with the US to exchange country-by-country (CbC) reports. CbC reports are designed to help both the IRS and its Canadian equivalent better monitor the dealings and tax affairs of multinational enterprises (MNE) that operate in their respective countries.
The stated goal of the CAA is to give each of the country’s tax authorities more transparent information, to better assess if a multinational operating on either’s soil, has been engaging in an effort to evade paying taxes via transfer pricing or other related tax avoidance methodologies.
The information exchanged will include a MNEs allocation of funds, any taxes paid, as well as more detailed financial data. However, the announcement advises that “the information cannot be used as a substitute for a detailed transfer pricing analysis of individual transactions and prices based on a full functional and comparability analysis.”
What Is Transfer Pricing?
Transfer pricing is one of the most important issues in international tax, particularly as the globalization trend continues.
Transfer pricing is the establishing of a price for the exchange of goods and services between two related legal entities within an enterprise. For example, if a US-based subsidiary of a multinational such as Coca-Cola, buys something from a European-based subsidiary of Coca-Cola, when the two parties establish a price for the transaction, that is considered “transfer pricing.”
That may sound simple, but actually such transactions can be quite complex. In fact, according to the Journal of Accountancy, “due to increased IRS audit procedures, transfer pricing has become one of the riskiest areas for multinational corporations from both a compliance and tax planning perspective.”
In 2010, the IRS announced a greater focus on transfer pricing to address potential revenue loss including plans to increase staffing by creating a new Director of Transfer Pricing position, which was filled in 2011. In the ensuing years, several very high-profile multinational companies have made headlines over transfer pricing disputes.
MBAF has been providing expert advice on transfer pricing since the increased scrutiny began, and we have a practice area dedicated to addressing the unique tax and reporting challenges presented to multinational operations.
Complying with the new CbC reporting agreement between the US and Canada could be quite complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our International Tax specialists, or call us at 1-800-239-1474.