A stable method of allocating income between related corporations dealing across national borders is transfer-pricing. There are a number of methods that can be used to determine the transfer-price of a good or service, and there are a number of record keeping and administrative duties that must be adhered to. To say it briefly, the price used when two related companies deal with each other across national borders must be the fair price that two unrelated parties would have used for the same transaction AND you have to record this price and the method of calculation at the same time as the exchange happens (you generally can not go back and create the records later).
Part of Canada’s transfer-pricing system includes relief when things go wrong in setting the transfer price of goods and services. This relief was provided through the Voluntary Disclosure Program. However, the Canada Revenue Agency has been looking to make changes to the VPD based on a recent report. The expert committee recommended that the CRA eliminate the availability of the VDP in transfer pricing cases to prevent companies from underreporting income and then coming clean. This is because in many cases companies found that it was cheaper to come clean and pay the interest to the CRA rather than borrow funds at market rates.
In January 2017, the CRA released the new VDP guidelines in Information Circular IC00-1R5. As was expected, at paragraph 19, the CRA has listed the “Circumstances Under Which VDP Relief Will Not Be Considered”. With respect to transfer-pricing, the CRA will no longer accept a Voluntary Disclosure where there was an “Advance pricing arrangement”. However, the effect of this is uncertain as under an advance pricing arrangement “confirms an appropriate transfer pricing methodology, in advance, and its application to specific transactions for a specified time frame using certain terms and conditions”. It would appear that if the terms and conditions of the agreement are not strictly adhered to, then errors would not be correctable without penalties and interest
It is important to note that where there is no advance pricing arrangement, the VPD continues to be available to correct transfer-pricing errors. This policy choice by the CRA seems to discourage the use of advance pricing arrangements by limiting their access to the VDP. In reality, however, the security of an advance pricing arrangement makes it a worthwhile effort even absent access to the VDP.
If you would like to negotiate an advance pricing arrangement with the CRA or think you may have made mistakes in your transfer pricing methodology, contact Faris CPA for assistance.