Competent Authority Resolutions and APAs

Transcription

1 Competent Authority Resolutions and APAs Tom Akin Senior Partner, McCarthy Tétrault LLP, Toronto Patricia Spice - Director, Competent Authority Services Division, CRA, Ottawa Introduction 2 A taxpayer may face difficulties on audit, and the outcome may be unfavourable Recent experience reveals that an audit may focus on the profitable years in the business cycle, ignoring unprofitable years If dissatisfied with a reassessment, the taxpayer can dispute it

2 Handling Canadian Transfer Pricing Disputes The Roadmap for Challenge 3 CRA: Objection Denied Taxpayer: Appeal CRA Appeals CRA: Reassessment Taxpayer: Objection Taxpayer: CA Request Appeal in Abeyance CRA Audit CRA: Reassessment Taxpayer: CA Request Competent Authority Tax Court of Canada Taxpayer: Appeal Re-activated Taxpayer/CRA: Appeal Federal Court of Appeal No CA Agreement CA Agreement Taxpayer/CRA: Leave to Appeal Supreme Court of Canada Taxpayer: Appeal Re-activated Arbitration Taxpayer/CA Arbitration Accept Accept Reject Competent Authority and APA Dispute Resolution Options A taxpayer may consider Competent Authority resolutions (MAP and ACAP) and APAs, in isolation or in combination for different taxation years Each of Competent Authority resolutions and APAs are government-to-government negotiations, with a limited but important role for the taxpayer Pressure on the Competent Authorities to resolve cases, even without binding arbitration 4

3 Competent Authority and APA Dispute Resolution Options 5 Popularity of APAs growing APAs give certainty of treatment into the future, and enables the taxpayer to avoid penalties for prior taxation years through the rollback Who Is the Competent Authority? 6 Canada s tax treaties define Competent Authority as the Minister of National Revenue or the Minister s authorized representative. Administratively, Competent Authority is split within the CRA between: the Director, Competent Authority Services Division, International and Large Business Directorate (CASD); and the Director, International, Provincial and Strategic Policy Division (IPSPD) see Information Circular 71-17R5 at para. 5

4 CRA Organizational Chart 7 CRA Headquarters Compliance Programs Branch Appeals Branch Legislative Policy and Regulatory Affairs Branch Small and Medium Business Directorate International and Large Business Directorate Income Tax Rulings Directorate Legislative Policy Directorate International Tax Division Competent Authority Services Division Income Tax Legislative Amendments International, Provincial and Strategic Policy Division Tax Treaty Group What Does the Competent Authority Do? 8 Canadian Competent Authority: IPSPD resolves issues involving general treaty interpretation and application. For example, Assisting Finance in all treaty and TIEA negotiations Advice on treaty policy and interpretation issues, working with CRA and with our treaty partners CASD resolves specific cases for particular taxpayers

5 CASD: Outline of Functions 9 CASD principally resolves specific cases for taxpayers under Canada s tax treaties, such as cases involving: transfer pricing (MAP and APA) dual residence permanent establishments certain elective agreements in the Canada-U.S. Treaty such as Article XIII(8) cross-border reorganizations, Article XXIX-B(5) - spousal trust rollovers CASD also administers the Exchange of Information Program (EoI) What is a Mutual Agreement Procedure (MAP)? 10 Assistance by the Competent Authority is generally provided under the Mutual Agreement Procedure (MAP) article contained in tax conventions. This assistance is provided to taxpayers in order to try to resolve situations where taxpayers are subject to taxation not in accordance with the provisions of the relevant tax convention, including situations of double taxation.

6 Typical Requests for Assistance 11 Dual residency Transfer pricing Permanent establishments (PE) Income allocation to a PE Withholding of tax at rate in excess of treaty rate Cross border reorganizations S corporations Mutual Agreement Procedure (MAP) 12 MAP request initiated by Canadian residents CASD offers a no-fee service to Canadian residents Generally a MAP request is a result of adjustments proposed by the CRA or other tax treaty partner.

7 Steps of MAP Process 13 Review the reason for MAP request Evaluate the issue(s) and/or adjustments Prepare position paper (P.P.) or evaluate P.P. of other tax treaty partner Enter negotiation Advise the requestor the MAP settlement accept or decline Implement the MAP settlement Negotiation is a government-to-government discussion Accelerated Competent Authority Procedure (ACAP) 14 Criteria for acceptance ACAP request made at the same time as MAP Issues are the same as MAP Years subsequent to MAP Consultation with TSO Foreign CA agrees No unusual situations or transactions. TPM12 arc.gc.ca/tx/nnrsdnts/cmmn/trns/tpm12- eng.html

8 Responsibilities of Taxpayers - MAP 15 Timely notify, if applicable Make a complete and timely MAP request Co-operative and transparent throughout the process Keep the taxation years open (depending on treaty) Timely provision of information to both CAs Make presentation if requested No self-help Appeals and Court vs. MAP 16 If objection or appeal not held in abeyance, CA process will be terminated CA cannot alter a court decision, or Appeals decision accepted by taxpayer Any relief at discretion of other competent authority

9 Binding Arbitration 17 5 th Protocol added mandatory binding arbitration to ensure full resolution of MAP cases on a timely basis Diplomatic Note (Annex A) provides additional details Government to government process Last best offer or baseball style arbitration, not precedent setting CAs have met several times to develop the procedures necessary to implement mandatory arbitration MAP RESULTS ACCEPTED & COMPLETED CASES 18 Fiscal Year Negotiable* Accepted Completed Non-negotiable** Accepted Completed Total Accepted Completed * Negotiable cases involve a request requiring discussions with another tax administration in order to resolve a treaty issue. ** Non-negotiable cases involve agreements and issues between Canada s Competent Authority and a taxpayer, and do not involve another tax administration. For example, requests for a refund of excess withholding tax.

10 MAP RESULTS AVERAGE # OF (CALENDAR) DAYS TO COMPLETE MAP NEGOTIABLE CASES (BASED ON CASES CLOSED IN THE FISCAL YEAR) 19 FISCAL YEAR CANADIAN INITIATED FOREIGN INITIATED ,132 1,131 MAP RESULTS NEGOTIABLE CASES: PERCENTAGES OF TOTAL, PARTIAL AND NO RELIEF (BASED ON CASES CLOSED IN THE FISCAL YEAR) 20 FISCAL YEAR TOTAL RELIEF (%) PARTIAL RELIEF (%) NO RELIEF (%) TOTAL (%)

11 What is an APA - Advance Pricing Arrangement 21 An arrangement between a taxpayer and a tax administration Confirms the appropriate transfer pricing methodology Establishes an arm s length price for cross-border transactions between related parties Types of APAs 22 Two types: Unilateral APA An arrangement between one tax administration and its taxpayer that sets transfer prices for covered transactions. An executed APA satisfies the documentation requirements and establishes the transfer price. Generally, adjustments do not arise for the covered transactions for the covered years where a taxpayer is in compliance with the terms of the APA. Bilateral or Multilateral APA: An arrangement between two or more competent authorities, implemented through an arrangement between each country s tax administration and its taxpayer. An executed APA may satisfy the documentation requirements and establishes the transfer price for the countries involved in the APA. Generally, adjustments do not arise in either country for the covered transactions for the covered years where the taxpayers are in compliance with the terms of the APA.

12 Unilateral APA 23 Most appropriate where: a tax treaty is not in place with the other tax jurisdiction the other tax jurisdiction does not have an APA Program the tax jurisdiction in the other country does not desire to participate in the process, or there is little incentive to pursue a bilateral APA as the focus of the business is in Canada and the amount of tax involved in the other jurisdiction is small Bilateral / Multilateral APA 24 CRA s preferred approach Since bilateral and multilateral APAs involve agreement between competent authorities, they can be applied to filed taxation years (rollback) Highest probability of the elimination of double taxation prospectively for the covered transactions

13 Rollback of an APA 25 With the concurrence of the CRA Tax Services Office (TSO), the transfer pricing methodology (TPM) negotiated through an APA may be rolled back where: a request for contemporaneous documentation has not been issued by a TSO Rollback of an APA (Cont d) 26 1) No significant differences exist (functions, assets and risks of the related parties involved in the transaction) that impact the ability of the TPM to produce an arm s length price, or 2) differences that exist can reliably be taken into account; the foreign tax administration and the relevant TSO have both agreed to accept the APA rollback request; and appropriate waivers, in the form outlined in the ITA, have been filed for each rollback year.

14 Small Business APA 27 For taxpayers with revenues of less than $50M or covered transactions of less than $10M Tangible goods and routine services no intangibles Small Business APA (Cont d) 28 Key elements: Forward years only Unilateral: no CA negotiations or rollback No site visits Only need a functional analysis CRA does economic analysis, simplified annual report Fixed non-refundable fee of $5000

15 APA - Who is involved? 29 The following people may participate from the CRA: APA Coordinator Manager of MAP/APA Unit Analyst Economist Field TSO auditor Stages of the APA Process 30 First Step Prefiling Meeting Request Letter Submission and User Fee Acceptance Letter Evaluation Site Visits Queries and Responses Analysis Development of Position Paper & Consultations

16 Stages of the APA Process (Cont d) 31 Exchange of position papers Negotiation (only for BAPAs and MAPAs) Bilateral arrangement Domestic arrangement Periodic reporting [APA compliance] Renewal Post-APA Process 32 Compliance through: APA Annual Reports In Canada, preliminary review by CASD Referral to the TSO for screening as part of regular workload Bilateral amendment if: Violation of critical assumption or terms & conditions Misapplication of the TPM Change in law or to the Convention Dispute Resolution Through the Director CASD

17 APAs in Difficult Economic Times 33 On concluded APAs, concerns about validity after changes in circumstances affecting comparables and critical assumptions? On prospective APAs, given greater uncertainty, are we seeing an increase in APA requests? How are the Competent Authorities coping with the decline in available benchmarks? APA Statistics Inventory Levels 34 Fiscal Year Prefile Starting Inventory Accepted Closed Ending Inventory

18 APA Growth APAs Accepted Applications under Consideration 25 Number of Cases Advance Pricing Arrangement (APA) Program Report 36 General interest in APAs remains strong 85% of taxpayers seeking bilateral APAs, the rest seeking unilateral Most common subject matter for cases in progress: 52% of cases involve transfer of tangible property; 26% involve intangibles; and 21% involve intra-group services. Most common methodology for cases in progress: 46% used transactional net margin method (TNMM) For TNMM, the most common profit level indicators (PLIs) were operating margin at 30% of all cases and total cost plus at 13% of all cases 18% used profit split method; and 18% used gross margin cost-plus method. Most common sectors for cases in progress: 23% of all cases involved auto and transportation equipment industries; 13% involved metals and minerals industries; and 11% involved computers and electronics industries.

19 Advance Pricing Arrangement (APA) Program Report (Cont d) 37 The CRA is considering initiatives to reduce completion time for APAs, including: the possibility of reducing/eliminating site visits on renewal APA applications where it can be reasonably ascertained that there has not been a material change to the functions, assets, and risks of the parties to the transaction the possibility of extending the period of coverage to provide taxpayers with expanded prospective certainty more rigorous due diligence at the application stage of an APA to better assess the suitability of candidates and to reduce the time needed to gather information during the APA process the utilization of specialized expertise to expedite the resolution of APAs and to ensure consistency in the treatment of issues and cases. Contact and References 38 Competent Authority Services Division - Phone: Fax: MAP-APA.PAA -APP@cra-arc.gc.ca IC 71-17R5: Guidance on Competent Authority Assistance Under Canada s Tax Convention IC 94-4R International Transfer Pricing: Advance Pricing Arrangements