Canada s APA Program September 25, 2009 American Bar Association Chicago, IL Shiraj Keshvani APA Coordinator Competent Authority Services Division, International and Large Business Directorate
Competent Authority authorized representatives Minister of National Revenue Assistant Commissioner Compliance Programs Branch Assistant Commissioner Legislative Policy and Regulatory Affairs Brian McCauley Deputy Assistant Commissioner Compliance Programs Branch Terrance McAuley Director General International and Large Business Dir. Jean-Jacques Lefebvre Director General Legislative Policy Directorate Mickey Sarazin Director Competent Authority Services Division Patricia Spice Director International, Provincial and Strategic Policy Division Jeannine Leroux-Lafontaine 2
Advance Pricing Arrangement (APA) An APA is an arrangement between a taxpayer and a tax administration that confirms the appropriate transfer pricing methodology to establish an arm s length price for transactions between related parties. An executed APA satisfies Canadian transfer pricing documentation requirements. Taxpayers will avoid the expense of undertaking regular documentation studies for transactions covered by the APA 3
Types of APAs Bilateral/Multilateral CRA s preferred approach Since a bilateral APA involves agreement amongst the affected competent authorities it can be applied to any eligible filed taxation year (rollback) 4
Types of APAs Unilateral 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 5
Types of APAs Small Business For taxpayers with revenues of less than $50M or a proposed covered transaction of less than $10M Objective is to expedite the APA process for lowerrisk transactions and assist taxpayers in their efforts to comply Key elements of a Small Business APA: Tangible goods and routine services no intangibles Forward years only Unilateral no CA negotiations No site visits Only need a functional analysis CRA does economic analysis Fixed non-refundable fee of $5000 6
Who is involved? The following people may attend from the government: APA Coordinator, Manager of MAP/APA Unit, Analyst, Economist, Field TSO auditor, Department of Justice Lawyer 7
Stages of the APA Process First Step Prefiling Request Letter Submission and User Fee Acceptance Letter Evaluation Negotiation (only for BAPAs) Arrangement Periodic Reporting Renewal 8
Suitability of an APA The APA Program may be best suited to taxpayers who: wish prospective tax certainty and the elimination of double taxation rather than a specific outcome wish to participate in a cooperative process face complex or contentious transactions where differing views are likely to arise in respect of the transfer price wish to avoid the possibility of dedicating significant resources to an extensive transfer pricing audit believe the initial effort required during the first APA will create future efficiencies through renewals (provided the facts and circumstances are the same) 9
APAs Benefits and Concerns Benefits Forward Looking- Mitigates risk of double taxation Once in effect, meets contemporaneous documentation requirements of s.247 Experienced faces Decreases audit risks and complexity Taxpayers involvement Cooperative process Enhances certainty of tax treatment May be applied retroactively (TPM-11) May be renewed Resources? Concerns Disclosure of confidential information Taxpayer involvement/contribution during CA meetings Time commitment and time involved Flexibility once committed Resources? 10
Annual APA Production Annual APA Production Fiscal Year Pre-Files Pre-Acceptance Withdrawals Opening Inventory Incoming Inventory: Accepted APAs Itemized Outgoing Inventory: APAs Completed APAs Unresolved Post- Acceptance Withdrawals Total Outgoing Inventory Closing Inventory 2008-2009 33 2 63 32 10 1 0 11 84 2007-2008 38 0 48 23 8 0 0 8 63 2006-2007 25 4 41 18 9 0 2 11 48 2005-2006 18 4 33 18 10 0 0 10 41 2004-2005 24 3 37 14 17 1 0 18 33 2003-2004 21 3 37 17 17 0 0 17 37 2002-2003 15 0 37 16 15 0 1 16 37 11
35 30 25 20 15 10 5 0 Current / Potential APA Growth Current / Potential APA Program Growth APAs Accepted Applications under Consideration 2008-2009 2007-2008 2006-2007 2003-2004 2002-2003 2001-2002 2000-2001 1999-2000 1998-1999 1997-1998 1996-1997 1995-1996 1994-1995 1993-1994 1992-1993 1991-1992 1990-1991 2005-2006 2004-2005 12 Number of Cases
APA Inventory Turnover APA Inventory Turnover 2008-2009 2006-2007 2004-2005 Fiscal Year 2002-2003 2000-2001 1998-1999 1996-1997 APAs Accepted APAs Closed 1994-1995 1992-1993 1990-1991 30 20 10 0 10 20 30 4 Outgoing / Income Inventory (# of Cases) 13
APA Completion Time APA Completion Time Report Fiscal Year Average Completion Time -- Months APAs Accepted* APAs Completed % Completed APAs Unresolved % Unresolved 2008-2009 0.0 32 0 0% 0 0 2007-2008 14.4 23 1 4% 0 0% 2006-2007 16.8 18 4 22% 0 0% 2005-2006 30.0 16 9 56% 0 0% 2004-2005 30.0 14 9 64% 0 0% 2003-2004 31.2 17 15 88% 0 0% 2002-2003 31.2 15 14 93% 1 7% 14
APA by Type APAs by Type Type Unilateral Bilateral Multilateral Total Completed To Date 24 99 3 126 In Progress 12 71 1 84 Total 36 170 4 210 15
70 60 50 40 30 20 10 0 Industrial Sectors by Rank for APAs APAs by Industrial Sector - Ranked In Progress Completed 16 Number of APAs Auto and Other Transportation Equipment Metals and Minerals Computer and Electronics Retail Trade Construction Equipment and Materials Petroleum Agricultural Others
Bilateral/Multilateral APAs by Foreign Jurisdiction Bilateral or Multilateral APAs by Foreign Jurisdiction Country Completed % of Total In Progress % of Total Combined % of Total Australia 7 7% 0 0% 7 4% Austria 0 0% 1 1% 1 1% Denmark 1 1% 1 1% 2 1% France 0 0% 2 3% 2 1% Germany 1 1% 0 0% 1 1% Japan 9 9% 5 7% 14 8% Korea 0 0% 2 3% 2 1% New Zealand 1 1% 0 0% 1 1% Switzerland 0 0% 1 1% 1 1% United Kingdom 5 5% 3 4% 8 5% United States 78 76% 56 79% 134 77% Total 102 100% 71 100% 173 100% 17
Recent Developments Policy on the application of an APA to prior (rollback) years Staffing Revision of CRAs Information Circular IC94-4R on APAs The Advisory Panel on Canada s International Tax System. Other 18
Competent Authority Program References Advance Pricing Arrangement www.cra-arc.gc.ca/tx/nnrsdnts/cmp/p_mp-eng.html TPM-11 Advance Pricing Arrangement (APA) Rollback www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/trns/tpm11-eng.html Mutual Agreement Procedure www.cra-arc.gc.ca/tx/nnrsdnts/cmp/cs_mp-eng.html Transfer Pricing www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/trns/menu-eng.html 19
Thank You
UPDATE ON US APA Program ABA CONFERENCE CHICAGO, IL September 24, 2009 CRAIG A. SHARON, APA DIRECTOR
APA Office Staffing and Locations 34 attorneys, accountants, economists, and paralegals 4 branches; 3 offices 5 Industry/Issue Coordination Groups DC California 1 manager 8 team leaders 3 economists Director Deputy Director 3 managers 10 team leaders 5 economists 2 paralegals
What is an APA? A voluntary alternative dispute mechanism A contract between the IRS & the Taxpayer resolving international, transfer pricing disputes covering specific transactions for a set period of years Applies to large and small taxpayers The IRS agrees not to seek a transfer pricing adjustment under IRC 482 if the Taxpayer files returns consistent with the agreed transfer pricing method Unilateral vs. bilateral Prospectivity vs. rollbacks
APA Case Processing APA submissions Rev. Proc. 2006-9 Formation of APA Teams Due diligence Analysis Discussion and agreement Drafting, review, and execution 4/ /
APA Receipts 90 per year on average through 2007; significant and sustained increase for 2008 (123) and 2009 (100+ so far) Increases in bilaterals, renewals, and foreign-parent cases 140 120 100 80 60 40 20 0 2004 2005 2006 2007 2008 Bilateral Unilateral
APA Taxpayer Characteristics Increasing percentage of foreign-parented corporations (in green) 2004-07 2008 25% 35% 65% 75% 6/ /
APA Completions Annual completions APAs, amendments, withdrawals and revocations reflect increased productivity (per 50,000 staff hours) and fluctuating staff levels Completions Staff Hrs. (000) 2-Yr. Productivity 150 100 50 0 2004 2005 2006 2007 2008
Other Significant APA Activities Regulations projects (cost sharing, services, global dealing) Audit guidelines (cost sharing) IRS training (IEs and IE managers, Field economists and managers, US comp authority, industry groups, etc.) Speeches, panels, webcasts, and other public appearances 8/ /
APA Timeliness Improving before 2008 Focused on closing older inventory to reduce age and size of active inventory Consistent and significant improvements through 2007 Reversed by 2008 staff attrition and record APA applications
APA Timeliness 2008 Median Completion Times Unilaterals 19.2 months (14 APAs) RNPs Bilaterals 19.4 months (54 RNPs) 35.9 months (49 APAs)
APA Timeliness Median Completion Times Unilateral RNPs 12 month target Bilateral 30 month target 30 25 20 15 10 5 0 2004 2005 2006 2007 2008 50 45 40 35 30 25 20 15 10 5 0 2004 2005 2006 2007 2008
Size & Age of Active APA Inventory Active Inventory Average Age (in Months) of Cases in Active Inventory 250 200 150 100 50 0 2004 2005 2006 2007 2008 Current 16 15 14 13 12 11 10 9 8 7 6 2004 2005 2006 2007 2008 Current
Recent Developments APA Rev. Proc. 2008-31 Arbitration Belgium, Germany, Canada (pending) Improved coordination with US Tax Treaty Increased communication with IRS Field Transfer Pricing Council Policies re (i) compensating adjustments and (ii) unilaterals with bilaterals Economic downturn 13 / /