Transfer pricing rules unclear
Tax committee calls for more nuanced approach to transfer pricing changes.
Draft amendments to the Income Tax Act dealing with transfer prices (between related corporate entities) appear to add ambiguity where once was clarity, says the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada.
In its 2019 budget the federal government announced it intended to address a potential concern by amending the Income Tax Act to clarify that transfer pricing rules in Part XVI.1 take priority over any other provision of the Act.
In a submission earlier this year the Joint Committee said it was concerned that the proposed “ordering” rule was inconsistent with the policy of the existing rules and “could lead to additional interpretive uncertainty, confusion and administrative burden” for both the Canada Revenue Agency and for taxpayers. The Joint Committee’s May 2019 submission notes the original policy clearly says that transfer pricing adjustments are to be made after the application of all other provisions of the Act, with the exception of the GAAR, and that a CRA administrative guidance supports this policy.
While the draft legislation was apparently intended to resolve problems addressed in the first submission, the Joint Committee says it instead introduces “considerable scope” for error.
“We remain concerned about the potential for unintended consequences of this approach,” the Joint Committee says in its November 2019 submission on the draft legislation. “(T)he priority of application of the provisions of the Act expressed in draft subsection 247(2.1) creates ambiguity as to the scope of the transfer pricing rules and uncertainty as to whether transfer pricing penalties apply to a much broader range of transactions than would be consistent with legislative policy as expressed to date.”
The Joint Committee says if the government wishes to expand the circumstances in which transfer pricing rules apply, or the scope of transfer pricing penalties, “a more nuanced approach would achieve the intended result without the aforementioned unintended and undesirable consequences.”