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2016 Federal Budget – Transfer Pricing Measures

23/03/2016


​On October 5, 2015, the OECD released the package of final reports from the BEPS project, responding to a series of issues that had been identified in the July 2013 BEPS Action Plan. To improve the integrity of Canada’s international tax system, the Government is moving forward with a number of initiatives to address BEPS.

Country-by-Country Reporting

The country-by-country report is a form that a large multinational enterprise (MNE) will be required to file with the tax administration of the country in which the MNE’s ultimate parent entity resides. A country-by-country report will include the global allocation, by country, of key variables for the MNE, including revenue, profit, tax paid, stated capital, accumulated earnings, number of employees and tangible assets, as well as the main activities of each of its subsidiaries.

Where a jurisdiction receives a country-by-country report from a member of an MNE, that jurisdiction will automatically exchange the report with other jurisdictions in which the MNE operates, provided that, in each case, the other jurisdiction has implemented country-by-country reporting, the two jurisdictions have a legal framework in place for automatic exchange of information, and they have entered into a competent authority agreement relating to country-by-country reporting.

This measure will apply only to MNEs with total annual consolidated group revenue of €750 million or more. Where such an MNE has an ultimate parent entity that is resident in Canada, the Canadian subsidiary is a designated “surrogate” for a parent located in a jurisdiction not requiring the country-by-country-report (or a Canadian resident subsidiary in the circumstances set out above), it will be required to file a country-by-country report with the Canada Revenue Agency within one year of the end of the fiscal year to which the report relates.

First exchanges between jurisdictions of country-by-country reports are expected to occur by June 2018. Before any exchange with another jurisdiction, the Canada Revenue Agency will formalize an exchange arrangement with the other jurisdiction and will ensure that it has appropriate safeguards in place to protect the confidentiality of the reports.

Consistent with the BEPS project recommendations released in autumn 2015, country-by-country reporting will be required for taxation years that begin after 2015.

Although the BEPS project recommendations included measures for the requirement of Local and Master File elements of transfer pricing documentation, there was no mention in the Budget of any proposed changes to Canadian transfer pricing documentation requirements to adopt the Local and Master File approaches to documentation.

Transfer Pricing Guidance

The recommendations arising from the BEPS project also include revisions to the Transfer Pricing Guidelines. These revisions provide an improved interpretation of the arm’s length principle and are intended to better ensure alignment of the profits of MNEs with the economic activities generating those profits.

In two areas, however, where the revisions to the Transfer Pricing Guidelines are not yet complete, the Canada Revenue Agency will not be adjusting its administrative practices at this time. The BEPS project participants are still engaged in follow-up work on the development of a threshold for the proposed simplified approach to low value-adding services. Work is also continuing to clarify the definition of risk-free and risk-adjusted returns for minimally functional entities (often referred to as “cash boxes”). Canada will decide on a course of action with regards to these measures after the outstanding work is complete.

For more information, the 2016 Federal Budget can be found here. You may also review MNP’s Federal Budget summary here.

For more information, contact Angeline Chandra, CPA, CA, International Tax, at 604.637.1552 or [email protected], or your local MNP Tax Advisor.