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Transfer pricing methods
Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?
The following transfer pricing methods are used in Canada:
- the traditional transaction-based method, which includes:
- other comparable uncontrolled price method, which requires a price comparison for similar goods or services between independent parties;
- other cost plus method, which requires a comparison with profit mark-ups applied by independent parties on the cost of production of similar goods or services in order to obtain the arm’s-length sale price that should be charged by the taxpayer for the goods or services; and
- other resale price method, which requires a comparison with profit mark-ups applied by independent parties on the sale of similar goods in order to obtain the arm’s-length purchasing price that should be paid by the taxpayer to a related party in respect of the goods subsequently being resold to third parties; and
- profit-based methods:
- othe transactional profit split method, which requires a determination of the division of profits that independent parties would have expected to realise, based on functions performed, assets used and risks assumed, from engaging in transactions similar to those entered into between related parties; and
- othe transactional net margin method, which requires the comparison of the net profit margin realised by a taxpayer from one or more transactions with related parties and compares it with the net profit margin realised by independent parties in similar circumstances.
Preferred methods and restrictions
Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?
The CRA officially endorsed the 2010 revisions to the Organisation for Economic Cooperation and Development, whereby the previous hierarchy of transfer pricing methodologies was replaced with an approach that seeks to apply the most appropriate method. However, it qualified the revisions’ endorsement by noting that they do not firmly de-emphasise the natural hierarchy, but refocus the topic on what is truly relevant – namely, the degree of comparability available under each of the methods and the availability and reliability of the data.
What rules, standards and best practices should be considered when undertaking a comparability analysis?
Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?
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