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Advance pricing agreements
Availability and eligibility
Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?
An ‘advance pricing arrangement’ (ie, a formal arrangement between a taxpayer and the minister of national revenue in respect of cross-border transactions between non-arm’s-length persons) is possible in Canada. Under an advance pricing arrangement, taxpayers may confirm with the minister the appropriate transfer pricing method and its application to the specific transaction.
The Canada Revenue Agency (CRA) may enter into unilateral, bilateral and multilateral advance pricing arrangements, although the latter are more common. The benefit of proceeding with a bilateral and multilateral advance pricing arrangement is that it minimises the changes of double taxation if a foreign administrator disagrees with the Canadian approach.
In its 2016 advance pricing arrangement programme report, the CRA noted that the transactional net margin method was the predominate methodology used in advance pricing arrangements.
Rules and procedures
What rules and procedures apply to advance pricing agreements?
To initiate the process for an advance pricing arrangement, an information package must be submitted to the CRA. These typically consist of information about the multinational enterprise including its:
- transfer pricing history;
- proposed transfer pricing methods;
- financial statements; and
- reason for the advance pricing arrangement request.
How long does it typically take to conclude an advance pricing agreement?
The typical timeframe to conclude an advance pricing arrangement is three to four years. Based on the 24 bilateral advance pricing arrangements closed in the 2016 calendar year, the CRA reported that an average of 47.3 months was required to complete an advance pricing arrangement from acceptance to completion.
The process involves three stages. During stage one, the taxpayer meets with the CRA within 180 days from the end of the first tax year covered by the advance pricing arrangement. After this meeting, the taxpayer can make a formal request to enter into the advance pricing arrangement programme. Once the taxpayer is accepted into the programme, the CRA reviews its submitted information package and may request additional information. The CRA then prepares a paper setting out its views on the covered transactions and the appropriate transfer pricing methodology. During stage two, the CRA negotiates with the foreign government, if there is a bilateral or multilateral arrangement. The taxpayer is generally not engaged in this process. The final stage involves:
- the execution of the advance pricing arrangement between the CRA and the taxpayer; and
- the documentation and execution of a bilateral or multilateral understanding between the CRA and the foreign tax administration body.
What is the typical duration of an advance pricing agreement?
The taxpayer should set out its preferred duration for the advanced pricing agreement in its application. Advance pricing arrangements are generally made for five years.
What fees apply to requests for advance pricing agreements?
The CRA levies a non-refundable user charge for each accepted advance pricing arrangement request or renewal to cover anticipated out-of-pocket costs, such as travel and accommodation expenses. User charges for advance pricing arrangements are outlined in an advance pricing arrangement acceptance letter between the taxpayer and the CRA and are payable on receipt of the acceptance letter (Information Circular 94-4R).
For advance pricing arrangements governed by the CRA’s Small Business Advance Pricing Agreement Programme, the administrative fee is fixed at C$5,000. This programme is generally available:
- to taxpayers with gross revenues of less than C$50 million in the most recent tax year; or
- where the transaction covered is anticipated to be less than C$10 million.
Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?
The benefits of an advance pricing arrangement in Canada are not unique. Such arrangements provide certainty to the taxpayer with respect to the tax outcome of its cross-border transactions and minimise audit activity and threats relating to the transactions covered by the advance pricing arrangement, which may result in cost savings over the term of the agreement. The principal disadvantage is that undertaking such an arrangement is a lengthy process that requires upfront investment of the taxpayer’s resources.
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