On June 7, 2017, the Canada Revenue Agency (CRA) announced an arrangement with the US Internal Revenue Service (IRS) on the exchange of country-by-country reports (CbC Reports). The arrangement implements the country-by-country reporting standard for large multinational enterprises (MNEs) set out in the 2015 Final Report on Action 13 of the OECD’s Base Erosion and Profit Shifting Action Plan (BEPS Action 13 Report). The CbC Reports will provide the CRA and the IRS with considerable information on an MNE’s global allocation of income, taxes paid, and certain other indicators of economic activity. Consistent with paragraphs 25 and 59 of the BEPS Action 13 Report, the CRA confirmed the following general principles concerning the appropriate use of information and data contained in these CbC Reports – in the course of an international tax audit:
1) The information and data can be used to assess high-level-transfer-pricing risks and other base-erosion-and-profit-shifting risks.
2) The information and data can also be used for economic and statistical analysis, and to make further enquiries into an MNE’s affairs in furtherance of the audit.
3) The information and data cannot, however, be used as a substitute for a detailed transfer-pricing analysis of individual transactions based on a proper functional and comparability analysis. (The CRA did not mention the corollary to this point – expressed in paragraph 25 of the BEPS Action 13 Report – that the information and data should not be used to propose transfer-pricing adjustments based on a global formulary apportionment of income.)
The scope of CRA queries in the course of an international tax audit might increase substantially as a result of information and data contained in these CbC Reports, having regard to the second principle above. One can always hope, however, that common sense will prevail such that the scope of these queries will be demonstrably reasonable having regard to the third principle above: namely, the requirement to focus on individual transactions based on a proper functional and comparability analysis for those specific transactions.