There are no shortcuts
With 17 different items to address in a
competent authority submission and the
length of time for the process to bring about
a resolution, taxpayers may be tempted to
ignore the competent authority process by
just filing amended tax returns to apply the
transfer pricing adjustment in the foreign
jurisdiction. They should be warned,
however, that the CRA and the IRS (as well
as many other tax authorities) make it clear
that taxpayers are not to try and attempt to
shortcut the competent authority process.
Also, the tax legislation in Canada places
limits on the taxpayer’s ability to amend tax
returns already filed to reduce income in
respect of transfer pricing adjustments.7 In
other words, bypassing the process may lead
to double taxation.
Competent authority vs. the
appeals process
Taxpayers need to be aware of the limitations
of competent authority if they decide to
battle the reassessment by appealing to
the CRA. If a decision is rendered through
the formal appeals process, and the
taxpayer then decides to try to seek relief
from double taxation, such relief may not
materialize—this is because the Canadian
competent authority will only present the
appeal decision to the other jurisdiction’s
competent authority—it will not negotiate
the issue. Hence, after the audit is complete,
taxpayers need to decide if they will battle
the reassessment through the appeals
process or through competent authority.8
The ACAP process – potential
benefits
The Accelerated Competent Authority Procedure (ACAP) is a process wherein the
competent authorities address the transfer
pricing issue not only for the years for which
a reassessment has been issued, but also for
the subsequent filed taxation years. Here’s an
example: Let’s say the CRA disagrees with
the management fee charge for 2010 and
issues a reassessment. The management fee
charge is calculated in the same manner in
years 2011 and 2012. In the ACAP process,
the competent authorities would deal not
only with 2010, but also with 2011 and 2012.
Taxpayers may want to consider ACAP, as it
can be very advantageous from a certainty and
cash flow perspective in some circumstances.
However, taxpayers must request ACAP
when they make their original competent
authority submission—it cannot be requested
after the fact. Therefore, taxpayers must
evaluate the benefit of ACAP prior to making
their competent authority submission.
Navigating transfer pricing
disputes
This article summarizes just a few of the tips
and traps related to transfer pricing disputes.
Taxpayers would be well-advised to learn more,
and to be proactive. Although competent
authority is a government-to-government
process (the competent authorities of each
country review and evaluate the submission,
draft and exchange position papers, and
negotiate with each other), if taxpayers are
seeking the reduction or entire reversal of a
reassessment, they should try to get—and
stay—involved in the process. It is best
practice to maintain regular communication
with competent authority officials, rather than
filing the competent authority submission
and waiting for word on resolution.
7
For the US, the tax rules disallow such downward adjustments in years for which tax returns have already been filed.
8
If the decision is to go through competent authority, it is still generally advisable to file a corresponding protective notice of objection.
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