Canada US transfer pricing Transfer prices are prices that companies charge for goods, services, tangible and intangible assets they trade with subsidiaries and other controlled entities. Given that these transfer prices are set internally by management, they are frequently subject to scrutiny by both the IRS and the CRA. Tax authorities concur that the proper transfer price is one which two parties dealing at arm's length would agree to. Consequently, the objective of transfer pricing experts is to determine what is the "arm's length price" or “market price” is for any particular situation. In recent years both the CRA and the IRS have increased their emphasis on transfer pricing audits. Both these tax authorities require companies to have documentary evidence supporting their transfer prices. A proper analysis of many factors is required to determine a transfer price, including: Nature of the company's activities Risks Tangible and intangible assets employed Characterization of the entities and comparability of arm's length with non-arm's length transactions. Regulations in Canada: In the absence of proper transfer pricing documentation, the tax auditor is required to assess a penalty of 10% of the net adjustment of the transfer price. In addition, companies are required to have transfer pricing documentation that is current, and it must be provided to the CRA within three months of a written request to do so. Agreements: Companies start their transfer pricing analysis by identifying the transactions between related parties, which generally fall into the following areas: Transfer of tangible products such as inventory. Transfer of services such as management and administration services. Transfer of intangible assets such as the use of a patent or copyright. Transfer of tangible capital assets such as machinery and equipment. Intra-group loans. Industry & Market analysis: The industry and market analysis provides a description of the general business environment, and includes: Industry profile. Market size and level of concentration. General profiles of competitors, their size, strategies and market shares. Current trends in the industry. Critical success factors. Functional Analysis: Functional analysis is at the core of the transfer pricing study and includes analysis of: Functions – which entity carries out the following which activities: Design Manufacturing Financing, Inbound logistics R & D, Inventory management Outbound logistics, Marketing Sales activities, After-sale services and Supporting activities Risks – which entity bears the risks associated with the transaction, and include: Financial risk Credit and collection risk, Operational risk, Market risk and Product risk Intangible assets - which entity: Developed the intangibles Has the legal ownership of the intangibles Receives the benefit of the intangibles Selection of a  Transfer pricing method: The CRA provides the following hierarchy of the following five methods: Comparable Uncontrolled Price (CUP) method  Resale Price (R-) method Cost Plus (C+) method. Profit Split (PS) method  Transactional Net Margin Method (TNMM). The CRA requires that the CUP method is used if possible. In cases where the CUP method is not feasible, one of the remaining four methods is to be used. In the rare case that it is not possible to use any of the above methods, other unspecified methods may be used. However, in general, it is not advisable to use unspecified methods. The selection of a method will depend on the functional analysis and availability of comparable transactions. If it is possible to use the internal CUP method, then the selection of a method can be relatively straight-forward. Economic Analysis The economic analysis provides the following: Selection of comparable transactions or companies consideration of the quality of data assumptions Comparability factors selection of appropriate economic Statistical methods profit level indicators quantification of appropriate adjustments Recommendation The recommendation is a clear statement of the recommended transfer pricing policy. Implementation & Monitoring This section details the most efficient method of implementing the selected transfer pricing policy. A transfer pricing study should be updated each year to reflect any material changes in the transactions under consideration. Provided that no material changes have occurred, an update is generally simple and straightforward. Since every study must be prepared by the filing due date (generally 6 months after the corporate year-end), it is advisable to monitor and document all the changes as they occur during the year. If circumstances change such that some or all transactions did not represent an arm's length price, it is possible to record a compensating year-end adjustment. This adjustment should be fully documented. Disclaimer: While every effort has been made to ensure that this site contains accurate information, it is possible that errors do exist in the materials presented. All of the information provided here is provided “as is”, with no guarantees of completeness, accuracy or timeliness, and without warranties of any kind, express or implied. The information presented on this site should not be considered to be or construed as legal, economic, tax, or accounting advice.