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Ottawa, September 11, 1997
1997-076

Draft Legislation and Information Circular on Transfer Pricing Released

Related documents:

• Draft Legislation on Transfer Pricing and Explanatory Notes - Adobe Acrobat Version.
• Revenue Canada Draft Information Circular 87-2R - Rich Text format (67,856 bytes).

Finance Minister Paul Martin and Revenue Minister Herb Dhaliwal today jointly released draft amendments to the Income Tax Act relating to the transfer pricing measures announced in the February 18, 1997 federal budget. Also released is a draft revision of Information Circular 87-2 which describes Revenue Canada's administrative practices in the area of transfer pricing.

The proposed amendments and the revised information circular are being released in draft form to provide taxpayers and their advisors an opportunity to consider and comment on the proposals. In addition, the release at this time should give taxpayers sufficient opportunity to comply with the new contemporaneous documentation requirements. It is anticipated that these measures will be included in a bill to be introduced later this year. Consequently, only comments received before November 1, 1997 will be considered.

The proposed rules are in conformity with the revised (1995) transfer pricing guidelines of the Organization for Economic Co-operation and Development (the "OECD"), and are generally in keeping with the transfer pricing rules of other OECD member states, such as the U.S.. Most notably, the draft amendments to the Act:

• require taxpayers who participate in cross-border transactions with non-arm'slength parties to conduct such transactions on terms and conditions that would have prevailed had the parties been dealing at arm's length with each other;

• introduce documentation requirements which effectively require taxpayers to contemporaneously document their transfer pricing transactions and the steps taken to ensure that the terms and conditions of such transactions satisfy the arm's length principle; and

• impose a penalty, in certain circumstances, where a taxpayer fails to make reasonable efforts to determine and use arm's length transfer prices or arm's length allocations in respect of transfer pricing transactions.

The draft information circular provides guidance for taxpayers with respect to a number of transfer pricing matters, including:

• the methods endorsed by the OECD to determine arm's length transfer prices or allocations for transfer pricing transactions and the considerations that enter into the selection of the most appropriate method in the circumstances of a particular transaction;

• special considerations regarding cost contribution arrangements, transfers of intangibles and intra-group services;

• the nature and extent of the documentation required to ensure that the taxpayer will be considered, under the proposed legislation, to have made reasonable efforts to determine arm's length transfer prices or allocations; and

• the application of the proposed penalty.

Mr. Martin noted that the new transfer pricing provisions would protect the Canadian tax base by encouraging taxpayers to observe the arm's length principle, which is the internationally recognized standard against which the terms and conditions of transfer pricing transactions are measured. Mr. Dhaliwal indicated that the proposed new provisions were also consistent with Revenue Canada's intention to devote more resources to the verification of cross-border transactions by multinational enterprises and would make transfer pricing audits more efficient for both taxpayers and Revenue Canada.

Revenue Canada will put in place the necessary administrative procedures to ensure that the proposed penalty is applied in a consistent manner.

The Department of Finance also welcomes comments with respect to the issue of transfer pricing between the permanent establishments or branches of the same entity. This issue is currently being studied by the OECD Committee on Fiscal Affairs and further amendments to the Act may be necessary to address this issue.

References to "Announcement Date" in the draft legislation and explanatory notes should be read as referring to today's date.

Draft Information Circular 87-2R is available on the Internet at http://www.revcan.ca or on Revenue Canada's E.D.D.S.

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For further information:

Concerning the proposed legislation:

Concerning the draft information circular: