Technical Committee on Business Taxation
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1996-10

Study on Transfer Pricing

Robert Turner, C.A.

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Abstract

Changes in manufacturing processes, increased data communication and networking, and the increasing role of services and valuable intangibles in the economy as well as the creation of trading zones (such as the European Community) enable businesses to operate more effectively transnationally. As a result, related party trade is growing both in volume and in scope. The implications of intracompany transfer pricing policies for government revenues can be significant as such prices can affect customs, excise and sales taxes as well as income taxes paid in relevant countries.

This paper has been prepared to provide the Committee with an overview of transfer pricing procedures and policies and the international environment governing such practices. The results of two recent surveys of taxpayers provide an overview of the taxpayer's perspective on transfer pricing issues. The paper summarizes recent transfer pricing guidelines issued by the Organisation for Economic Cooperation and Development, provides an overview of the tax rules applying in various countries to related party transactions and compares these approaches to those found in Canada. The study offers, for the Committee's consideration, possible changes or alternative approaches for the Canadian tax system having regard to the Committee's stated objectives of:

• promoting job creation and economic growth,
• protecting the Canadian tax base,
• simplification, and
• enhancing fairness by ensuring that all businesses share the cost of providing government services.

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