Frequently asked questions — Advance Pricing Arrangements (APAs) Information Circular (IC) 94-4R

1. What is transfer pricing?
2. How can an APA help me?
3. Is any minimum volume of cross-border activity required to qualify for an APA?
4. Was business and industry consulted in updating this information circular?
5. What were the key comments and concerns raised by taxpayers and practitioners during the consultations?
6. How have these key concerns been addressed?
7. Does the new information circular respect the OECD guidelines?
8. What is the relationship of IC94-4R to IC87-2R, International Transfer Pricing? Does IC94-4R establish new transfer pricing rules?
9. How is the information provided by taxpayers under the APA process protected from public disclosure or misuse?
10. What is the role, responsibility, and authority of the tax services office in the APA process?
11. Do taxpayers need to become involved in the APA process to gain "certainty on transfer pricing," or can they reach a similar arrangement with an auditor from the local tax services office under an Audit Protocol or memorandum of understanding?
12. How can more information be obtained about the APA program?

1. What is transfer pricing?

Transfer pricing involves determining the income and expenses related to cross-border trade between two or more entities who do not deal at arm's length. The growth of international trade in recent years has meant a corresponding increase in the volume of goods, services, and intangible property traded among non-arm's-length corporations situated in different countries.

2. How can an APA help me?

Any taxpayer subject to the transfer pricing rules in section 247 of the Canadian Income Tax Act (the Act) may request an Advance Pricing Arrangement (APA). The principal intent of the APA program is to:

• avoid potential double taxation;
• help taxpayers determine appropriate transfer pricing methodologies (TPMs) for transactions or arrangements they participate in with non-resident persons with whom they do not deal at arm's length for purposes of the Act; and
• serve as a key approach to resolving transfer pricing disputes.

When you comply with the terms and conditions of an APA, the Canada Revenue Agency (CRA) considers that the results of applying the agreed TPMs have satisfied section 247 of the Act for the transactions and periods specified in the APA. With respect to transactions covered by an APA, no penalty will be levied under subsection 247(3) of the Act for taxation years during which the APA remains in force. Also, the APA program may be used to resolve current audit years' transfer pricing controversies.

Benefits both to taxpayers and to the CRA include:

• resolving recurring complex matters efficiently;
• potentially applying findings to past years;
• saving time in the long term;
• achieving greater certainty about transfer pricing issues; and
• minimizing global risk.

The CRA may also consider, on a case-by-case basis, issues similar or related to transfer pricing, such as the proper attribution of income between various parts of a corporate entity located in several tax jurisdictions.

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3. Is any minimum volume of cross-border activity required to qualify for an APA?

No. Any taxpayer may apply for APA consideration, regardless of the size of the organization, the type or scope of its operations, or the nature of the transactions and proposed TPMs.

4. Was business and industry consulted in updating this information circular?

Yes. The CRA wanted to ensure that the APA process was meeting the needs of taxpayers. We began an internal evaluation of the APA process in September 1999, and extensive consultations with stakeholders in January 2000 (see final report). Feedback from Canadian and American practitioners and tax executives representing small, medium, and large corporations was received in June and July of 2000.

This consultation assisted the CRA greatly in developing an APA guidance package which aids in timely conclusions to requests, clarifies issues, and better informs APA candidates of the concept, procedural requirements, and workings associated with the APA program. The revisions to IC94-4 reflect the main points raised during the consultation process.

The final report provides futher information on the consultative process and results.

5. What were the key comments and concerns raised by taxpayers and practitioners during the consultations?

• Participants indicated that their overall impression of the CRA has improved as a result of the APA program. Most respondents would participate in the APA program again.
• The interest in participating in an APA is driven by the desire to obtain "certainty of treatment," to avoid double taxation and penalties, and to help Canada attract investment.
• The APA program is generally viewed favourably by participants in the program and their tax advisors, however the full potential of this program is being diminished by the lengthy and costly approval process for each applicant.
• There is a perception by the participants that the delays in the APA process are caused by a lack of sufficient, well trained staff and the APA staff's "mindset" in continually searching for an exact answer rather than a close, acceptable answer.
• There is a need for better communication between the APA staff and the taxpayer.

6. How have these key concerns been addressed?

To address the concerns noted above, to date the CRA has:

• hired and trained new staff;
• revised the information circular to provide comprehensive guidance on APAs;
• implemented a case plan/timeline process in the new information circular to help monitor and minimize the length, and therefore the cost, of the process. (For example, the CRA should be ready to negotiate the terms and conditions of an APA within 12 months of receiving a submission);
• introduced scheduling of regular and frequent consultations by APA staff with taxpayers and their advisors during each APA case, to promote co-operation throughout the process;
• enhanced APA program reporting and monitoring capabilities to better assess the effectiveness and efficiencies of the program activities;
• developed an APA Case Management System to improve the tracking of case progress and results; and
• put into place a new organizational framework to handle transfer pricing issues more efficiently. Two service units of the newly formed Competent Authority Services Division, within the International Tax Directorate, now handle requests for APAs and relief of double taxation. This has allowed the APA program to be more responsive to the needs and concerns of taxpayers.

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7. Does the new information circular respect the OECD guidelines?

Yes. There are no significant differences between the approach taken under Canada's updated APA regime and the Organisation for Economic Co-operation and Development (OECD) guidelines, titled "Guidelines for Conducting Advance Pricing Arrangements under the Mutual Agreement Procedure." The CRA endorses the OECD guidelines with respect to APAs and recommends they be consulted for detailed discussions of specific issues. APA approaches do vary somewhat from country to country.

8. What is the relationship of IC94-4R to IC87-2R, International Transfer Pricing? Does IC94-4R establish new transfer pricing rules?

IC87-2R sets out CRA's views on transfer pricing and provides guidance with respect to the application of the transfer pricing rules in section 247 of the Act. The purpose of IC94-4R is to explain how to apply for and obtain an APA for Canadian income tax purposes and give guidelines on related topics. IC94-4R requires that you provide a detailed analysis and explanation of your proposed TPM in accordance with the current version of IC87-2 and the OECD guidelines, and thus does not establish new transfer pricing rules.

9. How is the information provided by taxpayers under the APA process protected from public disclosure or misuse?

All information obtained or generated during the APA process, including commercially sensitive and proprietary data, is for the purpose of administering the Act. The confidentiality provisions of the Act limit the CRA's rights and powers to use and disclose information submitted in connection with an APA request or submission. The confidentiality provisions in any relevant income tax treaty also apply.

Except as otherwise provided by written agreement, your APA may not be introduced by you or the CRA as evidence in any administrative or judicial proceeding in relation to any taxation year, transaction, or person.

10. What is the role, responsibility, and authority of the tax services office in the APA process?

The role, responsibility, and authority of the tax services office is to:

• promote APAs as a key transfer pricing dispute resolution service;
• review requests to apply the terms and conditions of an APA retroactively to non-statute-barred taxation years, and discuss these requests with representatives of the Canadian Competent Authority Services Division;
• participate in the APA process as required, based on their background, knowledge, and experience; and
• review the periodic APA report with representatives of the Canadian Competent Authority Services Division, and perform an audit of compliance with the terms and conditions of the APA as part of the regular audit cycle.

11. Do taxpayers need to become involved in the APA process to gain "certainty on transfer pricing," or can they reach a similar arrangement with an auditor from the local tax services office under an Audit Protocol or memorandum of understanding?

The CRA is unable to alleviate the requirements of section 247 of the Act for any taxpayer. If taxpayers want to ensure that the transfer pricing methodology used and its application are acceptable under the Act for a specified number of future years, they would have to obtain an APA.

12. How can more information be obtained about the APA program?

The information circular is accessible on the Internet at IC94-4R. You can order printed copies by calling 1-800-959-2221 or any tax services office.

To request an APA or to make an appointment to discuss issues in more detail, telephone (613) 957-8859, send an email to ITD-APA@cra.gc.ca, or write to:

Director General
International Tax Directorate
Canada Revenue Agency
Ottawa, Ontario K1A 0L5
CANADA

Attention: Director, Competent Authority Services Division