Transfer pricing audits now the rule, says E&Y survey

A full 80% of Canadian multinational firms expect a transfer pricing audit over the next two years, according to an Ernst & Young survey. In fact, nearly half of "parent" multinational firms have undergone a transfer pricing audit somewhere in the world in the past three years, the survey says.

"Tax audits are proving to be a challenge and time-consuming for multinationals everywhere," says Robert Turner, a partner with Ernst & Young in Toronto and head of the firm's global transfer pricing Services group. "When we asked about audits, we found a considerable incidence of adjustments—globally, one-third of completed audit activity resulted in adjustments, while for multinationals with operations in Canada the figure was nearly 50%. All signs indicate that audit activity will increase as taxing authorities mount aggressive legislative, regulatory and enforcement efforts. The Canada Customs and Revenue Agency, for example, recently formalized its procedures for documentation and reviewing proposed audit adjustments, and almost 70% of Canadian parent company respondents say they believe CCRA is more attuned to transfer-pricing issues."

Transfer pricing, which involves the pricing of transactions among members of a corporate family, is an often complicated issue for any multinational firm.

"There is little surprise that the vast majority of multinationals (88% in Canada) identified transfer pricing as important, and tagged the issue as their primary international tax issue," says Turner. He adds that the survey underlines the importance of maintaining an overall tax-risk strategy, as well as sound transfer-pricing documentation, tailored to local requirements.

In response to more challenging and sophisticated audit techniques, multinationals may choose to use Advance Pricing Arrangements (APAs), which are agreements between a government authority and a corporation in which the authority agrees to accept a certain transfer-pricing method for a fixed time.

Here are more results from the survey.

Canadian data:
• 92% of subsidiary and 100% of parent respondents do not include stock-option expenses in their cost base.
• Parent respondents point to administrative or managerial services, and the transfer or sales of finished goods for resale, as transactions most likely to result in transfer-pricing disputes with the CCRA.
• 84% of parent respondents have reviewed their current transfer-pricing documentation for compliance in light of CCRA pronouncements and trends.

Global data:
• All companies are exposed to audits, but larger companies have higher exposure than average.
• 40% of transfer pricing adjustments resulted in double taxation.
• Fewer than 20% of respondents use APAs, but 90% of these will do so again.

The Ernst & Young Transfer Pricing 2003 Global Survey polled 641 multinational parent companies and 200 subsidiary corporations in 22 countries, including Canada. For more information, go to http://www.ey.com/GLOBAL/content.nsf/Canada/Media_-_2003_-_Global_Transfer_Pricing_Survey