Transfer Pricing Risks Top Worry for Tax Experts

* Originally posted in The Bottom Line - February 2014

When it comes to transfer pricing, managing risk is what worries Canadian companies the most. A survey conducted by Ernst & Young Global Limited found that for 76 per cent of companies in this country risk management is the top issue. This compares to 66 per cent for companies globally.

"This is a growing issue for companies," said Angeline Zioulas, a transfer pricing partner with MNP in Vancouver. "There is a lot more scrutiny by the tax authorities around the world. Canada is one of the most aggressive."

According to Ernst & Young’s 2013 global transfer pricing survey, Canadian respondents were more likely than their global counterparts to have had their transfer pricing policy examined by tax authorities in any country since 2009. All of the Canadian respondents said their transfer pricing had been reviewed compared with 82 per cent of global respondents.

"Governments have come to realize this is an easy way [for companies] to move money around legally, but what was acceptable 20 years ago is no longer acceptable. There is increased enforcement," said Jennifer Shulman, managing director of Duff & Phelps Corp., a financial advisory and investment banking firm in Toronto.

Those same governments have come to realize cracking down on transfer pricing is also a much more publicly acceptable way to add to national coffers. "It’s an easier way to get tax revenue without having to tax your own taxpayers. You are taking revenue from another country," noted Zioulas, a chartered professional accountant.

Until recently, it was also an acceptable way for companies to reduce payments in a higher-tax country by transferring them to a more tax-friendly jurisdiction. The government and the public, however, are looking at such tactics closely, and coldly — and companies are responding by changing their tactics.

"Our survey documents a clear shift toward companies making risk management in transfer pricing a priority. The report identifies several sources of risk that may be contributing to this new, more cautious posture, including more tax authorities saying they view transfer pricing as a high-risk tax issue worthy of closer examination," said Ottawa-based John Oatway of EY.