2020 International Fiscal Association Conference CRA Roundtable

Question 5: Transfer Pricing Memorandum TPM-17 and COVID-19

According to CRA’s Transfer Pricing Memorandum on the impact of government assistance on transfer pricing (TPM-17), the cost base should not be reduced by the amount of government assistance received unless there is reliable evidence that arm’s length parties would have done so given the specific facts and circumstances. It is presumed that the Canadian taxpayer will keep the government assistance, unless it can be proven that arm’s length enterprises would effectively share all or part of that assistance.

What are the CRA’s views on the impact and treatment of the COVID-19 related government assistance programs in the context of TPM-17, and whether CRA’s position may in any way be different given the unprecedented business circumstances caused by the pandemic (i.e. what sort of market evidence would CRA expect to see if the taxpayer decides to offset costs against the COVID-19 government assistance received in determining the final transfer pricing charge)?

CRA Response

The purpose of the TPM-17 is “to provide guidance on the impact and treatment of government assistance in the context of a transfer pricing analysis” to ensure that when a cost-based method is being used as a proxy for observing an arm’s length price for goods or services in a related party cross border transaction, any government assistance is properly accounted for in determining the transfer prices. Where government assistance has been received that assists in paying some of the costs of either labor or capital items (depending on the relevant cost base), that assistance will not usually be used to reduce the cost base for the purpose of determining the value provided by the party in the transaction.

The COVID-19 related government assistance is a temporary emergency measure implemented to support Canadians and Canadian businesses facing hardship as a result of the global COVID-19 outbreak. Given the nature of the assistance and circumstances under which it is provided, it is unlikely that market evidence would exist to support that arm’s length enterprises would effectively share all or part of this this type of emergency assistance. Accordingly, COVID-19 related government assistance would be expected to form part of the tax base of the recipients.

The example below illustrates how the Canada emergency wage subsidy (CEWS) should be treated for transfer pricing purposes.

A Canadian subsidiary (CanCo) of a multinational group provides services in Canada to a foreign affiliated company (ForCo). CanCo’s business and its employees are affected by the global COVID-19 outbreak and qualify for CEWS, a temporary emergency measure implemented to support Canadians and Canadian businesses facing hardship.

The purpose of the CEWS is to encourage Canadian employers who are facing economic hardship to retain employees who are still on the payroll and re-hire workers previously laid off as a result of COVID-19 and thereby help employers to more easily resume normal operations following the crisis. CEWS assists workers to keep their jobs by preventing further job losses so they can continue to pay their bills and provide for their families during the emergency period.

The transfer price between CanCo and ForCo applies a 10% mark-up ^{(footnote 1)} to CanCo's costs incurred to perform the services. CanCo incurs salary costs of $60 and other costs of $40. CanCo is eligible for the CEWS and receives an emergency wage subsidy of $10.

Appropriate transfer pricing treatment of the CEWS

In this example, the transfer price to ForCo is correctly calculated where the cost base ($100) is not reduced by the CEWS ($10).

Inappropriate transfer pricing treatment of the CEWS

In this example, the transfer price to ForCo is incorrectly calculated where the cost base ($100) is reduced by the CEWS ($10). The CEWS does not reduce the cost base for the purpose of calculating the transfer price.