2020-0862501C6 CTF 2020 Q12: COVID-19 and Prior APAs/Current MAPs

Principal Issues: A. What are CRA's views on how COVID-19 will impact (i) the Mutual Agreement Procedures (“MAP”) cases that are currently being negotiated and the previously negotiated Advance Pricing Arrangements (“APA”) and (ii) the benchmarking analyses that are used to establish transfer pricing policies and prepare transfer pricing compliance documentation? B. Is the CRA considering amendments to historic transfer pricing policies to reflect impacts of the COVID-19 pandemic on business economics, risk sharing, etc.?

Position: A.(i) To the extent that the MAP cases currently being negotiated cover taxation years that precede the 2020 COVID-19 crisis, the CRA does not envision any impacts on these cases or the need to adopt special considerations on account of the COVID-19 crisis. COVID-19 and the economic uncertainty created by the crisis also present a significant challenge as it pertains to APAs that are currently in the process of being negotiated. At this time, the CRA does not have a formal policy or approach to guide how APAs are to be negotiated to take into account these circumstances, nor does it believe (at this time) that an across the board policy is an appropriate measure, given that not all industries (or taxpayers) will be impacted in the same manner or degree. A.(ii) In transfer pricing, the CRA typically looks at year specific comparable company data in determining arm’s-length profitability. This will not change for the COVID-19 pandemic years. The CRA’s review of benchmarking studies will be unaffected as well. B. The CRA is not considering across the board changes on its historic transfer pricing policies. However, the COVID-19 crisis may impact the future selection and use of transfer pricing methodologies on a case-by-case basis.

Author: Argento, Angelina
Section: -

2020 Canadian Tax Foundation Conference
CRA Roundtable

Question 12:  Impact of COVID-19 on previous APAs and current MAPs

The economic impact created by the international response to the COVID-19 pandemic has and will negatively impact the growth prospects and profitability in many industry sectors in 2020, 2021, and potentially beyond.

A.    What are the CRA’s views on how this particular impact will affect:

(i)   the Mutual Agreement Procedures (“MAP”) cases that are currently being negotiated and the previously negotiated Advance Pricing Arrangements (“APA”); and

(ii)  the benchmarking analyses that are used to establish transfer pricing policies and prepare transfer pricing compliance documentation?

B.    Is the CRA considering amendments to historic transfer pricing policies to reflect impacts of the COVID-19 pandemic on business economics, risk sharing, etc.?

CRA Response (A)(i)

MAP cases that are currently being negotiated

To the extent that the MAP cases currently being negotiated cover taxation years that precede the 2020 COVID-19 crisis, the CRA does not envision any impacts on these cases or the need to adopt special considerations on account of the COVID-19 crisis. As a matter of practice, the approach used by the CRA to resolve double taxation on filed taxation years is to focus on the period(s) in question. The CRA does not take into account future years (or specifically, events that have transpired in later periods) when negotiating MAPs. 

Previously negotiated APAs

APAs are undertaken on the basis that the past is a reasonable projection of the future. When entering into an APA, it is assumed that the covered transactions and corresponding facts and circumstances (such as the functions, assets and risks of the transacting parties and the business and economic circumstances) will not materially differ from past years. However, as a matter of practice, all APAs entered into by the CRA include a series of critical assumptions – that, if breached, may require that the terms of the APA be re-visited. Establishing whether a critical assumption has been violated is a question of fact that will depend on the specific terms and conditions of the APA and the changes to the underlying business and economic circumstances experienced by the taxpayer(s).

COVID-19 and the economic uncertainty created by the crisis also present a significant challenge as it pertains to APAs that are currently in the process of being negotiated.  At this time, the CRA does not have a formal policy or approach to guide how APAs are to be negotiated to take into account these circumstances, nor does it believe (at this time) that an across the board policy is an appropriate measure given that not all industries (or taxpayers) will be impacted in the same manner or degree. That is not to say that certain allowances (for example – the use of limits / critical assumptions to collar or point to a specific return within a range) will not be required for certain taxation years over a proposed APA term; however, when and how this is implemented will be addressed on a case-by-case basis.

CRA Response (A)(ii)

Benchmarking analyses that are used to establish transfer pricing policies and prepare transfer pricing compliance documentation

The benchmarking results will be impacted by the greater macroeconomic conditions the market faces.

In transfer pricing, the CRA typically looks at year specific comparable company data in determining arm’s-length profitability. This will not change for the COVID-19 pandemic years. The CRA’s review of benchmarking studies will be unaffected as well. The benchmarking studies will continue to be based on the information gathered in the audit and due diligence process. 

The process will be unchanged and remain rooted in the underlying analysis of the functions, assets and risks faced by the tested party which will inform the benchmarking criteria.

CRA Response (B)

The CRA is not considering across the board changes on its historic transfer pricing policies. However, the COVID-19 crisis may impact the future selection and use of transfer pricing methodologies on a case-by-case basis.

Angelina Argento
October 27, 2020
2020-086250

Response prepared in collaboration with:
Alexandra MacLean, International Tax Division
International and Large Business Directorate
Compliance Programs Branch

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