Global recession puts another squeeze on Canadian multinationals: Ernst & Young - Ernst & Young - Canada

(Vancouver, 6 October 2009) The global recession is pushing the Canada Revenue Agency (CRA) to intensify transfer pricing enforcement, according to Ernst & Young’s 2009 global transfer pricing survey. As Canadian multinationals face new tax risks, the next two years could bring more audits, disputes with tax authorities and higher penalties. Transfer pricing is the valuation of cross-border transactions between related entities, and the issue has proliferated as commerce has globalized. 
 
“Canada, like many other developed nations, is walking a tight rope: on one hand, the government has to maintain services and infrastructure; and on the other, there is significantly less corporate profit to tax, said Greg Noble, Canadian Market Leader, Transfer Pricing Services, Ernst & Young. “From a political perspective, the government cannot raise taxes in a recession, so the next best option is to significantly increase tax audit enforcement.”
 
The recession has caused many companies to restructure, or suffer reduced profits — and both can trigger audits, according to Noble. “Given the seven year statute of limitation for transfer pricing audits in Canada, the CRA may extend its audit scope back to the boom days, despite the fact that the taxpayer may be facing financial difficulties in the current economy,” he said.

The CRA has publicly stated that it endeavours to include a review of transfer pricing in 100% of its large case tax audits. As such, it is merely a matter of time until a large taxpayer is subject to a transfer pricing audit. There is also significant audit enforcement with small and medium-sized enterprises.

Transfer pricing audits generate the largest tax adjustments for the CRA, which can be accompanied by interest and significant penalties. In addition to the financial aspects, they absorb a huge amount of time and expose the taxpayer to uncertainty that can significantly impact share price.

“To mitigate the impact of a transfer pricing audit, multinationals need to adopt a proactive approach to transfer pricing,” said Noble. “Ultimately, transfer pricing needs to be an integral part of multinationals’ business strategy — as it’s clearly been elevated from a tax issue to a CEO issue.”

The risks are clear for Canadian multinationals, as every transfer pricing transaction requires dealing with at least two different tax authorities and each will be competing for the same tax revenues. With a sharpened focus on enforcement, it is expected that the number and volume of multi-jurisdictional transfer pricing disputes will jump considerably over the next several years.

- 30 -

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve potential. For more information, please visit ey.com/ca.