Multinationals brace for big tax audits from the CRA: Ernst & Young

Toronto, 30 November 2010 – The Canada Revenue Agency (CRA) is intensifying its tax audit enforcement, and Canadian multinationals would do well to elevate transfer pricing from a tax issue to a CEO issue, says a recent Ernst & Young report, Tax administration without borders: A Canadian perspective.

“Bringing Canada’s budget back into balance on schedule requires a combination of economic growth, fiscal restraint and sustained tax revenues, and that means the CRA will have little choice but to continue or even ramp up its current audit focus on large businesses, especially international transactions involving transfer pricing,” says Gary Zed, Tax Markets Leader for Ernst & Young.

Transfer pricing is the valuation of cross-border transactions between related entities, and the issue has proliferated as commerce has globalized.

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 significant uncertainty that can impact share price.

As Canadian multinationals face new tax risks, the next two years could bring more audits, disputes with tax authorities and higher penalties. In particular, the recession has caused many companies to restructure, or suffer reduced profits — and both can trigger audits, according to Zed.

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.

“To mitigate the impact of a transfer pricing audit, multinationals need to adopt a proactive approach to transfer pricing,” said Fred O’Riordan, National Advisor in Ernst & Young’s Tax practice and author of the report. “That means understanding the dispute resolution processes where they do business, including Canada, and finding a way to resolve issues before they escalate into costly and time-consuming litigation.”

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