Global Tax Alert (News from Transfer Pricing) | 25 September 2013
Canada Revenue Agency issues 2012-13 APA Program Report
On 18 September 2013, the Canada Revenue Agency (CRA) released its Advance Pricing Arrangement (APA) Program Report for the fiscal year ending 31 March 2013 (covering the period from 1 April 2012 to 31 March 2013). The report provides an overview of the operations of the APA program, including statistical analyses of APAs completed and in progress. APAs completed in 2012- 13 were at a historic high. While interest in the program remains high, applications received in 2012-13 were down from 2011-12.
Highlights from the latest report
Number of APAs concluded is up significantly, closing inventory is down
In 2012-13, fully 24 APAs were completed — a significant increase from the 10 completed in 2011-12 and the 16 completed in both 2010-11 and 2009-10. This represents a historic high, besting the previous high of 17 APAs completed in both 2003-04 and 2004-05.
Twenty-one new cases were accepted into the program in 2012-13. Closing inventory for the program is at 99 cases, slightly below the historically high level of 102 cases in inventory at the end of 2011-12. Significantly, this is the first year that APA completions exceeded the number of acceptances into the program during the year.
Time to completion increased
Time to completion for cases concluded in the year is 51.5 months, up significantly from approximately 44 months in last year's report. It is difficult to truly compare this measure from year to year, since it may be unduly influenced by outlier cases that have taken an exceptionally long or short time to complete.
The report indicates that the duration of the due diligence and negotiation phases for the completed cases were relatively elevated this year by the completion of a number of long outstanding cases. This reasoning seems borne out by the median completion time for completed cases standing at 56.8 months, well above the average completion time.
The report also provides a breakdown of the average time in each of the three phases of a bilateral APA. It is interesting to note that, on average, 27.9 months (22.1 months in 2011-12) is required for the CRA to perform its due diligence, analysis and preparation of the position paper. While this may appear to be a lengthy period, there are a number of reasons this phase requires so much time, including the availability of taxpayers and the CRA team for the purpose of co-coordinating site visits and interviews, delays in taxpayer responses to queries, availability of historical information and the level of the complexity of the transfer pricing issues and/or covered transactions.
The successful negotiation of an APA with a foreign tax administration took the completed cases, on average, approximately 11.6 months to complete, up from 5.7 months in the prior fiscal year and 7 months in the 2010-11 year. This increase is likely a direct result of a number of older cases being completed in the year.
Following the completion of negotiations, an average of 12 months is required to draft the APA, obtain agreement on wording with both the foreign tax administration and the taxpayer, followed by signatures from the CRA's Competent Authority Services Division and the taxpayer. This remains unchanged for this phase from the 2011-12 report.
Pre-filing meetings down
Pre-filing meetings, including renewals and new applicants, were reduced to 24, down from 34 in 2011-12, and well below the historic high of 38 in 2007-08.
There were 21 cases accepted into the program in the year, up from 17 in the previous year. A further 35 cases were under consideration for acceptance at year end. These are cases where a pre-filing meeting has been held but the CRA has not yet indicated that the cases will be accepted into the program.
The report suggests that this level bodes well for continuing high volumes of cases coming into the program in the next year. While this is true, it is nonetheless concerning that a large percentage of yearly intake is awaiting acceptance seemingly more than a year after a pre-file meeting.
Withdrawals down slightly
Of the 24 pre-filing meetings, three taxpayers subsequently withdrew their requests to be considered for an APA, versus four withdrawals in the previous year. The report defines a withdrawal as either the taxpayer choosing of its own accord not to move forward with the APA, or the CRA informing the taxpayer that it considers that the proposed covered transactions are not well suited to the program. The report does not provide details on which of these circumstances led to the withdrawals.
TNMM remains the most prevalent transfer pricing methodology
Among in-progress APAs, the transactional net margin method (TNMM) is being used in 53% of cases in process at year end. Among these TNMM cases, operating margin is the most-used profit-level indicator, with 36% of all cases, followed by total cost plus (14%), Berry ratio (2%) and return on assets (2%).
Other methodologies used include cost plus (15%), profit split (13%), comparable uncontrolled price/transaction (14%) and resale price (6%) of APAs currently in process at the end of 2012-13.
The 2011-12 Advance Pricing Arrangement Program Report closed on a hopeful note, indicating that the CRA was confident that the next year's report would reflect a significant improvement in the number of completed cases. The 2012-13 report has proven that to be an accurate prediction, with a record high level of completions.
Many of the cases completed this year were evidently a long time in the system, and moving these older cases is to be commended in itself. This improvement is perhaps a reflection of new processes brought forth under the leadership of Sue Murray, who has been in the role as the director of the Competent Authority Services Division at the CRA since July 2012.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (Canada), Ottawa
- • Rene Fleming
+1 613 598 4406
- • Phil Fortier
+1 613 598 4291
- • Sandy Goldberg
+1 613 598 4810
- • Paul Mulvihill
+1 613 598 4339
- • Fred O'Riordan
+1 613 598 4808
- • Tony Wark
+1 613 598 4322
- • Gary Zed
+1 613 598 4301
Ernst & Young LLP (Canada), Toronto
- • Andrew Clarkson
+1 416 943 2146
- • Sean Kruger
+1 416 941 1761
- • Ken Kyriacou
+1 416 943 2703
- • John Oatway
+1 416 943 2709
- • Lori Whitfield
+1 416 943 7199
Ernst & Young LLP (Canada), Quebec and Atlantic Canada
- • Rachel Spencer
+1 514 879 8214
- • Alfred Zorzi
+1 514 874 4365
Ernst & Young LLP (Canada), Prairies
- • Lawrence Greer
+1 403 206 5031
Ernst & Young LLP (Canada), Vancouver
- • Greg Noble
+1 604 891 8221
- • Matthew Sambrook
+1 604 899 3559
Couzin Taylor LLP, Canada
- • David Robertson
+1 403 206 5474
- • Daniel Sandler
+1 416 943 4434
- • Louis Tassé
+1 514 879 8070
- • Roger Taylor
+1 613 598 4313
EYG no. CM3826