Transfer-Pricing Dispute Prevention and Resolution

Over the last decade, tax authorities around the world have been increasingly focused on raising revenues through transfer-pricing audits and assessments (see BEPS actions 8-10). Canada has been no exception, as the federal budgets from 2016 through 2022 demonstrate: the current Liberal government, since it was elected in 2015, has committed over $3 billion in additional funding to audit and enforcement activities, with much of that funding dedicated to combatting international tax avoidance and evasion and auditing large multinational groups. It’s clear that transfer-pricing practices are seen by the CRA and other tax authorities as a source of base erosion and therefore as a rightful target of audit resources.

Heightened levels of audit activity in the transfer-pricing arena necessarily mean greater potential for transfer-pricing controversies. The corollary of the BEPS project’s focus on transfer pricing as a source of tax revenues was its commitment to making dispute resolution mechanisms more effective (BEPS action 14—2015 final report). Implicitly recognizing that BEPS measures could lead to “unnecessary uncertainty for compliant taxpayers and to unintended double taxation,” the OECD made “[i]mproving dispute resolution mechanisms . . . an integral component of the work on BEPS issues.” The Forum on Tax Administration, an organization of more than 50 tax administrations, including those of the G 20—chaired by the CRA’s own Bob Hamilton and aimed at strengthening tax administrations around the world—makes tax certainty the central pillar of their work.

From a tax adviser’s perspective, however, it is not clear that the bright promise of ensuring effective, timely resolution of disputes has come to fruition in practice, and it does not appear—at least in Canada—that tax authorities’ enthusiasm for transfer-pricing audits and assessments has been matched by a genuine commitment to safeguarding dispute resolution processes.

A Canadian taxpayer that is a member of a multinational group faced with a transfer-pricing assessment with which it disagrees can generally consider three options for resolving the controversy. First, it can file an objection and pursue the administrative appeals process within the CRA. Second, if the transfer-pricing dispute involves a jurisdiction that is a treaty partner of Canada, it can pursue relief bilaterally, through the mutual agreement procedure (MAP) under the relevant treaty. Third, once CRA Appeals has confirmed the audit assessment (or once at least 90 days have elapsed since the filing of an objection), the taxpayer can seek relief through the TCC—and, from there, through the FCA and (with leave) the SCC. (There is, of course, flexibility in practice for a taxpayer to pivot among these three options—for example, by filing an objection and then seeking competent authority relief; or, having found the MAP to be ineffective, by proceeding with its administrative appeal or proceeding to file an appeal with the TCC.) A taxpayer may also proactively pursue an advance pricing arrangement (APA) under one of Canada’s tax treaties prior to a reassessment.

Historically, the CRA objections process has led to the resolution of a very large majority of tax disputes. However, lead times at CRA Appeals are notoriously long; taxpayers frequently wait 12 to 18 months before an Appeals officer is assigned and engaged in the consideration of an objection, and it is some months longer before these taxpayers receive an indication of the officer’s decision. Moreover, while the Appeals Branch has made efforts to operate independently of the audit function, CRA Appeals has no true statutory independence from the Audit Branch. With respect to larger-dollar-value transfer-pricing assessments, the authors’ experience has been that these assessments have frequently been “signed off on” by the International and Large Business Directorate at CRA Head Office, with the result that a contrary decision by Appeals is unlikely, and a taxpayer confident in its position must resort to the MAP or the courts.

With respect to the MAP, Canada was an early signatory of the multilateral instrument (MLI) that arose from BEPS action 15, and it opted in to mandatory binding arbitration as part of its commitment to effective (bilateral) dispute resolution. As a result, a large number of Canada’s treaties were modified to introduce binding arbitration in circumstances where the two jurisdictions are unable to come to an agreement within a specified period. Experience with binding arbitration under the treaty between Canada and the United States has been that it materially improved the effectiveness of the MAP—with no need to resort to arbitration, in many cases. Despite the optimism implied by this commitment to effective bilateral dispute resolution, more than two years after the MLI entered into force for Canada, it has yet (as far as we are aware) to enter into a single mode of application (MOA) with respect to procedures for the actual implementation of arbitration. (Paragraph 10 of article 19 of the MLI provides that the competent authorities must settle the MOA prior to the first case’s eligibility for submission to arbitration.) Moreover, Canada and Japan, although covered under the MLI, have not selected the same type of arbitration process, and thus arbitration will not be available until a process can be agreed on. Nor has Canada’s treaty with Mexico—although it, too, is a covered agreement under the MLI—been modified to include binding arbitration. Other key jurisdictions, such as Germany and Switzerland, are not covered by the MLI; these treaties have been under renegotiation since 2017. When we consider that Canada reported these two countries as among the main jurisdictions for MAP transfer-pricing disputes, binding arbitration does not appear to be, at least in the near term, the beacon of hope it once seemed. (In 2020, the CRA reported that Austria, France, Germany, Mexico, Switzerland, and the United States are the main jurisdictions with which the CRA started MAP transfer-pricing cases.)

APAs, based on cooperation and collaboration, are often seen as the best solution for both taxpayers and tax authorities, resulting in certainty and avoiding assessments altogether. To some observers, however, the extensive timelines and resources required for APAs make them a less viable alternative. In addition, APAs may not cover the most controversial issues, such as business restructurings.

The judicial process offers an alternative for multinational groups that seek certainty in transfer-pricing assessments. In the Cameco case (2018 TCC 195; aff’d 2020 FCA 112), the TCC and the FCA offered decisive guidance on the interpretation and application of the “recharacterization” provisions in paragraphs 247(2)(b) and (d)—and they vindicated the taxpayer’s position in full. But the outcome in Cameco, despite its clarity, came after a full decade of hard-fought litigation. Moreover, since Cameco, the CRA has continued to apply the transfer-pricing recharacterization provisions with at least the same enthusiasm as it did before the decision, and the 2020 federal budget announced a review of Canada’s transfer-pricing rules in the wake of the courts’ decisions.

Although some funding has been allocated to the courts in recent federal budgets, this funding (1) is not necessarily allocated to the Department of Justice and the TCC; (2) does not match the level of funding injections for CRA audit and assessment; and (3) appears to be inadequate for facilitating, through technology, a more expeditious dispute resolution system that would bring the Canadian judicial process truly into the modern era. When one considers, as well, that the TCC, after more than two years of recurrent pandemic lockdowns and an unrelenting level of assessment activity, now faces an unprecedented backlog, it is clear that taxpayers seeking to resolve their transfer-pricing controversies face a long haul.

This lengthy dispute-resolution process—as we consider the path to recovery in today’s post-COVID (we hope) environment—poses a significant issue for policy makers looking to ensure that Canada remains an attractive and viable place for investment and growth. Although one obvious solution may be to direct more resources to dispute resolution, we suggest that it may be time for a more creative approach. Consider the following possibilities, for example:

  • a statutory framework supporting a truly independent Appeals function that is bound by timelines and has the authority to create precedent for auditors;
  • investment in published MAP guidance that builds on the hundreds of successful resolutions achieved by Canada’s competent authority, and the redirection of resources to the proactive resolution of complex issues such as business restructurings—particularly as businesses transform themselves in order to meet new realities; and
  • investment in the efficiency of the judicial process, building on the digital changes made during the pandemic as well as on the pre-pandemic efforts to encourage early and effective settlement; and
  • consideration of new approaches to managing and streamlining the docket (for example, through case categorization).


Shiraj Keshvani
PwC LLP, Toronto

Amanda Heale
Osler Hoskin & Harcourt LLP, Toronto

International Tax Highlights

Volume 1, Number 1, May 2022

©2022, Canadian Tax Foundation and IFA Canada

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