The Canada Revenue Agency (CRA) published Transfer Pricing Memorandum (TPM)-15 for intra-group services. TPM-15 is meant to “clarify” CRA’s audit policy of intra-group services. Although the guidance references OECD’s 2010 Transfer Pricing Guidelines, it is issued in advance of new OECD guidelines, thereby leading to further global inconsistency and instances of double taxation. Links to a PwC summary and TPM-15 are included for reference:
CRA’s four-pronged approach to allocating costs is:
- Shareholder costs (no allocation)
- Specific non-Canadian entity costs (no allocation to Canadian entities)
- Specific Canadian entity costs (no allocation to non-Canadian entities)
- Corporate group costs, allocated via an arm’s length charge
- “Auditors should refrain from accepting the proportion of sales revenues as a single allocation basis for management fees.”
- Specific provisions in the Income Tax Act on non-deductibility of certain costs trumps treaty arguments, leading to double taxation.
- Indirect tax considerations are also addressed in the memorandum.
CRA’s aggressive approach, coupled with its timing, will result in additional complexity cloaked outside of the double treaty mechanisms for which the goal of avoiding double taxation may be ameliorated via appeal mechanisms.
All organisations with operations in Canada for which costs are allocated should review this memorandum to better understand CRA’s audit intent and processes.
Accordingly, documentation of the benefit provided locally, lack of duplication and transparency of the allocation method is vital in proving the tax benefit for intra-group services.