Advance Pricing Arrangement - Program report - 2022

Executive Summary

The Advance Pricing Arrangement (APA) program of the Canada Revenue Agency (CRA) is administered through the CRA’s Competent Authority Services Division (CASD), which is part of the International and Large Business Directorate of the Compliance Programs Branch. Canada has a longstanding and successful APA program. Canada is highly respected at the international level for its APA program and collaborates actively with other jurisdictions to identify possible improvements to the APA process.

The APA program is a service offered by the CRA to assist taxpayers in preventing transfer pricing disputes that could otherwise arise in future tax years. The main objective of the program is to provide increased certainty regarding future transfer pricing issues in a manner consistent with the Income Tax Act and guidance from the CRA and the Organisation for Economic Co-operation and Development (OECD).

A summary of the key findings presented in this year’s report is provided below:

• The CRA held 26 new pre-file meetings in 2022, which is an indication of the number of APA requests to expect in the near future.
• The year 2022 opened with an active case inventory of 70 APAs. In total, 29 new cases were accepted into the program and 10 cases were completed. This resulted in a closing inventory of 89 active cases in progress for 2022.
• There is a downward trend for the average time to complete a bilateral APA as delays from the COVID-19 pandemic subside. In 2022, the average time to complete a bilateral APA was 37.0 months, down from 49.4 months in 2021.
• The vast majority of cases closed (90.1% since 2018) involve taxpayers seeking an APA on a bilateral or multilateral basis, as opposed to 9.9% of taxpayers seeking an APA on a unilateral basis.
• Cases involving transfers of tangible property made up the largest percentage of APAs in process (34.8%); cases involving intangible property represented 32.6%; intra-group services represented 27.0%; and cases involving Financing represent 5.6%.
• In 2022, the CRA’s open APA cases involved taxpayers with operations in 17 different industrial sectors.
• The CRA is currently engaged in bilateral or multilateral APA processes involving taxpayers from 16 different jurisdictions.

Introduction

In line with the priorities of the OECD’s Forum on Tax Administration (FTA), one of the overarching goals of the CRA’s APA program is to provide taxpayers with an avenue to improve tax certainty and prevent future transfer pricing disputes.

The key objectives of this report include:

• enhancing awareness of the CRA’s APA program;
• notifying taxpayers of changes to the APA program;
• providing an operational status update; and
• identifying issues that may affect the APA program in future years.

Maintaining the approach of previous publications, this year’s report continues to emphasize statistical analysis and quantitative data.

Background

The APA program is delivered through the CRA’s CASD, which is part of the International and Large Business Directorate, in the Compliance Programs Branch.

The Director of CASD is supported by a division of approximately 50 employees structured as follows:

• Four Transfer Pricing MAP/APA sections consisting of 36 tax and economics specialists, working exclusively on MAP and APA cases concerning resolution of double taxation (attribution/allocation cases);
• One MAP Technical section consisting of 9 tax and legal specialists, working exclusively on non-transfer pricing MAP cases (other cases concerning taxation not in accordance with a convention);
• One Program Support section consisting of 5 employees working on procedural, reporting, monitoring and other program-related functions.

The program is a service offered by the CRA to taxpayers wanting to obtain increased certainty and prevent transfer pricing disputes. An APA is an agreement with respect to the determination of business profits in Canada that flow from cross-border intercompany transfer pricing transactions in a manner consistent with the Income Tax Act, as well as CRA and OECD guidance.

The APA process is based on co-operation and transparency. The APA process differs from the CRA’s audit process as its focus is on prospective or future tax years rather than tax years that have elapsed. In essence, an APA is an arrangement between a taxpayer and a tax administration that sets out a transfer pricing methodology, to be used on a prospective basis, for establishing an arm’s length transfer price for the transactions between related parties. Applying the arm's length principle is generally based on a comparison of the prices, or profit margins, that non-arm's length parties use or obtain, with those of arm's length parties engaged in similar transactions.

An APA process is started by a Canadian taxpayer through contact with the CASD. For more information on the CRA’s APA program, see Information Circular 94-4R, International Transfer Pricing: Advance Pricing Arrangements (APAs).

APA Program: 2022

The following section provides an operational overview of the APA program, along with current trends and issues.

Applications to the program

A taxpayer interested in obtaining an APA must first send a pre-file package to the Director of the CASD to request an APA pre-file meeting. As much as possible, the pre-file package should include all the information listed in Appendix I of Information Circular 94-4R, International Transfer Pricing: Advance Pricing Arrangements (APAs). The CASD will review the package and will contact the taxpayer to either request more information or, if the information is complete, to schedule a pre-file meeting.

A pre-file meeting, which takes place between a taxpayer and the CRA, provides an opportunity for the taxpayer to learn more about the APA program and for the CRA to get clarification on the taxpayer’s business, industry, and the transaction(s) to be covered under the request (covered transactions). The main objective of the meeting is to explore the suitability of the taxpayer and the proposed covered transaction(s) for the APA program.

After considering the nature of the request, the availability of information, and the taxpayer’s willingness to address potential issues identified during or after the pre-file meeting, a decision is made as to whether or not the taxpayer will be accepted into the next stage of the APA process. A taxpayer invited to continue in the process has to prepare a detailed APA submission outlining the specifics of the covered transaction(s), including a detailed transfer pricing analysis and all pertinent information necessary for the CRA to review and complete its own transfer pricing analysis. After the CRA has received and reviewed the taxpayer’s APA submission for completeness, a decision is made to accept or reject the taxpayer’s request for an APA.

Although a taxpayer’s acceptance into the APA program is not determined at the pre-file stage, the number of pre-file meetings held in a given period can provide a preliminary forecast of future years’ inventory. It can also be used to gauge the current level of interest in the CRA’s APA program. In 2022, the CRA held a total of 26 pre-file meetings.

Withdrawals from the APA process can occur during the application stage (application withdrawals) or after an application has been accepted by the CRA (APA withdrawals). By definition, an application withdrawal occurs when a taxpayer formally engages the CRA in an APA pre-file meeting but either chooses not to pursue an APA or is informed by the CRA that the proposed covered transaction(s) are not well suited for the APA program. In contrast, an APA withdrawal occurs when the taxpayer decides to withdraw from the APA process after having been accepted into the program. For example, this can occur when the taxpayer rejects the bilateral APA reached between the CRA and the foreign competent authority.

To maintain transparency in the program and to ensure applicants can meet the requirements of an APA, the CRA ensures that taxpayers have the necessary feedback on their proposed transfer pricing methodologies and covered transactions. Based on this feedback, a taxpayer may decide not to pursue an APA, while in other cases, the CRA may decide that it would not be appropriate to accept or pursue an APA with a taxpayer. If the CRA declines an APA request, or chooses not to continue in the APA process, taxpayers are provided with an explanation of the CRA’s decision.

As an example, the CRA may decline an APA request when the central issue involves a matter that is before the courts. However, in most cases, taxpayers are given an opportunity to make further representations on any outstanding issues that may prevent their acceptance into the program.

APAs are best suited for current transactions that will likely continue into the future with little to no change, and where the underlying assumptions that form the basis of an APA transfer pricing methodology do not change during the immediate pre-APA period or the APA period itself. Transactions involving one-time events, such as corporate restructurings of a significant nature, are generally outside of the scope of the APA program. Apart from a refusal by the CRA, other reasons why a taxpayer may not pursue an APA may include financial constraints, significant changes in operations such as a business restructuring, and/or changes in personnel.

From an efficiency standpoint, the withdrawal of an APA during the application stage instead of during the post submission stage can represent a significant savings of resources for both taxpayers and tax administrations. In 2022, there were 6 application withdrawals from the APA process.

On December 31, 2022, 43 applications were under consideration for acceptance to the program (that is, instances where a pre-file meeting has occurred between the CRA and a taxpayer, but a taxpayer had yet to provide the APA submission or the CRA had yet to respond to the submission).

Program inventory

In 2022, 29 new cases were accepted into the program. These new cases are in addition to those cases already reflected as part of inventory from acceptances issued in years past. Outgoing cases, which includes APAs completed and withdrawn from the program, totaled 10 cases. Closing inventory at the end of 2022 was 89 cases.

Intergovernmental Status

In 2022, 10 APAs were completed, of which 8 were bilateral agreements with foreign tax administrations and 2 were unilateral. This demonstrates a consistent trend whereby the majority of APAs have been bilateral or multilateral APAs involving at least one other foreign tax administration. It can reasonably be concluded that the CRA and applicants to the APA program continue to be focused on bilateral (or multilateral) arrangements to eliminate double taxation and secure the highest degree of tax certainty.

Completion times

Factors that determine the length of time required to complete an APA include:

• the scope and complexity of a case (as opposed to the size of the covered transaction(s) or the companies involved),
• a taxpayer’s level of co-operation,
• the availability of necessary and reliable information.

The small number of cases used to calculate the CRA’s APA completion time statistics may lead to a higher variability in the figures presented below, which may lead to distortions resulting from the presence of extreme outliers.

After a case has been accepted into the program, the process that ensues generally requires a substantial investment of time and resources from all stakeholders. Bringing an APA from start to finish is broken down into three distinct stages including:

• due diligence;
• negotiations; and
• post-negotiations stage.

The due diligence stage begins once a candidate is accepted into the program and finishes with the completion of a position paper outlining the CRA’s views on the covered transaction(s). Due diligence includes reviewing materials presented by the taxpayer, and may include undertaking site visits, conducting functional interviews, and issuing additional queries and/or information requests to permit the CRA to review the APA submission and complete a thorough financial and transfer pricing analysis. It concludes with the formalization of a position for competent authority negotiations.

In the negotiations stage (for bilateral and multilateral APAs only), the CRA engages in government-to-government negotiations with the corresponding foreign tax administration to establish an agreement on the approach and transfer pricing methodology to be used for the APA term. This can often require more analysis, research, and fact-finding to help resolve differences between the CRA’s and a foreign tax administration’s transfer pricing positions.

The post-negotiations stage pertains to the documentation and signing of a bilateral/ multilateral understanding between the CRA and a foreign tax administration, and similarly the signing of a corresponding domestic APA between the CRA and the Canadian taxpayer. Depending on the complexity of the transfer pricing methodology agreed to during negotiations, as well as the other examples listed below, the time needed to finalize an APA can vary from case to case.

Focusing on the 8 bilateral/multilateral APAs closed in 2022, it took an average of 16.5 months to complete the due diligence stage. An additional 10.3 months were needed for negotiations with the corresponding foreign tax administration. And finally, 10.3 months were needed to draft and finalize the bilateral APA agreements. Overall, for bilateral/multilateral cases completed in 2022, it took an average of 37.0 months to move from acceptance to completion.

The sum of the completion times for the due diligence, negotiations, and post-negotiations stages does not represent the active time within the control of the CRA that is spent to complete an APA. That is because the statistics for completion times include delays beyond the control of the CRA. As an example, cases may have been put on hold while the CRA awaited additional information, the taxpayer reconsidered the APA application, or the CRA awaited position papers from the other tax administrations before starting negotiations.

Categories of transactions

The categories of intercompany transactions can broadly be classified into four groups, the transfer of tangible property, the transfer of rights associated with intangible property, intra-group services and financing. The greatest percentage of APAs continues to be for the cross-border transfer of tangible property. As of December 31, 2022, the breakdown of APAs in process was:

• 34.8% for transfers of tangible property;
• 32.6% for intangible property; and
• 27.0% for intra-group services;
• 5.6% for financing arrangements.

Participation by industrial sector

The CRA’s APA program covers a diverse array of industrial sectors. In 2022, more than half of open APA cases involved taxpayers with operations in the following sectors: automobile and other transportation equipment; computer and electronics; construction equipment and materials; health; and retail trade. Other sectors covered include arts and entertainment; chemical and allied industries; clothing and textile; e-commerce; finance and insurance; food and beverage; machinery; metals and minerals; petroleum; technical, scientific and professional services; transportation and warehousing services; and finally, wood and paper.

Participation by foreign jurisdiction

The CRA is currently engaged in bilateral or multilateral APA processes involving taxpayers from 16 different jurisdictions: Belgium, China, Denmark, France, Hong Kong, India, Japan, Korea, Mexico, Netherlands, New Zealand, Singapore, Sweden, Switzerland, the United Kingdom and the United States. The breakdown of bilateral and multilateral APAs by country continues to reflect the significant flow of goods and services exchanged between Canada and the United States, representing 48.3% of APA cases.

Conclusion

Since its inception in 1990, the APA program has become a key compliance tool for the CRA, while fostering a collaborative and co-operative relationship between taxpayers and other tax administrations and offering a vehicle to improve tax certainty. It demonstrates that communication, transparency and compromise permit mutually agreeable resolution of complex transfer pricing issues on a proactive basis. The program provides an opportunity for taxpayers to openly discuss the challenges they face in trying to comply with the tax laws of multiple jurisdictions. Prospective tax certainty provided through the program helps to reduce barriers to trade and contributes to the free flow of capital.

In 2022, Canada was an active participant in working with other jurisdictions to identify possible improvements to the APA process.  

How to contact the CASD

If you have comments or questions about this report or the services offered by the Competent Authority Services Division, please contact the division:

• by phone: consult the CASD webpage for CASD managers’ phone numbers;
• by email: CPMAPAPAG@cra-arc.gc.ca
• by fax: 613-990-7370;
• by post or courier:
  
  Director
  Competent Authority Services Division
  International and Large Business Directorate
  Compliance Programs Branch
  Canada Revenue Agency
  344 Slater Street – 18th floor
  Ottawa, ON  K1A 0L5
  Canada