Tax advisers are encouraging executives at Canadian multinationals, for example, to treat transfer pricing as a serious issue, which can often involve significant penalties and interest.
A new Ernst & Young report, Tax administration without borders: a Canadian perspective, suggests the Canada Revenue Agency (CRA) will be ramping up audit activity in the coming months and years, resulting in more frequent disputes and higher penalties.
“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 in a statement.
Revenue agencies across the world are under increasing pressure to increase collection in times of recession. It is not surprising that the CRA will use transfer pricing audits as a way to collect revenue when transfer pricing audits generate the largest tax adjustments for the agency.
As a result of the recession, many companies have restructured operations or suffered a reduction in their profits. Both of these situations are likely to bring scrutiny from the CRA.
“To mitigate the impact of a transfer pricing audit, multinationals need to adopt a proactive approach to transfer pricing," said Fred O'Riordan, national adviser in Ernst & Young's tax practice, and author of the report.
Transfer pricing audits are not only costly; they may require a significant investment in time and resources.
Now, more than ever, there is likely to be competition between tax authorities for the same tax revenue.
In addition, the uncertainty surrounding audits can lead to negative effects for a company’s share price, says the report.
