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Canada Concerned About Loss of Revenue from Migration of Intellectual Property, Considers Recharacterization, Says Former Official

NEWS RELEASE

Contacts:
Mark Carrington
(703) 341.5880
mcarrington@bna.com

Arlington, Va. (March 12, 2009) – A former Canada Revenue Agency official shared his government's thinking on transfer pricing during an economic downturn, in a BNA interview recently, saying the CRA, like its U.S. counterpart the Internal Revenue Service, is concerned about loss of revenue from the migration of valuable intangible property offshore.

Phil Fortier, outgoing director of the Canada Revenue Agency’s International and Large Business Directorate candidly addressed recent criticism from the United States concerning Canada’s aggressive transfer pricing policy in an interview with BNA Tax & Accounting transfer pricing tax analyst Molly Moses. He reported that Canada is looking to establish a formal cost sharing regime that may propose recharacterizing transactions that result in offshore ownership of significant intellectual property.

Noting that divergent views currently exist within the agency on cost sharing, Fortier said one possible approach would be to take the view that a Canadian company “in fact would never allow an arm's-length party to gain ownership of its most significant intangible property, and therefore every transaction that results in offshore ownership of significant IP should be recharacterized.”

Other viewpoints, he said, would vary the treatment depending on the situation, respecting the form of the transaction but scrutinizing the valuations used “with a high degree of skepticism.” The former official added that it “would not be surprising to see the CRA propose to recharacterize some of these transactions in the near future.”

Asked about the transfer pricing issues that tend to arise during an economic downturn in Canada, Fortier listed loss importation, the treatment of plant closings, and distributor losses as some of the most difficult. He also said a less obvious impact of a recession is that a significant swing of the economy is likely to be viewed by the CRA as a “material change” in underlying facts, requiring taxpayers to revisit and revise their transfer pricing policies and documentation--“not just update their comparables sets.”

Fortier's full responses to questions on cost sharing and other matters appear in Question and Answer format in the March 5 issue of BNA Tax & Accounting’s Transfer Pricing Report. The article, which may be quoted with attribution, appears below.

For information on BNA Transfer Pricing Special Reports available for purchase, click here: http://tmstore.bna.com/ReportsNSurveys.aspx#Reports

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