Canada May End Voluntary Transfer Pricing Disclosures

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By Peter Menyasz

Dec. 9 — A proposal for Canada to stop offering voluntary disclosure incentives in transfer pricing cases is an overreaction to perceptions of widespread tax avoidance by multinational corporations, tax lawyers told Bloomberg BNA.

The recommendation by an expert committee to eliminate the Canada Revenue Agency’s Voluntary Disclosures Program in transfer pricing cases, as well as limit its use in other situations, could discourage companies from stepping up to report unintended non-compliance, most of the lawyers said Dec. 9.

The government has said it will act on the group’s recommendations by late 2017.

The Offshore Compliance Advisory Committee’s one-line reference to transfer pricing, based on a desire to maintain the overall purpose and objectives of voluntary disclosure, doesn’t justify ending the program’s use in transfer pricing cases, said John Tobin, a tax partner in the Toronto office of Torys LLP.

Even accepting the committee’s thesis that taxpayers with a high degree of culpability shouldn’t receive incentives doesn’t justify that, Tobin told Bloomberg BNA in an e-mail. “Transfer pricing is no different a matter of compliance than any other reporting of income,” he said. “Merely because multinationals may make use of the program does not seem justification to wholly exclude it.”

Like other measures being adopted in response to the Organization for Economic Cooperation and Development’s recommendations to combat tax base erosion and profit shifting, the limits proposed on voluntary disclosure seem excessive, he said.

“Taxpayers should not be rewarded for having gamed the system. Yet taxpayers who have non-compliance that want to correct that and want to report and pay the outstanding taxes should be given an opportunity to do so. Otherwise, CRA will create incentives to continue to non-report,” he said.

Patrick Marley, a tax partner with Osler Hoskin & Harcourt LLP in Toronto, agreed there is “no clear policy reason” for not making voluntary disclosure available for any type of error or omission, “including with respect to relief of transfer pricing penalties,” he told Bloomberg BNA in an e-mail.

Balanced Approach?

But Claire Kennedy, a corporate tax and transfer pricing partner with Bennett Jones LLP in Toronto, suggested the recommendations by the “credible, knowledgeable” panel for significant restrictions on voluntary disclosure represent a “fair and balanced” approach.

The panel was created at a time of considerable negative press coverage of the disclosures program based on an Isle of Man offshore tax structure being used by clients of accounting firm KPMG that the CRA is reviewing as potentially abusive, Kennedy told Bloomberg BNA in an e-mail.

“I do not think that the recommendation to prohibit Voluntary Disclosures Program relief for transfer pricing cases will have a significant impact, certainly not for large multinationals given their considerable internal focus on transfer pricing reporting and documentation as is, and even more so with country-by-country reporting,” she said.

Non-Transfer Pricing Recommendations

The Offshore Compliance Advisory Committee, established in April 2016 to follow up anti-tax-avoidance measures announced in the federal government’s budget for fiscal 2016-17, issued its preliminary report on Dec. 8 specifically addressing the Voluntary Disclosures Program.

In addition to proposing ending voluntary disclosure in transfer pricing cases, for which it provided no detailed rationale, the committee recommended less generous relief in cases involving deliberate or willful default or carelessness, active efforts to avoid detection, large dollar amounts of tax avoided, multiple years of non-compliance, sophisticated taxpayers, disclosure motivated by CRA statements of intended compliance efforts or any other situation involving significant taxpayer culpability.

Only One Disclosure

It also recommended strengthening language confirming that each taxpayer is entitled to only one voluntary disclosure, clarification that disclosures not providing complete information may be acceptable, new requirements to disclose the identity of advisers who assisted with non-compliance and specialist review of disclosure applications. It rejected suggestions that penalties for offshore non-compliance should be more stringent than for domestic non-compliance, however.

The committee’s recommendation to limit taxpayers to a single voluntary disclosure is unfairly prejudicial to large corporations, as they may have unrelated issues over a number of years involving different time periods and different personnel and there is no policy reason to deny access to disclosure in such cases, Marley said.

Voluntary disclosure “should also explicitly apply where a single mistake leads to multiple errors or omissions,” he said.

Tobin warned against many of the other proposed limitations on use of the program, noting that his experience with voluntary disclosure has largely involved non-compliance caused by errors such as computer programming, data entry, changes in law, complicated transactions and weak or insufficient documentation.

“Many common and ordinary mistakes occur in large dollar amounts, in sophisticated organizations and can span many years,” he said. “These factors on their own should not justify reduced protection when a mistake is discovered.”

Still, Tobin said many of the report’s proposals are welcome, as taxpayers who use devices or structures to actively avoid detection shouldn’t be allowed to “game” the system and then obtain amnesty from penalties and prosecution and relief from interest. That includes cases where a taxpayer chooses “conveniently” to disclose just before a change in circumstances that could trigger an audit, even if the tax agency hasn’t yet started investigating, he said.

Government Reviews Recommendations

National Revenue Minister Diane Lebouthillier on Dec. 8 welcomed the report’s recommendations to tighten application of the program to limit repeated use by “sophisticated” taxpayers. The government will “leverage” the recommendations to review the program and will announce changes in late 2017, Lebouthillier said in a statement.

“We will continue with our efforts to crack down on tax cheats. My message is clear: the trap is closing,” she said.

The CRA said Dec. 8 that the crackdown on tax cheating domestically and abroad, supported by new funding of C$444 million ($333 million) over five years, includes a new strategy to review all international electronic funds transfers greater than C$10,000 between Canada and four foreign jurisdictions.

The first two jurisdictions were the Isle of Man and Guernsey, of which reviews are almost complete, and reviews of the other jurisdictions will be completed by March 31, 2017, the agency said. To date, more than 20,000 transfers totaling more than C$7 billion have been reviewed, and the government is on track to recoup the C$2.6 billion in additional revenue it projected the crackdown would generate, it said.

To contact the reporter on this story: Peter Menyasz in Ottawa at correspondents@bna.comTo contact the editor on this story: Molly Moses at

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