Transfer Pricing: Rules and Practice in Selected Countries (C-D) (Portfolio 6945)

Tax Management Portfolio, Transfer Pricing: Rules and Practice in Selected Countries (C–D), No. 6945, presents the rules and practice related to transfer pricing in Canada, China, and Denmark.

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Chapter 30, “Transfer Pricing Rules and Practice in Canada,” analyzes the operation of the Canadian transfer pricing rules and examines Canada's rules relating to penalties, tax amnesty and interest on amounts in dispute. Transfer pricing compliance, litigation, advance pricing agreements, Competent Authority assistance, information reporting, and record keeping under the Canadian system are discussed in detail.

Chapter 40, Transfer Pricing Rules and Practice in China,” provides an overview of the current transfer pricing environment in the People's Republic of China, highlighting in particular the key rules and practices introduced by new transfer pricing administrative guidance. The chapter is based on Ernst & Young's Doing Business in China. The chapter provides basic information regarding the structure of taxation in China. The chapter also compares the transfer pricing practices of the State Administration of Taxation (SAT) with the Organization for Economic Cooperation and Development (OECD) Guidelines. The chapter addresses documentation and reporting requirements as well as the penalties and the administrative appeals process regarding transfer pricing adjustments. The chapter concludes with a discussion of the advance pricing arrangement (APA) process in place in China, followed by unofficial translations of selected guidance and forms in the Worksheets.

Chapter 45, “Transfer Pricing Rules and Practice in Denmark,” provides an overview of the Danish Tax system and administration and analyzes the basic Danish transfer pricing rules contained in §2 of the Tax Assessment Act, §3B of the Tax Control Act and §§34 and 35 of the Tax Administration Act. The chapter also describes other provisions of importance when analyzing transfer pricing issues. The methods applied by the Danish Tax Administration for examining intercompany transactions are explained as well as the administrative procedures to be followed in such matters. Issues concerning binding tax rulings, advanced pricing agreements, and mutual assistance are also discussed. Finally the chapter contains a description of the relevant customs provision and the interaction with the transfer pricing rules for direct tax purposes.


The Transfer Pricing: Rules and Practice in Selected Countries (C–D) Portfolio is authored by the following experts.
Nathan Boidman, Esq.

Nathan Boidman, Esq., International Tax Partner, Davies Ward Phillips & Vineberg LLP, Montreal; member of the Council of the Canadian Branch of IFA; member of Tax Management's Transfer Pricing and Foreign Income Advisory Boards; frequent contributor to Tax Management International Journal; has advised, lectured to and been counsel to the Canadian government on transfer pricing matters; chaired the General Working Session and Panel for IFA's 1992 study of transfer pricing; lectures and writes on the topic.

Brian Bloom, Esq.

Brian Bloom, Esq., International Tax Partner, Davies Ward Phillips & Vineberg LLP, Montreal; was the chief draftsman of the tax reform, in 1998, of Canada's transfer pricing rules, while a member of the Tax Policy Group of Canada's Department of Finance; lectures and writes on the topic.

Luis Coronado

Luis Coronado is Ernst & Young's Far East Area and Greater China Transfer Pricing Leader. Coronado has extensive advisory experience in international tax and transfer pricing issues, initially serving domestic and multinational companies in the Americas and Europe before moving to Asia in 2005. His experience includes advising companies on the negotiation of bilateral Advance Pricing Agreements (APAs) and Competent Authority resolutions with China, Japan, Mexico, and the United States. Coronado is a member of the International Fiscal Association and has been voted numerous times intoEuromoney's Guide to the World's Leading Transfer Pricing Advisers.

Patrick Cheung

Patrick Cheung is the Transfer Pricing leader of Ernst & Young's Hong Kong and South China Transfer Pricing practice as well as the Financial Services Transfer Pricing Leader for the Far East Area, based in Hong Kong. Cheung has many years of international tax and transfer pricing experience, including many APA, Competent Authority, and tax-effective supply chain management projects.

Jessica Tien

Jessica Tien is responsible for the leadership of Ernst & Young's China Central Transfer Pricing practice based in Shanghai. Tien has extensive experience in transfer pricing from an advisory perspective and as an in-house corporate executive. Her work includes management of controversy resolution, APA negotiations, and the planning and implementation of transfer pricing structures designed to achieve business objectives while meeting transfer pricing compliance requirements and achieving tax efficiency.

Joanne Su

Joanne Su is the transfer pricing controversy leader in China for Ernst & Young. Su has many years of extensive practical experience in international tax and transfer pricing services, and acts as a trusted China advisor to more than a dozen global and U.S. Fortune 500 companies. Su has assisted multinational corporations with bilateral APAs, unilateral APAs, and dispute management for various national transfer pricing audit cases. Su was named by Euromoney as one of the leading transfer pricing advisors in China.

Christian Emmeluth, Esq.

Christian Emmeluth obtained an L.L.B.M. from Copenhagen University in 1977 and became a member of the Danish Bar Association in 1980. During 1980–81, he studied at the New York University Institute of Comparative Law and obtained the degree of Master of Comparative Jurisprudence. In 1988 Mr. Emmeluth was admitted to the Supreme Court in Denmark. Mr. Emmeluth has previously worked in London and is now a member of the niche firm “CPH LEX Advokater” in Copenhagen.

Table of Contents

Portfolio 6945-1st: Transfer Pricing: Rules and Practice in Selected Countries (C-D)

Portfolio Description


Technical Advisors


Significant Developments

Significant Developments



Enacted Legislation

Transfer Pricing, Thin Capitalization Changes to 2012 Budget Enacted

Pending Legislation

Proposed Amendment on Related-Party Loan Guarantee Fees


TeleTech Canada Inc. v. Minister of National Revenue, 2013 FC 572

Canada v. GlaxoSmithKline Inc., 2012 SCC 52

Administrative Developments

Guidance on Referrals to the Transfer Pricing Review Committee

Guidance Endorsing 2010 Update of OECD Guidelines


Administrative Developments

SAT Releases Annual Advance Pricing Arrangement Report for 2012

SAT Institutes Joint Panel Review System for Large Transfer Pricing Adjustments


Enacted Legislation

Denmark Enacts Rules on Transfer Pricing Assurance Reports, PE Income Allocation, Company Tax Returns Disclosure

Detailed Analysis

CHAPTER 30: TRANSFER PRICING RULES AND PRACTICE IN CANADA by Nathan Boidman Davies Ward Phillips & Vineberg Montreal, Canada

30:I. Introduction and Overview

A. The Arm's Length Principle — Nature and Role in Canada

B. Themes and Parameters of Canadian Transfer Pricing Law

1. Overview

2. Parameters

C. Overview of Changes Since 1994

30:II. Relationship Between the Canadian Tax System and Transfer Pricing

A. Principles of Taxation (Taxing Jurisdiction — Tax Base; Unilateral Relief from Worldwide Taxation)

1. U.S. Multinational with Canadian Subsidiary

2. Canadian-Based Multinational with U.S. Subsidiary

B. Federal and Provincial Tax Rates

1. Overview

2. Federal Tax Rates

3. Provincial Corporate Income Tax Rates

4. Withholding Taxes on Dividend Distribution

5. Combined Rates of Tax

C. Tax Rate Arbitrage

30:III. Threshold Issues and Parameters of Canadian Transfer Pricing Law

A. Basic Conundrum (“Reasonable Amount”)

1. Basic Simplicity of Relevant Law

a. Statutory Scheme

b. Case Law

c. Administrative Approaches

2. The Problem and Issues (Arising from the Basic Simplicity of the Law)

a. Tax-Motivated Structures

b. Tax-Motivated Prices

c. Basic Uncertainty

d. Increased Compliance Reporting — Requirements and Penalties

3. Summary

B. Motive and Evidentiary Issues

1. General Discussion

2. The Role of Hard Bargaining

3. Canada-United States Context

a. General Discussion

b. January 1994 Revenue Canada/Department of Finance Announcement

C. Sources of Canadian Transfer Pricing Law: Section 69, Section 247, IC 87-2 (Revised IC-87-2R), Case Law

1. General Considerations

2. Legal Framework

a. Statutory Basis for Arm's Length Principle

b. Scope and Purpose of the Information Circular

(1) The Original Circular (IC-87-2)

(2) The Revised Circular (IC-87-2R)

c. The Case Law

D. Canadian Transfer Price Laws Compared with Internal Revenue Code Section 482

1. Historical Similarities

2. Historical Differences

3. Current Similarities and Differences

a. Overview

b. The Best Method Rule v. the Natural Hierarchy of Pricing Methods

c. Choosing “A Method of Last Resort”

d. TNMM v. CPM

e. An Overall View of the Hierarchy — Contrast to the United States

f. Periodic Adjustments and Intangibles

30:IV. Basic Canadian Transfer Pricing Rules

A. Statutory Rules — Sections 247 and 251

1. Overview

2. Transactions Subject to Canadian Transfer Pricing Rules

3. Note Respecting Intracompany (Head Office–Branch) Transactions

4. The Anti-Avoidance Element

B. Parties Subject to Transfer Pricing Reallocation Rules

1. Section 247 and Non-Arm's Length Persons

2. Non-Arm's Length Persons

a. Persons

b. “Dealing at Arm's Length”

(1) Arm's Length and Related Parties

(2) Non Arm's Length Dealing Between Unrelated Parties — A Question of Fact

c. Summary

C. Reasonable Price (Transfer Pricing Standards)

1. Overview

2. Basic Rules and the Issue of Offset

a. Under Prior Sections 69(2) and (3)

b. Offset Under Section 247(2) and (10)

3. Separate Price v. Bundling

4. Comparability Factors

5. Ranges

6. Role (Effect) of Business Strategy

D. Arm's Length Price for Tangible Property Sales

1. Overview of Methods Establishing Arm's Length Prices

2. The CCRA's Position

3. Comparables

a. General Discussion

b. Analysis of Comparables in Indalex

4. Secondary and Other Methods

a. Overview and Implications of U.S. “Best Method” Rule [The Original Perspective]

b. Resale Price and Cost Plus Methods

c. “Fourth Methods”: Profit Splits and Other Methods — The Original Perspective

(1) General Discussion

(2) Application of Fourth Methods in Indalex

d. “Fourth Methods”: The Current Perspective

E. Intangibles

1. Overview

2. Sale of Intangibles

3. Licensing Agreements

a. Under IC-87-2R

b. The U.S. Super Royalty Rule in the Canadian Context

(1) Overview and Background

(2) Implementation of Super Royalty from the Traditional Canadian Perspective

(3) Summary: Original Perspective

4. The Revised Circular

5. Cost Contribution (Sharing) Arrangements

a. Research and Development (Cost Contribution Arrangements) — Under Original IC-87-2

b. Qualified Cost Contribution Arrangements Under IC-87-2R

6. Withholding Tax Issues

7. Outbound Transfers

F. Services

1. Commissions and Services Generally

2. Fees for Centralized Administrative Management and Other Services

a. Overview

b. Deductibility

(1) Overview

(2) Custodial (Stewardship) Expense Issue

(3) Benefit Test

(4) Allocation Methods

(5) Pricing and Mark-Up or Profit Margin?

(6) Related OECD Views

c. Withholding Taxes

d. Contracts of Service vs. Agency Relationships

G. Interest on Loans

1. Arm's Length Standard

2. Thin Capitalization

3. Interest Imputation — Loans by Canadian Corporations

4. Interest Imputation — Loans by Nonresidents

H. Secondary Adjustments

30:V. Penalties, Tax Amnesty and Interest on Transfer Pricing Adjustments

A. Overview

B. Transfer Price-Related Penalties and Contemporaneous Documentation

1. Overview

2. The Penalty Rule

3. Contemporaneous Documentation

4. Effective Date Issue

5. The CCRA (Circular) Views

C. Penalties and Amnesty — General Application

D. Interest on Amounts in Dispute

E. Amnesty on Interest and Penalties

30:VI. Compliance and Litigation

A. Main Features of the Tax Administration

1. Domestic Law

2. Treaties

B. Role of the Government — Finance and the CCRA

1. Assessment

2. Reporting

3. Advance Rulings (APAs)

a. The Advent of the APA

b. Canadian APAs — Background

c. Information Circular 94-4R

(1) Overview

(2) APA Processing

(3) Bilateral and Multilateral APAs

(4) Term and Possible Retroactive Application

(5) APA Reports and the Review of Results

d. Advisability and Risks of Seeking APAs

(1) The Difference Between an APA and an Advance Income Tax Ruling

(2) Situations in Which APAs Should Be Sought

(3) Situations in Which Not to Seek an APA

4. Transfer Pricing Audits

5. Exchange of Information and Competent Authority

6. Information Demands

7. Correlative Adjustments

C. Burden of Proof on Taxpayer

D. Administrative Appeals

E. Judicial Review

1. Jurisdiction and Procedure

2. Burden of Proof

3. Functional Analysis

4. Confidentiality

a. Confidentiality of Third Party Information — Background

b. Confidentiality of Third Party Information and the Issue of “Secret Comparables”

F. Provincial Law Aspects of Transfer Pricing and Cooperation with the Federal Authorities

30:VII. Canadian Competent Authority and Transfer Pricing Issues

A. Overview

B. Transfer Pricing Rules in Canada's Tax Treaties

1. General Approach

2. Parties Involved

3. Mandatory v. Discretionary Settlements

4. Branches

C. CCRA Initiated Adjustments

1. CCRA Audits and Statute of Limitations

2. The Competent Authority Proceedings

3. The Degree of Canadian Taxpayer Involvement With the CCRA in Competent Authority Proceedings

4. The CCRA's Willingness to Deviate from Canadian Transfer Pricing Rules in Competent Authority Proceedings

5. The CCRA's Willingness to Deviate from Canadian Penalty and Interest Rules

D. Foreign Government Initiated Adjustments

E. Taxpayer-Initiated Adjustments

30:VIII. Information Reporting and Recordkeeping

A. Reporting Transfer Prices

1. Prior to 1998

2. 1998 Amendments to Reporting Rules

a. The Statutory Rule — Reporting Requirements

b. Penalties for Non-Compliance

3. The Prescribed Information Return Under Section 233.1 — Form T106

B. The CCRA Demands for and Access to Information

30:IX. Coordination of Transfer Prices with Customs Declarations

CHAPTER 40: TRANSFER PRICING RULES AND PRACTICE IN THE PEOPLE'S REPUBLIC OF CHINA  by Patrick Cheung Deloitte Touche Tohmatsu Hong Kong  Luis Coronado Jessica Tien and Joanne Su Ernst & Young People's Republic of China

40:I. Introduction

40:II. Overview of China's Tax System

A. General

B. Administrative Structure — State Administration of Taxation and Local Tax Bureaus

40:III. Overview of China's Corporate Income Tax System

40:IV. History of China's Transfer Pricing Rules

40:V. Current Transfer Pricing Rules in China

A. Overview of the Current Transfer Pricing Rules in China

B. Definition of “Related Parties” or Controlled Persons

C. Transfer Pricing Rules for Different Types of Transactions

1. Transfer Pricing for Cost Sharing Agreements

2. Transfer Pricing Rules for Loans

D. Data Sources Commonly Used in China

40:VI. How the Chinese Transfer Pricing Rules Differ from the OECD Transfer Pricing Guidelines


A. Use of Nonpublic Information

B. Interquartile Range and Adjustments to the Median

C. Year-End True-Up vs. True-Down

D. Loss-Making Single-Function Entities

E. Transfer Pricing and Customs

40:VII. Reporting and Documentation Requirements

40:VIII. Penalties

40:IX. Transfer Pricing Audits in China

40:X. Adjustments to Be Made in the Wake of a Transfer Pricing Adjustment

40:XI. Administrative Review of Transfer Pricing Adjustments

40:XII. Resolving Conflicts with Other Countries

40:XIII. Advance Pricing Arrangements

Introductory Material

A. Pre-filing Meeting

B. Formal Application

C. Review and Evaluation

D. Negotiation and Signing

E. Monitoring and Execution

CHAPTER 45: TRANSFER PRICING RULES AND PRACTICE IN DENMARK  by Christian Emmeluth, Esq. CPH LEX Advokater Copenhagen

45:I. Overview of Danish Tax System and Administration

A. Income Subject to Danish Taxation

1. Income Derived by Danish-Based Entities from Transactions Involving Foreign Activities or Payments

2. Income Derived by Foreign-Based Entities from Transactions Involving Danish Activities or Payments

3. Joint Taxation

a. Definitions

b. Domestic Joint Taxation

c. International Joint Taxation

B. Assessment of Income Tax

C. Audit Procedures

D. Administrative Appeals of Disputed Audit Findings

45:II. Basic Danish Transfer Pricing Rules

A. Transactions Subject to Rules

1. Basic Conditions Applying to Danish and Foreign Companies

2. Special Reporting Requirements Applying to Danish and Foreign Companies

3. Case Law

B. Transfer Pricing Standards

1. Statutes

a. Tax Assessment Act § 2

b. Corporate Tax Act §12

c. Corporate Tax Act §11

d. Corporate Tax Act §11A

e. Corporate Tax Act § § 11B and 11C

f. Tax Assessment Act § § 5G and 5F

2. Administrative Interpretations and Practice — Influence of OECD Standards

a. The Comparable Uncontrolled Price Method

b. The Resale Price Method

c. The Cost Plus Method

d. The Profit Split Method

e. The Transactional Net Margin Basis Method

3. Defenses to Transfer Price Adjustments

4. Judicial Decisions

C. Treatment of Secondary Adjustments

45:III. Transfer-Pricing-Related Reporting and Documentation Requirements

A. Denmark's Reporting and Documentation Requirements

B. Coordination with U.S. Documentation Requirements

45:IV. Transfer Pricing Penalties, Interest on Additional Income Taxes Due, and Tax Amnesty

A. Penalties

B. Interest

C. Tax Amnesty

45:V. Dealing with the Danish Tax Authority on Transfer Pricing Issues

A. Advance Rulings

1. Assessment Board and Appeal to the Tax Court and Ordinary Courts

2. Conditions that Must Be Satisfied for a Ruling

B. Danish Government Participation in U.S. Advance Pricing Agreement Process

C. Transfer Pricing Audits

D. Refund Claims Following U.S.-Initiated Allocations of Income from Danish Entities to U.S. Taxpayers

45:VI. Practical Aspects of the Competent Authority Process

A. Mutual Agreement Article 25 of the OECD Model Convention

B. EU Arbitration Convention

45:VII. Information Disclosure

A. The Act on Public Administration

B. Secrecy Provisions Applicable to the Tax Administration

45:VIII. Coordination of Transfer Prices with Danish Customs Declarations

Introductory Material

A. The Transaction Value of Identical Goods

B. Transaction Value for Similar Goods

C. The Resale Price

D. The Computed Value Method

E. Reasonable Methods

Working Papers

Working Papers

Table of Worksheets


Worksheet 1 “Canada: Transfer Pricing in the Absence of Comparable Market Prices,” Cahiers de Droit Fiscal International, Vol. LXXVIIa, p. 323 (International Fiscal Association, Subject I, Cancun, 1992)*

Worksheet 2 Resolution: “Transfer Pricing in the Absence of Comparable Market Prices,” (International Fiscal Association, Subject I, Cancun, The 46th IFA Congress, 1992)

Worksheet 3 “Canada: An Offshore Transshipment Company Case: Indalex v. The Queen,” 1988 International Bureau of Fiscal Documentation — BULLETIN, p. 202 (May 1988)

Worksheet 4 “Canada: Interest–Free Loans and Intercompany Pricing,” 1 Int'l Transfer Pricing J., No. 1, p. 34 (Oct. 1993)

Worksheet 5 Department of Finance — Immediate Release, 94–003, “Transfer Pricing Rules and Guidelines Clarified” (Ottawa, January 7, 1994)

Worksheet 6 The Revenue Canada assessor guidelines, “Intercompany Pricing Guidelines” Revenue Canada No. 14(53)(0)

Worksheet 7 “Canada: Interaction Between Sale of Goods and Use of Trade-Marks Under Cross-Border Group Distributorships' Agreements,” 1 Int'l Transfer Pricing J., No. 3 (April 1994)

Worksheet 8 Interpretation Bulletin No. IT-303, “Know-how and Similar Payments to Non-Residents,” April 6, 1976, as amended by Special Release September 19, 1985

Worksheet 41 Danish Forms








EU Regulations