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This will interest companies in every country that have, or will be, restructuring their business. |
| Trends in Restructuring Businesses |
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The Canada Revenue Agency continues to focus on companies that, after a series of transactions, restructure their business to reduce the income taxes paid in Canada on a go-forward basis.
The U.S. and other tax authorities are also concerned. This helps explain why the OECD - the international model on taxation used by most countries including Canada - recently published a Discussion Draft on the Transfer Pricing Aspects of Business Restructuring.
The trend is worrisome, since there has been a steady stream of U.S. tax court cases scrutinizing the restructuring of businesses that find the taxpayer understated the valuation and transfer price of intangibles by many millions of dollars. We are starting to learn about Canadian companies with the same or similar strategies, issues and exposure. |
| Key Concerns |
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The OECD Discussion Draft poses a number of key issues:
- Has the taxpayer sold a business segment or asset at the time of the restructuring?
- How did the taxpayer's business change following the restructuring?
- What are the inter-company transactions following the restructuring?
- Examples of when the tax authority could dispute a transaction, its value, or the entire business restructuring.
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| Important Steps |
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This would be a good time to review the details of any business restructuring that your company is considering, or has undergone in recent years, to ensure it will stand-up to the scrutiny of your next audit. Here are a few suggestions:
- Identify the parties to the transaction and gather all of the relevant details.
- Draft a detailed statement of facts that explains and analyzes the "business purpose" and impact of the restructuring.
- Identify the business segment or assets transferred at the time of the restructuring, and determine its "fair market value" in accordance with valuation principles.
- Identify the inter-company transactions after the restructuring, and determine their "arm's length price" in accordance with transfer pricing principles.
- Involve professional advisors as needed.
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| Transfer Pricing Services |
Please conta ct MDW Consulting Inc. if you have questions about this or other transfer pricing issues that concern you. |
