
Valuation Advisory
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Jill Weise, Managing Director and Head of Duff & Phelps’ Global Transfer Pricing practice, and Matt Billings, Managing Director and leader of the firm’s Canadian transfer pricing activities, were recently featured in a Law360 article titled, “Canada's Tax Authority Could Bypass Reallocation Barriers.” The Federal Court of Appeal recently upheld a September 2018 decision by the Tax Court of Canada in a tax dispute between the Canada Revenue Agency (CRA) and Cameco Corp. centered around the company’s use of its Swiss subsidiary and the transfer pricing methodology used for certain intercompany uranium sales and purchasing agreements. The June 26, 2020 ruling in Cameco’s favor will likely deter the CRA from recharacterizing intercompany transactions to pull a foreign subsidiary's income into Canada.
Matt noted that Cameco's case was the first judicial test of Canada's recharacterization rule. Relatively few Canadian transfer pricing disputes have reached the courts, and a majority have been framed in the context of repricing existing transactions, as opposed to recharacterizations. “I'm not sure the Cameco decision raised the bar, but it's been clarified that it is a really high bar you have to reach to reconstruct or recharacterize a transaction,” he said.
Meanwhile, U.S. companies may find themselves in similar situations with the Internal Revenue Service (IRS). According to Jill, there's been controversy over whether an adjustment by the agency should be considered a recharacterization. For example, in some cases, the IRS has used the comparable profits method to price a transaction when the company relied on comparable uncontrolled prices.
Jill noted that there are arguments about whether the comparables used have the same risk profiles as the tested party. If they're different, "is that a recharacterization or just a disagreement over the best method?" she asked.
Law360 subscribers can access the full article here.
Valuation and consulting for financial reporting, federal, state and local tax, investment and risk management purposes.
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