Client

A Company with headquarters in Portugal manufactured specialty products which were distributed by their Canadian subsidiary company throughout North America.

Business Challenge

The Canadian subsidiary received a letter from the Canada Revenue Agency (CRA) requesting transfer pricing documentation within three months.  If the documentation is not provided within three months the potential for penalties increases significantly. The Company required assistance in preparing transfer pricing documentation for the three years under audit within the three months. The Company has never documented their transfer pricing policy, nor have they filed any T106 disclosure forms to the CRA that outline their cross-border transactions.  The Canadian subsidiary also experienced operating losses in two of the three years under audit. The client was aware that the CRA often reassess Canadian distributors of goods manufactured by non-Canadian related companies.

Solution

Ceteris’ team began working right away with the Company to review their financials, business functions and cross-border transactions. Following in-depth research and analysis, Ceteris determined that the Comparable Uncontrolled Price Method (CUP) was the most appropriate transfer pricing method. Also, alternative transfer pricing methods may not have reasonably explained the losses. The application of the CUP method required a detailed analysis and explanation of many factors that affected product pricing, including changes in price for raw materials, exchange rate fluctuations and inflation. Within three weeks, Ceteris presented the Company with a complex economic analysis that addressed key industry and market factors and the impact on the Canadian subsidiary.  A week later, draft reports for each of the three years were issued for review. One week following, the three final reports were sent to the Company.

Results

With Ceteris’ help, the Company was able to assemble transfer pricing documentation for each of the three years under audit within a five week timeframe.  The documentation was reviewed by the CRA and accepted with no reassessment.