Should a company have a transfer pricing agreement?

Volume No. 14-05

‘Transfer pricing agreement’ is sometimes the way a company owner or manager will describe the document that is needed to prove a bona fide transaction and arm’s length transaction terms to a tax authority. The term ‘agreement’ is often easily substituted for the term ‘documentation’ in conversation. The term ‘documentation’ means something different to tax practitioners in a transfer pricing context, and is synonymous with the requirements of paragraphs 247(4)(a) and (b) of the Act, Part 7 of IC 87-2R and TPM 09 posted on the CRA website (not to mention other countries’ transfer pricing documentation requirements).

Recent developments suggest that an inter-company agreement and documentation are both important parts of explaining and supporting a transfer pricing tax position on audit.

Perhaps the best reason to have an agreement in place is that the CRA and other tax authorities routinely ask for agreements in audit queries. While tax authorities will often state that related-party agreements lack credibility due to the relationship of control between the contracting parties, an dated and signed agreement often has a the effect of reassuring an auditor of the timely exercise of forethought, provides a clear expression of intent on the part of the company, and is generally suggestive of good records and record-keeping procedures.

Several recent transfer pricing decisions from the Tax Court of Canada have relied on the analysis of the terms of intercompany agreements against arm’s length comparables. We discussed an example from the McKesson decision in Non Arm’s Length News No. 14.03.

Written agreements tend to demonstrate adherence of transaction terms to commercial norms, if only in their legal form. Even though a related-party transaction often has no direct market analogue, being able to describe the terms of a related-party transaction in the familiar form of an agreement supports the notion that the related-party transaction is not patently unreasonable.

An inter-company agreement sets out the form of a transaction and the obligations of the parties. Support for a future argument against transaction re-characterization by a tax authority can often be found in an intercompany agreement. As a starting point, the agreement sets out the inputs for a transactional comparability analysis. A well drafted agreement contains clauses that mirror the list of comparability factors found in most country tax law and administrative guidance.

As is the case with any agreement governing a complex transaction, an inter-company agreement should be drafted or reviewed by a lawyer. Inter-company agreements, while neither substitutes for the detailed information contained in transfer pricing documentation nor required by law in many instances, are another tool that companies should use to manage the transfer pricing aspects of international related-party transactions.


THE NON-ARM’S LENGTH NEWS is provided as a free service to clients and friends of Cadesky and Associates LLP. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing a tax planning arrangement or taking an uncertain tax filing position. Cadesky and Associates LLP cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.