Is the CUP half empty?

Volume No. 16-01

In its recent decision in Marzen Artistic Aluminum Ltd. [2016 FCA 34], the Federal Court of Appeal upheld the Tax Court’s use of a contract between two independent parties as a Comparable Uncontrolled Price.[1]  One of those independent parties was a participant in the related-party transaction whose pricing was at issue, and the other was a management company.  Is Marzen Aluminum the new exception in the rationale for the use of the CUP method, or the new rule (in Canada, at least)?

Suppose Canadian corporation A is related to non-resident corporation B, and A contracts with B to perform a single type of service.  B then contracts with C, an independent non-resident individual or corporation to provide substantially all the same types of services that B is obligated to provide to A.  B can meet its obligation to A by hiring no further resources other than C.

Should the price charged by C be used to set the transfer price charged by B?  Though both the Tax Court and the Federal Court suggest this approach makes sense, the facts of Marzen Aluminum were unique, meaning this approach might not always apply.  Comparability standards set out in the OECD Transfer Pricing Guidelines require that the correct answer to this question should address both the facts of the transaction and the economic circumstances of the transacting parties.

The utility of the Marzen Aluminum decisions is limited for two main reasons.  First, as different services were rendered by B and C involving fundamentally different risks, any comparability analysis is arguably of limited future value.  Second, the ranking of transfer pricing methodologies that once held the CUP method to be the most reliable has been replaced by the more objective ‘most appropriate method’ approach introduced in the 2010 version of the OECD Guidelines.  The standard of comparability required to use the CUP reliably has increased between 1995 and 2010.

Marzen Aluminum may suggest that pricing a related-party transaction using the CUP method now leads to greater uncertainty, or that the CRA can now successfully rely on a bygone standard.  If accepted comparability standards and analytical rigour are employed, the CUP will remain half-full.  Using another transfer pricing method?  It may runneth over the CUP.

[1] CUP – one of the five transfer pricing methods accepted by the Canada Revenue Agency and other tax authorities


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