Reminder: File transfer pricing adjustments early
A reminder to file transfer pricing adjustments as soon as possible after your fiscal year-end.
What are transfer pricing adjustments?
If the Canada Revenue Agency (CRA) and the Canadian Border Services Agency (CBSA) were rivers, transfer pricing adjustments would be found where these two rivers meet.
In other words, transfer pricing adjustments live at the intersection between CRA and CBSA. Through these adjustments, CRA is trying to maximize income tax payable by your company (fairly, and by using the rules in place) while CBSA is trying to maximize duty paid on the goods being imported. In doing so, CBSA seeks to ensure that the value of the goods being imported reflects the final price paid or payable; often considered the total cost of goods sold plus profit.
To be clear: transfer pricing adjustments reflect the value of the goods being imported and are not a tax on imports. (For more about customs and import taxes, read here.)
Why do you need to file a transfer pricing adjustment?
When related party corporations undergo a transfer pricing study for income tax purposes, they often find themselves booking a transfer pricing adjustment for sales between related parties.
For example, your related vendor transfers goods to you (the Canadian importer) at "cost", then when your tax accountant performs a transfer pricing study at year-end, you learn that the "market value" of your goods is substantially higher. Since income tax is payable on the total profit earned by the Canadian entity/ importer, by increasing your cost to acquire those goods, your profit margin is lowered (i.e. your tax base is lowered.) CBSA will then want you to disclose the increased cost since the customs value of imported goods is based on the total price paid or payable. CBSA will anticipate additional payment of duties (if applicable), GST and interest on the increased cost.
When this occurs for cross-border related party corporation sales, the party acting as the importer in Canada should also adjust their import customs declarations, as the imported goods will have been over or undervalued at the time of shipping.
Everything you need to file
When it comes time to file transfer pricing adjustments, keep in mind it will involve the following:
- Adjustments against all import transactions that may have been impacted by the original valuation either by
- An application with CBSA requesting permission to file a blanket claim and/or a voluntary disclosure, or
- Any individual claims against all transactions
File early to avoid penalties
With transfer pricing adjustments, filing on time is optimal - especially if you want to avoid penalties.
It is important to remember that as an importer, you only have 90 days after your fiscal year-end total adjustment is known to file any transfer pricing adjustments without incurring penalties. This is especially important if the adjustment represents an increase in the value of the imported goods for dutiable or non-dutiable goods.
All is not lost if you do not file on time, however. If you do not file in a timely manner, but still choose to file, you can file a voluntary disclosure after the 90-day period has expired, the first time only.
Filing is a legislative requirement
One more important note: Any adjustments, regardless of whether they result in money owing to CBSA or no money owing to CBSA, are both required by legislation.
This means that choosing not to file an adjustment to the customs import transactions at all could leave you facing significant penalties, including being audited by CBSA.
However, downward price adjustments that may result in duty refunds to the importer can also be filed - and who would not want the refunds?
Best practices for filing transfer price adjustments
If you're wondering what to do next, Cole's consulting team has you covered. Here are the best next steps to take when it comes to filing these adjustments:
- Engage a service provider who commonly assists clients with filing adjustments to CBSA for transfer pricing
- Time any CBSA adjustment requests with the finalizing of your income tax adjustment
- Inform your customs consultant about the finality of these adjustments
You can reduce penalties/ fees/ audits, or avoid them in the first place. We can help with both. Connect with our team of consulting professionals today.
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