Small and medium-sized businesses need to do a better job of structuring cross-border sales.
According to an Ernst & Young (E&Y) report released Friday, transfer pricing transactions between Canadian companies and their related parties outside of Canada are worth more than $1.5 trillion a year.
This while bodies such as the Canadian Revenue Agency (CRA) and other global tax authorities scramble to raise tax revenue to battle deficits.
But even though Canada is ranked the fifth most vigilant country when it comes to transfer pricing audit enforcement, only 22% of Canadian parent companies prepare the correct documentation by the legislated due date.
Add to that the fact the CRA performs some 2,000 transfer pricing audits a year, with two thirds of its auditors focused on small and medium-sized enterprises that have sales below $250 million per year.
"With this much trade moving between related companies, it’s easy to understand why transfer pricing has remained the number one issue for multinational companies for more than a decade," commented Greg Noble, a partner with E&Y’s national transfer pricing practice.
The report also found that 74% of parent companies and 76% of their subsidiaries think transfer pricing will be a critical or very important issue over the next two years.
Noble said businesses should ensure they have all their documentation in order for any kind of cross-border transactions.
"The way a lot of taxpayers think is the Canadian and U.S. tax rates are basically the same so if I net them both out I can’t be out that much at the end of the day," Noble said in an interview. "But I think what they forget about is the friction costs of going through all the dispute resolution to get that offsetting adjustment on the other side, which takes a lot of time and money."
"And they forget about all the other things like penalty and late filing interests, which can be quite expensive and punitive for a small company."