TPM-16 Role of Multiple Year Data in Transfer Pricing Analyses Has Recently Been Released

As indicated by the Canada Revenue Agency (CRA), “the purpose of this memorandum is to provide guidance and direction on the use of multiple year data in determining the arm’s length price in transfer pricing cases.”

TPM-16 Role of Multiple Year Data in Transfer Pricing Analyses basically provides “guidance” on paragraph 51 of Information Circular IC 87-2R International Transfer Pricing.

TPM-16 establishes a clear distinction between the use of multiple year data to account for the degree of comparability of the economic characteristics of a transaction and its use to identify an arm’s length price or range.

TPM-16 somewhat brings into line the administrative policy of the CRA pertaining to the use of multiple year data with the guidance found in Chapter 3 of the OECD Transfer Pricing Guidelines.

The update provided by TPM-16 is a welcomed addition to TPM-14 2010 Update of the OECD Transfer Pricing Guidelines released in October 2012 which simply stated at the time that “the CRA endorses the application of the arm’s length principle and the 2010 version of the Guidelines for the administration of the Income Tax Act regarding transfer pricing matters.”

However, paragraph 9 of TPM-16 repeats that “the determination of arm’s length prices used in related party transactions for Canadian taxpayers should be established for each individual tax year using the results obtained from comparable transactions in the relevant tax year.”

As such, the CRA maintains (as also stated in paragraph 20) the long-standing position that “since comparability cannot be expressed in numbers, it is not possible to apply a statistical tool to arm’s length data to improve the comparability of the underlying transactions or to improve our understanding of the comparability.”

Paragraph 22 of TPM-16 specifies that “the proper use of multiple year data and the application of statistical tools are different issues.”

According to the CRA interpretation of the term “data” in paragraph 3.75-79 of the OECD Transfer Pricing Guidelines, multiple year data is meant to be “more than the observed financial outcomes as reflected in the income statements or selected profit level indicators. The data to be used include:

• information relating to the transactions being reviewed;
• information from companies engaged in potentially comparable transactions;
• information showing how the transactions may have evolved over time;
• information demonstrating how unrelated parties involved in similar transactions interact in the industry;
• information on the factors that arm’s length parties would take into account in conducting their transactions; and
• information on the impact of changes or movements in the industry and the wider economy on the results of the transactions.”

From this interpretation, the CRA sets once again a clear distinction between the use of multiple year data and the use of statistical tools.

According to paragraph 27 of TPM-16, the OECD Transfer Pricing Guidelines do not “suggest or imply that averages or other statistical tools should be used to improve a comparability analysis”.

The conceptual rift between the CRA administrative policy and the guidance found in section 1.482(1)e) CFR therefore remains unchanged.

If anything, the gap between the CRA and the IRS on that matter is exacerbated by the babbling found in appendix A of TPM-16 on the “distinction” between “descriptive statistical tools” and “inferential statistical tools”.

For example, paragraph A.5 of TPM-16 explains:

“[…] transfer pricing studies frequently reject potential comparable transactions on the basis that they are outliers. Indeed, the use of inter-quartile ranges [footnote omitted] is based on the assumption that the comparable transactions, whose observed financial outcomes are outside this range, are not comparable, simply on the basis of these observed outcomes rather than any consideration of the other economic characteristics of the transactions. Again, it is imperative to note that such uses of statistical tools do not measure the comparability of transactions, simply the outcomes of those transactions. Therefore, rejection of data on the basis of statistical analysis alone is not appropriate.”

That statement, we would contend, illustrates the inability of the CRA to properly reconcile the practical realities of transfer pricing with its conceptual limitations, especially in the context of a transfer pricing audit or litigation.

If nothing else, the ever-increasing volatility of financial and commercial markets all around the world should suffice to indicate that “statistical outliers”, as they are often called in a given transfer pricing arm’s length range, should indeed be removed from the actual arm’s length range for transfer pricing purposes.

For more on the TPM series, visit DRTP Resources page on Canada available here.

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Senior Partner, DRTP Consulting Inc.
514-742-8086; robertrobillard “at” drtp.ca
www.drtp.ca

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