Canadian APAs still attractive for US Automakers

October 29 2015

The Canada Revenue Authority (CRA) has just released its 2014-2015 APA program report (covering the 12 months to 31st March 2015). The report provides statistics in respect of all APA cases managed during the period. For the full report, see:

http://www.cra-arc.gc.ca/tx/nnrsdnts/cmp/Final_2014_15_APA_report_E.pdf

Key points summary:

28 applicants to the program this past year (measured by number of pre-file meetings conducted);

Year opened with inventory of 110 active cases;

22 new cases accepted into the program during the year;

31 APAs completed;

6 cases withdrawn, one case was unresolved (i.e. closing inventory of 94);

93% of all cases for bilateral or multilateral APAs (only 7% unilateral);

Average time to conclude a bilateral APA was 48.4 months;

APAs for tangible property constituted over one-half all those in process (56%);

APAs for intangible property, intra-group services and financing represented 22%, 21% and 1% of cases, respectively;

TNMM was the most frequently employed transfer pricing methodology (62% of all APAs in progress, followed by Profit Split 13%, CUP 12%, Cost+ 11%, and Resale Minus 3%);

Majority of APAs involve USA (61% of those in process) and over 50% involve a company based in Ontario;

Automobile/Transport Equipment industry accounts for largest share of APAs in process (18%) followed by Chemical & Allied industry (11%).

Observations:

APAs continue to be attractive for certain taxpayers in certain situations. The data reported by the CRA tends to confirm the historic trend for auto manufacturers [1], chemical companies, or other tax payers with large intra-group flows of tangible goods to be particularly attracted to APAs given the tax certainly they offer. Whether this demand stems from particular characteristics of these industries/companies or simply because these taxpayers tend to be audited more frequently [2] is unclear.

[1] Since Chrysler, Ford, GM, Honda, and Toyota run 12 plants in Ontario (making it the only province or state in North America with five OEMs), you don’t need to be Hercule Poirot to guess who may be currently involved in an APA discussion with the CRA.

[2] APAs are often concluded on the back of an audit and tax inspectors (in our experience) like auditing manufacturing companies where business models are often easier to understand/challenge than say financial services companies or technology companies.