We just sort of.... I have never felt so welcomed by the Conservatives. It's good to be back.
Thank you, Mr. Hsu, Mr. Lamoureux, and Mr. McCallum.
On clause 10, dealing with transfer pricing, secondary adjustments, and tax avoidance to partnerships, here are some explanatory notes as background.
Paragraph 53(2)(c) of the act provides for deductions to the adjusted cost base of the taxpayer's partnership interest. Proposed item 53(2)(c)(viii) is introduced consequential on the introduction of the provisions relating to transfer pricing secondary adjustments found in subsections 247(2) to 247(5). These subsections apply only to corporations, and as a result, proposed item 53(2)(c)(xiii) is only relevant for corporate partners.
On this issue, I'd like to read from an article entitled “Transfer Pricing—The Basics from a Canadian Perspective”, by Jamal Hejazi.
He says that transfer pricing investigates the price that multinational firms charge a related party for goods, services and intangibles, and that
Related party transactions account for a significant part of global trade with approximately 80% of international trade between related parties and the remaining 20% of international trade between unrelated, multinational companies.
According to this article, transfer pricing encompasses the investigation of the price associated with intercompany or intracompany transactions. While the typical example in transfer pricing textbooks involves the sale of manufactured goods to a related distributor, it also includes the price that one related party charges another for the provision of services or the use of intangible property. Transfer pricing attempts to determine the appropriate intercompany price between related parties by asking the following question: if the related parties to the transaction were at arm's length, what would they pay for the goods, services, or intangibles?
According to International Taxation in Canada, second edition, from which I will now read, with some paraphrasing, transfer pricing is generally viewed as the most difficult and fundamental problem in international taxation. It affects transactions between members of multinational corporate groups that dominate cross-border trade and investment. It concerns the heart of international taxation and the allocation of the international income tax base among countries, and it presents tax planning opportunities and tax compliance headaches for multinational corporations. For these reasons, transfer pricing has become an important issue for taxpayers and tax authorities, as it can play a major role in reallocating corporate profits from relatively high-tax countries to relatively low-tax countries, or in some cases, almost nil tax countries.
At a technical level, transfer pricing refers to the situation where multinational firms with related parties in more than one country transfer goods, services, or capital among these parties, so these transfer prices are the prices typically set for these transactions and related parties, including both separate legal entities like corporations and unincorporated related parties within the same legal entity. For example, in some cases, you may have a branch or a permanent establishment.
The transfer price received or charged for goods, services, or financing will be included in the income of the supplier, and the corresponding cost or payment will be deducted from the profits of the related parties. The price is thus crucial to the allocation of the profit and from the transaction to the parties. Tax regimes recognize that distortions of the reported income of related corporations may occur or, perhaps just as accurately, doubt that those distortions would not occur, because their activities are integrated in one manner or another as the result of common control and its functional manifestations.
In effect, Mr. Chair, these multinationals or global businesses tend to operate as singular businesses in economic and even financial respects, even though the compartmentalization of their activities and entities dictates that the law and financial accounting treat them as separate—