Key Issues in Transfer Pricing and Tax Disputes Between the U.S. and Canada

January 16, 2025

The U.S.-Canada tax relationship is complex and constantly evolving, particularly in Transfer Pricing and tax controversies. This article addresses the key points of this dynamic and how companies can prepare to face challenges and take advantage of opportunities. 

Recent Changes in Transfer Pricing

In recent years, both countries have significantly adjusted their Transfer Pricing rules. The United States has adopted a stricter review for intercompany transactions. Canada has been increasing penalties from 40% to 70% over the years leading up to 2023. As enforcement intensifies, companies should anticipate and prepare for increased scrutiny of their Transfer Pricing methodologies and economic substance practices. 

Tax Controversies: An Unavoidable Reality

Tax disputes between the two countries have increased, primarily due to the growing number of intercompany transactions worldwide. Some of the most common issues in disputes include: 

  1. Adjustments in profit margins. 
  2. Determination of the market value of goods and services. 
  3. Questions regarding the methods applied in intercompany transactions. 
  4. Erosion of the local tax base. 

A solid strategy for dealing with potential disputes and exploring resolution mechanisms such as arbitration or mutual agreement procedures (MAP) is essential. 

Preparing for These Challenges

In order to avoid unnecessary risks and comply with regulations: 

  • Review and update your Transfer Pricing documentation regularly. 
  • Perform internal analysis to ensure that margins meet market standards. 
  • Consider obtaining expert advice for regulatory concerns. 

Conclusion

Proper management of Transfer Pricing and tax controversies is essential for companies operating between the United States and Canada. Awareness of regulatory amendments and proactive strategies can distinguish between success and potential penalties. 

Call to action

At TPC Group, we are experts in assisting you in navigating Transfer Pricing challenges. Contact us today to ensure your company is compliant and future-proof. 

Source: Morgan Lewis