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GE Capital Canada: Transfer Pricing Appeal Dismissed
On 16 November 2010, the Federal Court of Canada heard the Crown's appeal from a decision by Hogan J. of the Tax Court of Canada. At the trial level, the TCC found in favour of General Electric Capital Canada Inc. regarding the payment of guarantee fees to its parent, General Electric Capital Corporation, for guaranteeing GEC's debt to third parties. GEC paid guarantee fees of over $135 million during the tax years of 1996 through to 2000. Taxand Canada highlights one of Canada's most significant cases to date regarding guarantee fees, transfer pricing and the arm's length principle.
The FCA upheld the TCC's ruling by agreeing to uphold the arm's length principle and the concept of implicit support, and set the price of the transaction (the Guarantee) between GEC and GEUS at a price that two independent parties would have agreed to. By reaching this conclusion, the FCA has instilled and bolstered the fundamental principles of transfer pricing. At the very heart of transfer pricing is the notion that intercompany prices between related parties be set as if the parties were independent of one another. This principle is enshrined in the OECD guidelines on transfer pricing, which the CRA generally adheres to. The CRA adjustment that led GEC to court is troubling on a number of levels, especially given the fact that certain transfer pricing principles, namely the idea that prices be set to represent arm's length standards, were ignored by the CRA.
The CRA's position is unfortunately another example of where the Agency did not follow its own principles or past decisions, and decided to take a tough stance based on the pure quantum of the adjustment. The CRA must be more consistent in the manner in which they approach transfer pricing, particularly in respect to guarantee fees, considering it has accepted guarantee fees in the past on both an inbound and outbound basis. It is important to note that the size of the fee should not matter, as long as such fees meet the commercial and economic realities of the given transaction. In the final analysis, any fee negotiated should be based on sound economic theory, and principles that meet the economic reality of the transaction. The FCA's ruling confirms these sound transfer pricing principles.
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