Can an efficient transfer pricing strategy be developed under Canadian Law?

Overview

This article considers whether, in the Canada-U.S. context, an efficient transfer pricing strategy can be developed under Canadian law and, if so, how. This gives rise at least to the following questions:

1. What are the objectives of an efficient transfer pricing strategy? For purposes of this discussion, the objectives are twofold: First, to achieve overall reduction of group taxation, and second, to do so with a minimum risk of double taxation.

2. Is it possible to develop a strategy that will achieve these objectives and, if so, what are the characteristics or components of such strategy?

3. What is the likelihood that any such strategy will, in fact, be challenged by Revenue Canada or the Internal Revenue Service?

4. If challenged, what is the likelihood that the challenge will be sustained by Canadian or U.S. courts?

5. If challenged, what is the likelihood that - rather than adjudication by a court - the matter will be successfully dealt with by competent authority?

6. Apart from competent authority and court proceedings, what is the prognosis for either advance pricing agreements or alternate dispute resolution (arbitration, etc.

7. What are the effects of the transfer pricing penalty rules of section 6662 of the U.S. Internal Revenue Code(1)(**) or certain U.S. initiatives concerning the replacement of the arm's-length standard with formulary methods?

The discussion focuses on the Canadian side of these issues but also tentatively touches on the U.S. aspects, with a view to arriving at some rough consensus whether it is possible to have "efficient transfer pricing strategies."

I. Background Factors

A. The Choice of Law - The Arm's-Length Principle

Like the United States and most other countries, Canada has chosen a transfer pricing structure based on the arm's-length principle rather than a formulary-apportionment approach. This is reflected in section 69(2) of the Canadian Income Tax Act,(2) which requires - with respect to inbound transactions (i.e., an intercompany transfer of property, intangible rights, or services to a Canadian member of a multinational group) - that the price not exceed that "which would have been reasonable had the parties been dealing at arm's-length."(3) In the case of outbound transactions, section 69(3) requires that the Canadian taxpayer report an amount that is no less than that which, again, would have been "reasonable" had the parties been dealing at arm's-length.(4)

There are no statutory or regulatory rules to apply the principles of section 69. The few court decisions on transfer pricing matters in Canada suggest that arm's-length prices are to be determined in accordance with the generally accepted international norms advocated by the Organisation for Economic Co-operation and Development (OECD). In a nonbinding Information Circular, Revenue Canada has expressed the view that taxpayers should follow the guidelines set out by the OECD in 1979 and 1984(5).

Because the OECD guidelines were essentially a reproduction of the 1968 U.S. Treasury Regulations under section 482 of the U.S. Internal Revenue Code, the commonly held view is that Canadian transfer pricing law - as in most other countries - follows the 1968 U.S. methodologies (i.e., comparable uncontrolled price ("CUP"), resale method, cost-plus method, or "other"). The Canadian government is involved in the activities of the OECD and presumably shares the views set out in the draft revised OECD guidelines issued in July 1994 and March 1995.(6)

B. Canadian Court Approach to the Arm's-length Principle

Even before the development of formal methods of applying the arm's-length principle, a Canadian court recognized the substantial difficulties in applying a legal standard based on a facts-and-circumstances test. In J. Hofert Ltd. v. M.N.R.,(7) the court adopted a comparables approach as the main, or perhaps only, objective way of determining compliance with the arm's-length principle. It thus formulates rational principles on which to determine whether controlled and uncontrolled transactions are sufficiently comparable and identifies the essential facts-and-circumstances inquiry required where CUPS do not govern.

Hofert reflected the fact that the arm's-length principle cannot be reduced to any preconceived mechanistic formula or methodology, but inevitably comprises a best estimate (guestimate?) of what the parties might have done had they been unrelated.

C. Current Controversies in Transfer Pricing

The current controversies have arisen from U.S. concerns that taxpayers take advantage of the uncertain and amorphous nature of the arm's-length principle to deliberately manipulate transfer prices in order to reduce taxes otherwise payable to the United States.(8) The United States has been basically unsuccessful, however, in legislating the arm's-length principle. The reason is simple. Except in the rare case of mutually agreed-to comparables, there is no objective basis upon which an arm's-length transfer price can be determined.(9) Instead, in the absence of CUPs, any methodology employed to arrive at an appropriate arm's-length price produces, at best, an estimate.

As a capital importing country with a preponderance of 'inbound' intercompany transactions, Canada has sought to offset the risks (to the fisc) raised by the subjectivity in pricing under the arm's-length principle through increased efficiency in audit and the adoption of such U.S.-spawned techniques as legislating foreign document procurement provisions(10) and requiring annual reporting of intercompany transactions on a form akin to U.S. Form 5472.(11) As discussed below, Revenue Canada has vigorously responded to relatively blatant tax-motivated pricing arrangements (generally involving offshore transshipment companies), resulting in litigation in which the government has had mixed success and, belatedly, specific anti-avoidance legislation.

No attempt has been made either to "legislate" new approaches to applying the arm's-length principle (correctly so, given the essential impossibility of legislating any legal notion based on a facts-and-circumstances determination(12)) or to bring an in terrorem factor to the proceedings through Draconian-like penalty provisions such as section 6662 of the U.S. Internal Revenue Code.(13)

In early 1994, in an unusual joint statement, the Department of Finance and Revenue Canada issued a warning to Canadian members of multinational groups involving units in the United States that periodic adjustment in respect of licenses of intangibles or the comparable profits method - as set out in the temporary section 482 regulations - are not considered acceptable methods of determining arm's-length prices and their use could lead to conflict with Revenue Canada.(14) The Canadian government has not formally commented on the final U.S. section 482 regulations, although the apparent downgrade of CPM - as well as the additional exceptions to periodic adjustment - may provide some insight into what the final regulations will look like.

Finally, the initiative of U.S. Senator Byron Dorgan (and others) to replace the arm's-length principle with a "formulary" methodology has raised alarm in Canada. Further developments in the United States on the `formulary' front (as well as the interrelated effects on the status of the Canada-U.S. Protocol) will be followed closely.

II. What Is an Efficient Transfer Pricing Strategy?(15)

A. Efficiency In Terms of Minimizing Overall Group Taxes

As in any multinational context, reduction of overall group taxes by reference to the effect of transfer prices on the allocation of overall profit between the members of the group will turn on (1) tax rate arbitrage (i.e., in which of the two countries will net effective tax rates be lower on the relevant profit allocated by the transfer price), or (2) available losses that can offset such allocated income and are not otherwise effectively utilizable. From the U.S. perspective, another relevant factor is the use of excess foreign tax credits. In the latter context, the following general propositions can be made:

* Where a Canadian manufacturing company has outbound intercompany transactions to a U.S. subsidiary (i.e., inbound from the U.S. perspective), overall group taxes can be reduced by maximizing intercompany transfer prices and thus minimizing overall group profit. The overall Canadian rate of tax on profits earned by a manufacturing corporation - particularly in respect of an eight-point reduction in the standard Canadian federal corporate tax for manufacturing profits (or those deemed to be manufacturing profits) - should be less than the overall effective rate of U.S. tax (including both the corporate mainstream tax and the withholding tax on dividend distributions to the Canadian parent) on profit realized by the U.S. subsidiary. Or the Canadian parent may have excess losses for tax purposes (perhaps arising from research and development, etc.) that could offset Canadian tax in respect of profits realized from intercompany transactions with the U.S. subsidiary.

* Conversely, for a U.S. company with outbound transactions to a Canadian subsidiary (particularly where the Canadian subsidiary is not manufacturing or does not qualify for the rate reduction), overall Canadian taxes (including the withholding tax on distributions) on profits realized by the Canadian subsidiary may well be greater than that incurred by the U.S. parent on its own profit, including an intercompany transaction. There may also be excess losses in the United States to offset profit from the intercompany transaction; issues involving foreign tax credits may militate toward maximization of profit by the U.S. parent.

* Specific factors such as the province or state involved may reverse the predilections. For example, overall group tax may be reduced by maximizing transfer prices outbound from the United States for a U.S. parent with a Quebec-based subsidiary (where the corporate tax rate is generally six points lower than most provinces).

B. Efficiency in Terms of Avoiding the Risk of Double Taxation

The lower-tax objective may encounter resistance in the country where overall allocation of profit is minimized. Canada has long been concerned about overcharges by U.S. parent companies to Canadian subsidiaries and has developed sensitive antennae to any possibility of tax-motivated, inbound transfer prices. In contrast, the target of the IRS's administration of United States transfer pricing law since the 1980s has been foreign-parent manufacturers selling into the United States through U.S. distributing subsidiaries.

Taxpayer concerns are generally reduced because since 1962 not a single dispute between Revenue Canada and a Canadian subsidiary of a U.S.-owned group has resulted in Canadian court litigation. The disputes are generally resolved through treaty-based competent authority procedures. The difficulty with this approach to avoiding double taxation is the threat that, in light of the recent U.S. transfer pricing initiatives, the competent authorities will fail to resolve issues. More particularly, the joint press release by Revenue Canada and the Department of Finance in January 1994 does not augur well for the continuing efficiency of competent authority. That press release was issued, however, before the release of the final section 482 regulations, which are viewed more favorably by most other governments (except, apparently, Germany). It may remain possible for Canada/U.S. groups to adopt strategies designed to reduce overall group tax without ultimate risk of double taxation.(16) Any such conclusion is subject to (1) the nature and effects of the evolution over the next few years as the `new' rules settle in; (2) the unresolved question whether the U.S. section 6662 penalty will be negotiable in a competent authority resolution; and (3) Senator Dorgan's initiative on the use of formulary methods.

III. What Is Required to Achieve an Efficient Transfer Pricing Strategy?

A. Overview

The basis for establishing an efficient transfer pricing strategy turns on the following questions:

* Is transfer pricing law in Canada and the United States firm and stable?

* Is transfer pricing law in the two countries simply similar or instead basically identical? This question must be divided between "substantive" transfer pricing law and "procedural" transfer pricing law (and related factors such as penalties).

* Is transfer pricing law in each country applied consistently by the tax authorities?

In this regard, it is suggested that the substantive transfer pricing law of the two countries, after issuance of the final section 482 regulations, remains essentially identical. Obviously, however, the procedural rules are quite different. The most significant distinguishing factor is the section 6662 penalties and their effect on the overall question. The very nature of transfer pricing law based on the arm's-length principle is unavoidable subjectivity and potential uncertainty. It cannot be certain that there can, in fact, be consistent application of the law.

B. Stability of Transfer Pricing Law in Canada and the United States

There are apparently only two situations where taxpayers can establish transfer prices that are sufficiently objective enough to be recognized by all as meeting the arm's-length requirement: CUP or the arm's-length bargaining process. In any other case (i.e., where an "objective" basis for establishing arm's-length prices is not present), the development of a transfer price by taxpayers (or an audit of that price by the tax authority) involves an unavoidable degree of subjectivity (i.e., estimating the "correct" price based on the facts-and-circumstances evaluation and determination) that often results in differing determinations and, thus, disputes between the parties.

The United States has struggled mightily since 1986 to eliminate this inherent uncertainty in the arm's-length principle. This effort was doomed to failure from the outset, because you cannot fit a square peg into a round hole. The U.S. tax law writers have finally recognized the limitation; the final section 482 regulations are essentially a retreat to the 1968 regulations, dressed up for the 1990s.

Given the basic relationship between Canadian and U.S. law - and the inherent instability in the arm's-length principle - the basis upon which Canadian and U.S. tax planners may seek to construct an "efficient transfer pricing strategy" is, in fact, not only unstable but continues to be characterized by uncertainty of result and substantial risk of dispute with the two tax authorities (although past disputes have almost always been resolved by competent authority procedures(17)).

The presumption that taxpayers will manipulate transfer prices to lower their overall group taxes has characterized Revenue Canada's approach to U.S.-owned subsidiaries, while the entire thrust of the U.S. government approach since the issuance of the 1992 proposed regulations remains a ubiquitous factor that cannot be avoided in any aggressive attempt to adopt an "efficient transfer price strategy."(18)

Finally, U.S. observers of the Canadian transfer pricing scene should bear in mind that, in Canada, there is very little `official' guidance available. The statutory rule is brief, there are no regulations, and since 1962 there has not been a single transfer pricing case dealing with conventional transactions between a Canadian company and an affiliate in another high-tax jurisdiction. All Canadian jurisprudence since that time has involved essentially tax avoidance - offshore (transshipment company) schemes that distort the discussion and hinder the development of the law relevant to straight business dealings.(19)

In summary, there is a substantial amount of uncertainty concerning bottom-line results when one embarks on developing an "efficient transfer pricing strategy" involving a Canadian member of a multinational - whether or not the United States is involved. Neither the law nor its administration is firm, stable, or predictable. Furthermore, in the Canada/U.S. context, it is obvious that any strategy seeking to maximize a profit shift to Canada and not to the United States (i.e., the Canadian parent with outbound transactions to a U.S. subsidiary) will meet stiff resistance from the U.S. transfer price law apparatus, including the intimidating risk of onerous penalties under U.S. section 6662.

On the other hand, where the "efficient" strategy targets profit shift to the United States (and is not considered to comprise tax fraud or gross negligence), the only downside risk is that the competent authority proceeding will fail to resolve the issue, thus leading to double taxation. (Such a risk is certainly raised by the January 1994 press release of Revenue Canada and the Department of Finance. In a nutshell, there may be two entirely different sets of rules in considering transfer price strategy between Canada and the United States, depending upon the direction in which transactions move and, more particularly, the parties' preference for maximizing income in Canada or in the United States. The reaction of Canada and other foreign governments, however, to either U.S. section 6662 or formulary initiatives could lead to retaliatory measures that level out the playing field.(20)

IV. What Would Be the Effect of Adoption of Formulary Methods?

If the initiative by Senator Dorgan, et al., to require formulary apportionment methods prevails (coupled with his attempt to have coordinating changes to Article IX transfer pricing rules),(21) there will be chaos in transfer pricing determinations between the United States and any other country, including Canada. It would be impossible at this point to intelligently discuss "efficient transfer pricing strategies."

Unless there is a complete turnabout by Canada and other OECD countries, the nature of things to come simply cannot be predicted if the United States goes formulary. There is obviously much uncertainty with respect to the results of transfer price determinations made on the basis of the arm's-length principle, but it seems impossible to link in any predictable and harmonious fashion the United States, or any other country that adopts a formulary apportionment approach, with those retaining the arm's-length principle.

The arm's-length principle is arguably sufficiently flexible and malleable to accommodate and coordinate with a country on a formulary basis. The conceptual clash and the resentment that undoubtedly would arise in other countries, however, raise the spectre of chaos in international transfer pricing. If the United States does not switch, there will be continued uncertainties and potential disputes, with the resolution either being left to competent authority (subject to the applicability of the U.S. section 6662 penalties) or dealt with under several alternative approaches.

V. The Interplay Between Efficient Transfer Pricing Strategies, APAs, and Alternative Dispute Resolution Mechanisms

A. Overview

The twin objectives of transfer price strategies - overall group tax minimization and minimization of the risk of double taxation - should, in concept, be mutually exclusive but, up to now, they have not been. In general, taxpayers have had the luxury of pursuing aggressive transfer pricing strategies without a real bottom-line risk of double taxation, given the successful Canada-U.S. record for resolving disputes under competent authority procedures. The stakes for strategies designed to shift profit from the United States to Canada, however, have changed by reason of U.S. section 6662 and in that context the two objectives may now be mutually exclusive. Canadian companies seeking to shift profit back to Canada may well do so at the risk of substantial double tax in the form of penalties under section 6662.

Furthermore, even where aggressive strategies are not pursued by Canadian-based multinationals with U.S. distributor subsidiaries, the potential uncertainties inherent in seeking to establish a transfer pricing methodology that qualifies the U.S. subsidiary for the reasonable cause exception to section 6662 may put at risk even the simple strategy' of avoiding double tax.

B. APAs

At least in theory, a complete solution to uncertainty exists - by tapping into the new world of advance pricing agreement (APA) procedures, in full force in the United States and recently adopted by Revenue Canada.(22)

Within the protected context of an APA negotiation, taxpayers may seek to negotiate arrangements. Whether or not a lower overall tax liability is achieved will depend upon the facts and circumstances of each particular case and the success in negotiating an advantageous transfer pricing methodology in the APA.

What is the role of APAs for Canada-U.S. groups seeking to maximize income shift to the United States? Given the pre-existing situation - and the lack of a section 6662 penalty in Canada - there will be fewer reasons for seeking an APA. It is quite possible that the continuing state of subjectivity in Canadian transfer pricing law can afford the opportunity to push prices to "the margins" and in a fashion that serves the objectives of the parties without undue risk of penalty or even double taxation.

Any such strategy, however, will require scrutiny of the interrelationship between the Canadian government's January 7, 1994, statement and the emerging Canadian government reactions to the final U.S. section 482 regulations, as well as the positions adopted by the OECD. In the latter context, it is wise to remember that the revised OECD guidelines issued in July 1994 and March 1995 are in draft form and - until a final report is issued - the contours of the relationship between the official OECD position and U.S. rules will not be known. Moreover, the position of the Canadian government is not now known.

Furthermore, the ongoing debate concerning U.S. section 6662 and, in particular, the opposition now being mounted by OECD countries make it impossible to know whether there will be a massive retaliation by other countries (such as Canada) in adopting similar penalties, which would tend to create a level playing field.

A juncture has thus been reached where - notwithstanding the apparent settling of U.S. substantive transfer pricing law and the lack of differences in Canada, the United States, and other OECD countries - there remains unfinished business: either (1) the section 6662 penalty rules will be effectively emasculated by subjecting them to competent authority procedures, or (2) there will be a marked degree of uncertainty, controversy, and perhaps retaliatory legislation in Canada and other countries. In the former case, the potential for efficient transfer pricing strategies may live on, in essentially pre-existing form and context, whereas in the latter case "efficient transfer pricing strategies" will presumably be reduced down to the single objective of avoiding double tax.

In the foregoing context, is is clear that the real risk of double taxation in Canada-U.S. transfer pricing matters arises not from metaphysical differences, if any, between the substantive transfer pricing laws of the two countries nor from the basic manner in which Revenue Canada and the IRS administer those laws, but rather from the singular effect of the one-sided penalty rules in the United States.

Those rules will only have a negative impact on strategies designed to shift profit from the United States to Canada, however, if Canada does not adopt similar rules. It is clear that where the priority is the avoidance of burdensome penalties, even at the sacrifice of minimizing overall group tax, APAs will be the answer.

Finally, if the IRS agrees that the penalties are subject to competent authority adjudication, the situation will revert to the pre-existing situation. Taxpayers seeking the comfort of the absolute elimination of risk of double taxation will seek APAs, but presumably at the cost of undermining the first objective of a transfer pricing strategy, namely, a reduction of overall group taxes.

The manner in which this equation will play out may well be known within the next year or two, but until such time it will be difficult to adopt long-term, efficient transfer pricing strategies involving Canada and the United States - regardless of the configuration of the multinational or its objectives from the overall group tax minimization perspective - unless the "efficiency" targeted is simply avoidance of double tax (including penalties such as section 6662).

C. Alternative Dispute Resolution

Finally, other methods of resolving transfer pricing disputes such as arbitration do not currently offer much assistance, if any, to tax planners in the Canada and U.S. context.(23) The August 31, 1994, Protocol (and the revised version of March 17, 1995) signed between the two countries provides for transfer pricing and other treaty dispute resolution, but not for at least a three-year period.(24)

Notes

(1) Internal Revenue Code of 1986, as amended (the "Code"). (2) Income Tax Act (Canada), R.S.C. 1985, Chap. 1 (5th Supp.), as amended (herein "the Act" or "ITA"). (3) Under Canadian law, if persons are "related" within the specific rules of section 251(2) of the Act (e.g., any two corporations where either one controls the other by reference to the ownership of more than 50 percent of the shares entitled to vote, or both are so controlled by the same party), they are deemed, under section 251(l), not to deal at arm's length. In addition, even if not related, taxpayers may be treated as not dealing at arm's length. For the high mark of this latter approach, see the Supreme Court decision in Swiss Bank, et al. v. M.N.R., 72 DTC 6470. (4) See Nathan Boidman, The Canadian Approach to Offshore International Transactions: Indalex v. The Queen--A Transshipment Case, 39 The Tax Executive 45 (Fall 1986): Nathan Boidman, The Canadian Approach to Offshore International Transactions: An Update, 40 The Tax Executive 383 (Spring 1988); Nathan Boidman, The Section 482 White Paper--A Canadian Perspective, 41 285 (Spring 1989); Nathan Boidman, The Effect of the APA and Other U.S. Transfer-Pricing Initiatives in Canada and Other Countries, 44 The Tax Executive 254 (July-August 1992); and Boidman, infra n. 5. (5) Information Circular 87-2, International Transfer Pricing and Other International Transactions, February 27, 1987 (citing Transfer Pricing and Multinational Enterprises, Report of the OECD Committee on Fiscal Affairs (1979), and Transfer Pricing and Multinational Enterprises-Three Taxation Issues, Report of the OECD Committee on Fiscal Affairs (1984)). See Nathan Boidman, Canada's Administrative Guidelines for Multinational Transactions: Information Circular No. 87-2, 40 The Tax Executive 35 (Fall 1987). (6) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations-OECD Discussion Draft, Report of the OECD Committee on Fiscal Affairs Organisation for Economic Co-Operation and Development, Paris (Part I, July 12 1994, and Part II, Mar. 15, 1995). (7) 62 D.T.C. 50 (T.A.B.). (8) The U.S. concerns are ironic since Canada has long been concerned about this problem, with the United States as the chief perpetrator of the manipulation with respect to its dealings with Canadian subsidiaries of U.S. companies. See, e.g., section 212(1)(a) of the Act (imposing a 25-percent tax on the gross amount of management or administrative fees paid by Canadians to foreign persons). The provision was enacted in 1963 as a response to alleged overcharges by U.S. parent companies to Canadian subsidiaries for management and other head office centralized services. (9) A study by the 1992 Annual Congress of the International Fiscal Association raised the question whether there is a better approach to applying the arm's-length principle. See Transfer Prices in the Absence of Comparable Market Prices, Cahiers de Droit Fiscal International Vol. LXXVIIa (International Fiscal Association, Subject I, Cancun, 1992). The Congress determined (in Resolution 7 of the the study) that the objective aspect of a CUP (namely, that the price has arisen from a bargaining process carried out by unaffiliated persons) can also be manifested in prices established by members of multinational groups through an actual arm's-length bargaining process. In such a case, IFA advocated that the developed prices be accepted as preemptive, irrefutably acceptable transfer prices. IFA's recommendations have been largely ignored, even by the OECD and, even if adopted, would seemingly have limited application. (10) Section 231.6 of the Act. (11) See Form T106 prescribed pursuant to section 233.1 of the Act. (12) The final section 482 regulations issued in 1994 marked an almost total retreat to the essential principles of the 1968 regulations from the radical notions of the White Paper (the BALRM method) and the 1992 proposed regulations (particularly the mandatory nature of the comparable profits method). (13) Canada has not even adopted the U.S. section 6038A approach to ensuring access to foreign information necessary to assess inbound transactions. Note, however, that there are a number of sanctions or penalty provisions that can be used in the case of deliberate (and therefore illegal) transfer price manipulation. The Canadian government had had difficulty in sustaining the burden in a penal initiative, as seen in Redpath Industries Ltd., et al. v. The Queen, 83 D.T.C. 5117 (Quebec Court of Sessions of the Peace) and 84 D.T.C. 6349 (Quebec Superior Court), where the court dismissed a criminal tax fraud charge against a Canadian company for allegedly overpricing the import of raw sugar through a transshipment offshore subsidiary. (14) Department of Finance, Immediate Release No. 94-003, Transfer Pricing Rules and Guidelines Clarified, a Statement by Finance Minister Paul Martin and National Revenue Minister David Anderson (Ottawa, Jan. 7, 1994). (15) The following discussion will be restricted to transactions directly between Canadian and U.S. members of a Canadian or U.S.-based multinational group. (16) For an optimistic prognosis, see Transfer Pricing-Canadian Official Says Potential Problems Remain With U.S. Transfer Pricing Rules, 206 BNA Daily Tax Report G-1 (Oct. 27, 1994). (17 Information Circular 71-17R4, Requests for Competent Authority Consideration under Mutual Agreement Procedures in Income Tax Conventions (May 12, 1995). (18) Furthermore, the May 1995 report by the U.S. General Accounting Office - noting the lower amount of U.S. taxes paid by foreign-based multinationals - will do nothing to reduce pre-existing controversies and U.S. governmental concerns. See GAO Says Most Foreign-Controlled Firms Paid No U.S. Income Taxes During 1987-91, 92 BNA Daily Tax Report G-3 (May 12, 1995). (19) Dominion Bridge Co. Ltd. v. The Queen, 75 D.T.C. 5150 (F.C.T.D. and 77 D.T.C. 5367 (F.C.A.); Hofert, supra; Indalex Limited v. The Queen, 86 D.T.C. 6039 (F.C.T.D.) and 88 D.T.C. 6053 (F.C.A.); Irving Oil Limited v. The Queen, 88 D.T.C. 6138 (F.C.T.D.) and 91 D.T.C. 5106 (F.C.A.), with leave to appeal to the Supreme Court of Canada denied in September 1991; Redpath Industries, supra; and Spur Oil Ltd. v. The Queen, 80 D.T.C. 6105 (F.C.T.D.) and 81 D.T.C. 5168 (F.C.A.). For procedural cases, see Crestbrook Forest Industries Ltd. v. The Queen, 91 D.T.C. 5521 (F.C.T.D.) and 92 D.T.C. 6187 (F.C.A. (concerning the use of industry study by Revenue Canada), 92 D.T.C. 6412 (F.C.T.D.) and 93 D.T.C. 5186 (F.C.A.) (concerning the requirement to provide information). (20) See discussion in OECD Discussion Draft-Part II, supra note 6. (21) See Dorgan Will Try To Delay Vote on Treaties If Treasury Opposes Formula Method, 188 BNA Daily Tax Report G-4 (Sept. 30, 1994) and John Iekel, U.S. Senator Calls For Formulary Apportionment in Some Situations, 9 Tax Notes International (No. 15) 1110 (Oct. 10, 1994), respecting the initiative by Senator Byron L. Dorgan. Superficially, there is some Canadian support for formulary methods in certain areas. See Canadian Officials Say Formulary Approach `Makes Sense' For Financial Products APAs, 3 Tax Management-Transfer Pricing (No. 2) 75 (May 25, 1994). This relates, however, to profit splits that are seen as methods of "last resort" or act as a check on the results of a transactional method. (22) In general, the Canadian APA approach follows that of the United States. The final Circular on APAs, issued in December 1994, is not substantially different from the draft exposure circulated in 1992. The wholly administrative nature of the program, coupled with the apparent eagerness of Revenue Canada to eliminate costly and time-consuming disputes, suggests that the government will be flexible in APA negotiations. In an October 28, 1994, Revenue Canada press release, the government announced agreement on "common procedures" for bilateral APAs. See Revenue Canada Reaches Agreement With Australia, Japan and the United States on Bilateral Advance Pricing Arrangements (67T/94). (23) In Europe, the Arbitration Convention (Convention 90/436/EEC of 23 July 1990) for Intercompany Pricing Matters has now been ratified by all members of the European Community. Pursuant to Article XVIII of the Convention, it will enter into force on the first day of the third month following the month in which the final instrument of ratification is deposited. (24) As of the date this article went to press, the U.S. Senate Foreign Relations Committee has held hearings on the Protocol and recommended its approval, but the Senate has taken no action toward final ratification.

(*) This article is a modified version of a paper delivered by the author at a seminar sponsored by Executive Enterprises, Inc. ("Intercompany Transfer Pricing") held in Chicago on December 1-2, 1994. (**) Footnotes are printed on pages 295-296.