Key Transfer Pricing Takeaways From ExxonMobil

The Tax Court of Canada recently released a detailed transfer pricing decision in ExxonMobil Canada Resources Company v. His Majesty the King (ExxonMobil). That decision relies on a range of principles developed in Canadian transfer pricing jurisprudence. Here are five key takeaways from ExxonMobil:

1. The OECDguidelines  are a  “widely accepted interpretive aid” but  are  not  “controlling.” The Court acknowledged thatthe guidelines do not have the authoritative power of a statute. However, the Court ultimately gave “very limited weight” to the evidence given by the Crown's expert, in part, because he failed to “properly apply” them. As proposed to be amended, section 247 of the Income Tax Act would formalize the role of the guidelines on a go-forward basis, but this case reflects their general use under the current legislation.
2. Fundamental  “building blocks” are necessaryto ground a sound transfer pricing  analysis. The application of the transfer pricing rules must be grounded in an accurate understanding of the subject transactions. Where transfer pricing experts misinterpret the underlying transaction documents, fail to have regard for economically relevant circumstances or otherwise improperly rely on hindsight to ground their analytical work, their conclusions are likely to be given very little weight or be discarded altogether. The Court found that the Crown's expert failed to address certain basic building blocks of a transfer pricing analysis.
3. Transfer pricing recharacterizationis  reserved for exceptional  cases, where the actual structure “practically impedes the tax administration from determining an appropriate transfer price” and the Crown establishes that the conditions in paragraph 247(2)(b) have been met.
4. The  current  recharacterization test  is an objective  one based on hypothetical persons. Citing Cameco, the Court found that the question to be answered in the recharacterization analysis is whether any hypothetical arm's length persons would have entered into the transaction under any terms and conditions. The Court clarified that this is “not a speculative exercise” but involves “an objective assessment of the commercial rationality of the transaction.”
5. Transfer pricing is  “not an exact science.” Relying upon GlaxoSmithKline, the Court reaffirmed that the requirements of the transfer pricing rules are satisfied if the transfer price is within a reasonable range. Some leeway must be allowed in the determination of what is “reasonable” to account for inevitable deviations from comparators.

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