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 OECD guidelines are a “widely accepted interpretive aid” but are not “controlling.” The Court acknowledged that the 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 necessary to 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 recharacterization is 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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