Is a functional analysis the same thing as a benchmarking study?
No, and the order matters. The functional analysis establishes what each party does, which risks it controls, and which assets it uses. Only once that is settled do you know which entity is the simpler one to test and what a comparable company would have to look like. A benchmarking search run before the functional work is a search for companies resembling an entity nobody has described yet. In practice the functional analysis decides most of the answer: the party that performs the significant functions and bears the significant risks is the one entitled to whatever profit is left after the routine activities are paid for.
Our intercompany agreement says the parent bears the risk — is that enough?
It is the starting point, not the conclusion. A contract tells you how the parties intended to allocate a risk. What is then tested is whether the entity given the risk actually makes the decisions about taking it on and responding to it, and whether it has the financial capacity to carry the downside if the risk materialises. Where it does not, the allocation in the contract does not survive review. Risk written onto an entity with no ability to control it is the classic finding in this area, and it is usually found by reading the contract against what the people involved describe themselves as doing.
Who should be interviewed for a functional and risk analysis?
The people who make the decisions, not only the people who sign the agreements. That usually means whoever sets prices, whoever approves credit terms and inventory levels, whoever decides on product development and marketing spend, and whoever would be called if a large customer stopped paying. Finance can describe the flows; only the operating staff can tell you where a decision is really taken. Interview notes should be kept, because the analysis is evidence about conduct and the conduct is what the file is later tested against. Where the interviews contradict the contract, that contradiction is the finding.
Do we need a functional analysis if our intercompany amounts are small?
The question generally turns on whether the transaction took place at all rather than on how large it was. A small charge still has to be priced on arm's length terms, and you cannot show that without knowing who did what. The work can be proportionate: for a simple arrangement between two entities, a short functional description, a risk table and a note of the interviews may be the whole of it. What does not scale down is the need to have the conduct written down. Small amounts also grow, and a file built while the people involved are still available is far easier to prepare.
Our group restructured mid-year — does the functional analysis change?
Yes, and it is better done at the time than reconstructed later. A restructuring moves functions, risks or assets between entities, which is exactly what the analysis records, so the file needs to describe the position before the change, the position after it, and what actually moved. The harder question is whether anything of value was transferred in the process and whether an independent party would have been paid for it. Both halves of the year may need their own functional description, and the transition itself needs one of its own.
What does control of risk actually mean in transfer pricing?
It means two things in practice, and both have to be present. The entity has to make the decision to take the risk on, and it has to make the decisions about how to respond when the risk plays out — not merely be informed of them. Alongside that sits financial capacity: the ability to absorb the loss if the outcome is bad. An entity that rubber-stamps decisions taken elsewhere does not control the risk, whatever the agreement says, and an entity that could not survive the downside cannot be said to have assumed it. Document both, with reference to who did what.
Do I pay tax when I inherit property abroad?
The inheritance itself is often not income to you, but three other things can create tax: the estate may owe tax where the deceased or the property was situated, some countries tax the recipient directly, and the gain from the date you inherit to the date you sell is yours. Reporting obligations can also attach to holding the asset. See inheriting property abroad.
Do Canada and the United States share tax information?
Yes, through more than one channel. The treaty has an exchange-of-information article that supports both routine and on-request exchange. Separately, an intergovernmental agreement has Canadian financial institutions identify US-reportable accounts and report them to the CRA, which passes them to the IRS, with the reverse flow for Canadian residents. Most other country pairs use the Common Reporting Standard for the same purpose. See FATCA reporting.
