CRA increased our Canadian profit, will the other country reduce its side?
Not by itself. Each country assesses its own return, and nothing in one assessment obliges the other to move. The matching reduction has to be asked for, by the taxpayer, in the other country, and the usual route is the treaty procedure under which the two authorities discuss the case. Until that happens the same profit is taxed in both places. The practical consequence is a sequencing one. The moment an adjustment looks likely, the second country's position has to be protected, because relief there can be limited by time and by what has already been agreed here.
How do I ask the other country to match an adjustment?
Through the treaty procedure, and the request goes to your own authority rather than to the foreign one, which then takes it up with its counterpart. What makes or breaks it is the material: the adjustment as assessed, the reasoning behind it, the analysis the original price was based on, and a clear statement of the relief sought. Requests fail more often on incompleteness than on the merits. We prepare the request alongside the domestic file for that reason, so the facts asserted in one place are the facts asserted in the other.
Should we settle with CRA before applying for treaty relief?
Consider the order carefully, because what you sign can narrow what the other authority is willing to do. A settlement reached on a basis nobody can explain afterwards gives the foreign authority nothing to follow: it is asked to reduce its own tax base by reference to a figure with no reasoning attached. Where a domestic agreement is the right outcome, it should record the method, the facts and the reasoning, not only the amount. We also check the other country's limits for making a claim before agreeing anything here.
Is a corresponding adjustment the same as a foreign tax credit?
No, and confusing them is expensive. A credit leaves both profits where they are and offsets one country's tax against the other's, so it is capped by the tax the crediting country charges and disappears if it charges none. A corresponding adjustment changes the other country's taxable profit itself, removing the doubled income rather than offsetting the tax on it. They sit in different places on the return and are claimed in different ways. On a transfer pricing assessment the adjustment is usually the relief you want; the credit is what is left if you cannot get it.
Can the other country refuse to make the matching adjustment?
Yes. The treaty procedure commits the authorities to try to resolve the case; it does not bind either of them to the other's figure. A foreign authority that regards the adjustment as wrong in principle, or as reaching further than the facts support, can decline to follow all of it, and cases do settle between the two positions. That is one reason the original documentation matters long after the domestic argument is over. It is the material that persuades a second authority the price was arrived at properly in the first place.
Is there a time limit for claiming a corresponding adjustment?
Yes, in both the treaty and each country's domestic law, and the limits do not run together. The trap is a domestic reassessment window closing in the second country while the treaty discussion is still going on, so that relief is agreed and then cannot be given effect. Where that is a risk, a protective filing or a written request to hold the year open is made in the second country before the discussion starts. We check the limits in both systems at the outset and diarise them, rather than treating the claim as the only clock that matters.
What is double taxation?
Double taxation means the same income being taxed by two authorities. It comes in two forms: juridical, where two countries each tax one person on one amount, and economic, where two different people are taxed on the same underlying profit — a company on its earnings and a shareholder on the dividend paid out of them. Relief comes from a treaty, a foreign tax credit, or an exemption, and which one applies depends on the income type. How to avoid double taxation sets out the routes.
Is double taxation illegal?
It is legal. Two countries can each have a valid claim on the same income — one because the income arose there, the other because you live there — and nothing prohibits both from exercising it. What exists instead is relief: tax treaties allocate the claim, and domestic law gives a credit for foreign tax paid. The relief is not automatic, though. It is claimed on a return, and unclaimed relief is simply lost. See how double taxation is relieved.
