Increasing Corporate Profitability Through Canadian Transfer Pricing Compliance

Author: David Hogan
Publication Date: February 06, 2003

Increasing Corporate Profitability through 
Canadian Transfer Pricing Compliance 

By David Hogan, Fuji Photo Film Canada * 

For many corporate tax executives, transfer pricing is viewed as an onerous, time-consuming tax-compliance project.  Transfer pricing is really about the whole of the relationship between corporations and their suppliers and customers, which is more than just a price.  Assessing the transfer pricing requirements from an operational perspective, however, can result in significant cost savings and massive profits.  A true-life experience at Fuji Photo Film Canada (Fuji Canada), described below, illustrates how successful transfer pricing compliance freed tens of millions of dollars from working capital, and reduced carrying and obsolescence expenses by millions.  

Documenting the Results at Fuji Canada

Since 1999, transfer pricing documentation in Canada has been legislatively required to avoid tax penalties.  At Fuji Canada, the corporate transfer pricing documentation was initiated by benchmarking the company to similar firms in its industry.  Although Fuji Canada’s sales margins were within range, this first pass indicated a sub-optimum return on assets.  The concern that this may be indicative of a transfer pricing problem motivated a much more significant evaluation of the existing practices.  Since the Canada Customs and Revenue Agency (CCRA) defines a hierarchy of methods, rather than benchmarks, in establishing transfer prices, we researched our business relationships.  Using these arm's length comparisons, we evidenced the appropriate nature of Fuji's transfer prices.  The documentation was prepared for, audited by, and accepted by the CCRA during 2001. 

Comparison of Fuji Canada Results with Industry Averages

While researching the arm's length comparables, we were forced to address an important issue:  if the transfer prices were appropriate, then how could Fuji Canada be underperforming comparable companies in its industry?  To better understand the nature of the issue, we implemented a series of internal controls to add structure to the purchasing processes.  Not only were we seeking a better understanding of the pricing of the purchase transactions for the transfer pricing documentation, but also the timing and volume of these transactions. 

The project was pitched to the sales and marketing groups as being about selling more product and improving customer service by getting the right product in the right place at the right time.  However, from a financial standpoint, there were three motivators.  By better managing inventory we would realize:

(1) a reduction in working capital requirements,

(2) less fixed capital requirements, as the facilities and equipment are rationalized; and

(3) reduced obsolescence expense.   

With implementation now complete, Fuji Canada has reduced its working capital requirements by 30 per cent, reduced storage requirements, and decreased obsolescence expense by 60 per cent.  

In addition to the dramatic financial benefits, these new processes allow us to provide a time-phased order forecast to our suppliers.  This reduces their manufacturing costs by allowing them a greater planning window and, thereby reducing their working capital and waste.  With the improved information sharing with our suppliers, we are now able to identify and resolve differences more expeditiously, thereby further increasing our level of customer service.

Thus, as a direct result of our transfer pricing study, Fuji Photo Film Canada has freed tens of millions in working capital, rationalized costs, and implemented a more collaborative planning system with our suppliers and customers.   When corporate executives think about transfer pricing, it is important that they consider the broader perspective.   Transfer pricing can and has dramatically improved corporate profitability.

So, now that transfer pricing documentation is required by many countries around the world, the next time you prepare and document transfer pricing at your company, look for cost-effective ways to use the information to improve profitability and customer relations. 

* David Hogan is the Senior Director, Tax (Finance and Accounting) for the Fujifilm Group in Canada and, concurrently, the Senior Director, Marketing Logistics and Information for Fuji Photo Film Canada.  Formerly Mr. Hogan was a transfer pricing consultant with both PricewaterhouseCoopers and KPMG, and he has previously worked at the Conference Board of Canada and the Bank of Canada.