Strategizing Multinational Tax Risks

The Tax Executives Institute (TEI) has submitted comments in response to Canada’s treaty shopping proposals.  TEI’s comments are referenced herein:

Click to access Treaty_Shopping_in_Canada_TEI_submission.pdf

Canada proposes that if all of the following circumstances exist, it would be justified in denying treaty benefits due to the lack of economic substance, and a bona fide purpose, and the ultimate beneficiaries are third-country residents not entitled to direct benefits from the treaty.  Such circumstances include all of the following:

• A tax treaty resident uses the tax treaty to obtain a reduction of Canadian tax otherwise payable on Canadian source income,
• The intermediary entity is owned or controlled mainly by residents of another country which are not entitled to at least the same treaty benefits,
• The intermediary entity pays no or low taxes in its country on the item of income earned in Canada, and
• The intermediary entity does not carry on real and substantial business activities, other than managing investment income) in its country.

TEI also provides general comments stating the following concepts:

• Treaty Limitation on Benefit (LOB) Provisions should be the favored approach rather than domestic legislation
• Unilateral Approach should be eschewed in favor of a multilateral approach
• Evidence of the scope and degree of treaty abuse in Canada is inconclusive

TEI’s comments also addressed the specific questions raised in the consultation paper of 14 August, 2013:

1. Advantages and disadvantages of a domestic law approach, a treaty based approach, or a combination of both
2. Merits of OECD approaches to treaty shopping, and other possible approaches re: treaty shopping
3. Preference for a general, versus a specific and objective approach; achieving balance between effectiveness, certainty, simplicity, and administration
4. Views on a domestic law general purpose test and its effectiveness in preventing treaty shopping and achieving taxpayer certainty
5. Details for preference of a specific approach
6. Comments addressing applicability of a domestic anti-treaty shopping rule in addition to a comprehensive anti-treaty shopping rule

TEI’s comments are well written, posing arguments for all multinationals to consider for Canada, and in the broader context of domestic general anti-avoidance rules (GAAR), vs. treaty based benefits, and the impetus behind countries to adopt unilateral domestic rules prior to dates in the OECD BEPS Action Plan for issues that should be internationally consistent.  For reference, prior posts have addressed GAAR provisions advocated by several countries that can be accessed for future insight.