As MNE’s (anxiously) await the final Treas. Reg. Section 385 final regulations (for which the House and Senate seem unable to slow down Treasury’s intent) and its potential impact on cash pools and foreign-to-foreign transactions, Canada has proposed rules providing for deemed dividend and withholding tax treatment for certain cash pool arrangements, notwithstanding notional pool arrangements.
The perceived abuse of cash pools, albeit physical or notional, has trumped the basic business tenets and rationale of international business. As a result, significant complications have resulted in additional costs, compliance and regulatory oversight that stifles basic business transactions.
MNE’s with physical cash pools may have, or will need to, consider notional vs. cash pools as countries look at such opportunities with its sovereign right for revenues and source taxation. Notional cash pools are no longer safe, as a result.
These non-intuitive rules should introduce discussions between tax administrations and MNE’s located in their jurisdiction to truly understand business dynamics prior to enacting draft/final rules affecting such instruments. Until that time, MNE’s will have to consider restructuring that further begets questions of complexity and planning arrangements.
Details of Canada’s proposal are provided in EY’s Global Tax Alert provided as reference.