Canadian Government Proposes 2016 Federal Budget
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On March 22, 2016, Canadian Finance Minister the Honorable Bill Morneau presented his first budget. The Canadian Budget (“Budget”) includes several provisions that impact international business transactions.
Some of the key international tax provisions included in the Budget are discussed below.
Base Erosion and Profit Shifting
Canada is actively engaged in coordinated multilateral efforts of the G20 and the Organisation for Economic Co-operation and Development (“OECD”) to address base erosion and profit shifting (“BEPS”). Today, the Budget announced the following actions related to the OECD BEPS recommendations:
Country-By-Country Reporting (“CbCR”) -
The Budget proposes to implement CbCR as part of required transfer pricing documentation, applicable to large multinationals (groups with annual consolidated revenue of 750 million Euros or more). Multinational enterprises with an ultimate parent entity resident in Canada will be required to file a CbC report with the Canada Revenue Agency (“CRA”) within one year of the end of the fiscal year to which the report relates. This reporting will be required for tax years beginning after 2015, consistent with the OECD recommendations. The first exchanges of this information between tax authorities in other jurisdictions are expected to occur by June 2018, but only once exchange agreements are finalized, to ensure the confidentiality of taxpayer information is maintained.
Revised Transfer Pricing Guidelines -
The OECD transfer pricing guidelines have been revised to improve the interpretation of the arm’s-length principle. These revisions generally support the CRA’s current interpretation and assessing practices.
Treaty Abuse -
The Budget confirmed Canada’s intention to address tax treaty abuse in accordance with the minimum standard outlined in the OECD recommendations. Canada will look to amend its tax treaties, adopting either a limitation-on-benefits approach or a principal purpose test, depending on the particular circumstances and discussions with Canada’s treaty partners. Canada is also participating on work on a multilateral instrument that could streamline the amendment of its tax treaties.
Spontaneous Exchange of Tax Rulings -
The Budget confirmed the government’s intention to implement the BEPS minimum standard for the spontaneous exchange of certain tax rulings with tax authorities in other jurisdictions, to improve transparency. This process will begin in 2016.
Cross Border Surplus Stripping
Section 212.1 of the Income Tax Act
contains an “anti-surplus stripping” rule that is intended to prevent a non-resident shareholder from entering into a transaction to extract (or “strip”) without tax a Canadian corporation’s retained earnings (or “surplus”) in excess of the paid-up capital (“PUC”) of its shares or to artificially increase the PUC of the shares. Subsection 212.1(4) is an exception to this “anti-surplus stripping” rule, that essentially turns off subsection 212.1 when certain conditions are met. The budget suggests that some non-resident corporations have misused this exception by reorganizing the group into a sandwich structure as part of a series of transactions designed to artificially increase the PUC of shares of those Canadian subsidiaries. To address this, subsection 212.1(4) will be amended so it will not apply if there is a sandwich structure, and a non-resident person (i) owns shares of the top-tier Canadian purchaser corporation and (ii) does not deal at arm’s length with the Canadian purchaser corporation. This amendment will apply to such dispositions that occur on or after March 22, 2016.
Extension of the Back-To-Back Loan Rules
There are currently rules in place to ensure that a back-to-back loan arrangement cannot be used to reduce the amount of withholding tax on a cross-border interest payment. The Budget proposes to build on the current back-to-back loan rules by:
- Extending the application of the rules to royalty payments made after 2016.
- Adding character substitution rules to the back-to-back rules, which will apply to interest and royalty payments made after 2016. These rules will prevent the avoidance of the back-to-back loan rules through the use of arrangements that provide payments that are economically similar to interest or royalty payments, which can be substituted between a non-resident intermediary and the other non-resident person.
- Adding back-to-back loan rules to the existing shareholder loan rules which will generally apply to back-to-back shareholder loan arrangements as of March 22, 2016.
Also, the Budget clarifies the application of the back-to-back loan rules to multiple-intermediary structures, which will apply to payments of interest and royalties made after 2016 and to shareholder debts as of January 1, 2017.
United States businesses with Canadian activities should review the impact of the provisions on their business activities and structure. BDO can assist in evaluating the impact of the budget proposals in particular business’s facts and circumstances.
For more information, please contact one of the following practice leaders: