International Taxation

Transcription

1 KPMG LLP Calgary Young Practitioners Group International Taxation I. Outbound Investment Overview & Update Foreign Affiliate / Controlled Foreign Affiliate PI Overview Surplus Overview October 24, 2012 NWMM Foreign Affiliate Distributions Upstream Loans Foreign Tax Credit ( FTC ) Generators II. Inbound Investment Update Foreign Affiliate Debt Dumping Thin Cap Changes 2 Calgary Young Practitioners Group

2 Outbound Investment Overview & Update 3 Calgary Young Practitioners Group Foreign Affiliate Legislation Japan Karaoke Alcohol 4 Calgary Young Practitioners Group

3 Foreign Affiliate Legislation PI Surplus 5 Calgary Young Practitioners Group Outbound Investment Overview & Update Foreign Affiliate vs. Controlled Foreign Affiliate 6 Calgary Young Practitioners Group

4 Definition of Foreign Affiliate Contained in subsection 95(1) Generally, taxpayer must hold at least 1% of shares, and taxpayer and related persons must hold at least 10% of shares Surplus rules apply. PI rules do not, although amounts included in taxable surplus. 7 Calgary Young Practitioners Group Non-resident corporation must first be a Definition of Controlled Foreign Affiliate will be a C of a taxpayer resident in Canada ( ) if is controlled by either (a) (b) (c) (d) The taxpayer (i.e., ) Persons that are related to and not more than 4 other persons resident in Canada ( relevant Canadian shareholders ) Persons who do not arm s length with any relevant Canadian shareholder PI earned by a C is subject to Canadian taxation on a current basis. 8 Calgary Young Practitioners Group

5 Definition of Controlled Foreign Affiliate > 50% Is Forco a C of? Forco is controlled by therefore under (a), Forco is a C of Forco 9 Calgary Young Practitioners Group Definition of Controlled Foreign Affiliate Cansub 1% 99% Forco Is Forco a C of? Forco is controlled by persons that are related to therefore under (b), Forco is a C of 10 Calgary Young Practitioners Group

6 Definition of Controlled Foreign Affiliate Cansub 0.9% 99.1% Forco Is Forco a C of? Similar to previous slide, Forco is controlled by persons that are related to However, Forco is not a foreign affiliate of. Therefore, Forco cannot be a C of 11 Calgary Young Practitioners Group Definition of Controlled Foreign Affiliate Mr. Smith Mrs. Smith 40% 40% 20% Forco Is Forco a C of? Forco is controlled by and not more than 4 other persons resident in Canada therefore under (c), Forco is a C of 12 Calgary Young Practitioners Group

7 Outbound Investment Overview & Update Foreign Accrual Property Income ( PI ) 13 Calgary Young Practitioners Group You Won t be Happy if You Have PI! Overall objective of PI rules To ensure that Canadian corporations pay tax annually on income from investments that are located in an off-shore jurisdiction but that remain under the control of the Canadian corporation Without these annual accrual rules, Canadian tax on the income could be deferred indefinitely, or at least until the income was remitted to back to Canada 14 Calgary Young Practitioners Group

8 PI Overview PI earned by a C is taxable to a Canadian resident shareholder on an accrual basis PI earned by a is also added to taxable surplus Inclusion of PI in computing a Canadian taxpayer s income is based on participating percentage Deduction available for foreign accrual tax ( T ) * relevant tax factor PI computed under Canadian tax rules In Canadian dollars unless Canadian shareholder has made a functional currency election PI is usually, but not always, comprised of passive income earned by the C 15 Calgary Young Practitioners Group Subsection 91(1) Foreign Accrual Property Income s.91(1) $1,000 C 100% $1,000 3 rd Party interest income $100 foreign taxes (10%) In computing the income of a taxpayer resident in Canada there shall be included In respect of each share owned by the taxpayer of the capital stock of a controlled foreign affiliate The percentage of the foreign accrual property income of any controlled foreign affiliate of the taxpayer For each taxation year of the affiliate ending in the taxation year of the taxpayer Equal to that share s participating percentage 16 Calgary Young Practitioners Group

9 Subsection 91(4) Amounts Deductible for Foreign Taxes s.91(1) $1,000 s.91(4) (400) T/I 600 Tax Rate 25% Cdn Taxes $150 C Where an amount has been included in income under subsection 91(1) in the current year or any of the 5 preceding years There may be deducted the foreign accrual tax applicable to the amount included in income multiplied by the relevant tax factor $1,000 3 rd Party interest income $100 foreign taxes (10%) 17 Calgary Young Practitioners Group Relevant Tax Factor Defined is subsection 95(1) Currently defined as 1/ 38% or 2.63 for corporations 2 for individuals Used as a mechanism to gross up income in order to take into consideration Canada s effective tax rate Due to the decreases in Canada s tax rates over the past few years, the RTF is proposed to be adjusted to 1/ (38% - 13%) or 4.00 for corporations 18 Calgary Young Practitioners Group

10 PI Example Year 1 Year 1 Income Inclusion 60% s share: Forco EBT $60,000 Taxes paid 6,000 Net income $54,000 PI inclusion under s.91(1) $60,000 Deduction under 91(4) (24,000) $6,000 x RTF of 2.4 Taxable income $36,000 Forco Canadian 25% $9,000 Forco EBT $100,000 Taxes paid 10,000 Net income $ 90,000 Year 1 - Addition to ACB Addition to ACB under s.92 $60,000 Deduction from ACB under s.92 $24,000 Total $36, Calgary Young Practitioners Group PI Example Year 2 Year 2 Dividend income under s.90 $30,000 Forco1 60% s share of dividend = $30,000 Deduction under s.113(1)(b) (9,000) $3,000 x (RTF 1) or 3 Net balance 21,000 Deduction under s.91(5) (21,000)* Taxable Income $ 0 Dividend paid = $50,000 * Deduction is limited to lesser of net balance and net adjustments to ACB of shares under s Calgary Young Practitioners Group

11 Outbound Investment Overview & Update Surplus Overview 21 Calgary Young Practitioners Group Section 90 Dividends Received From Non-resident Corporation Dividend from = $1,000 Dividend from IBM shares = $1,000 Section 90 income inclusion: Dividend from IBM $ 1,000 Dividend from 1,000 Net income 2,000 Potential s.113 deduction re dividend (1,000) Taxable income $ 1, Calgary Young Practitioners Group

12 Investment The Details What is surplus? Essentially determines the Canadian taxability of dividends paid by foreign affiliates to a Canadian corporation Four Categories: Exempt Surplus Represents earnings from an active business carried on in a designated treaty country / TIEA Includes certain capital gains Hybrid Surplus (proposed) Represents 50% exempt surplus and 50% taxable surplus Would generally include capital gains arising from the sale of shares of a foreign affiliate Taxable Surplus Represents earnings from an active business carried on in a non-designated treaty country / non-tiea Includes passive earnings from a designated or non-designated treaty country and certain capital gains Pre-acquisition Surplus Investment in the affiliate 23 Calgary Young Practitioners Group Investment The Details Dividend Payments First paid out of Exempt Surplus (ES), then out of Taxable Surplus (TS) & then out of Pre-acquisition Surplus (PS) If hybrid surplus rules enacted, order would be: ES, HS, TS, PS with certain elections available to modify the order In general, PS is essentially the ACB of the shares S.90 - Dividend included in income S.113(1)(a) - Deduction equal to dividend paid from ES S.113(1)(a.1) Deduction for one ½ of HS dividend plus grossed up deduction for foreign income tax paid on other ½ S. 113(1)(b) - Grossed up deduction for foreign income tax paid on TS dividend S. 113(1)(c) - Grossed up deduction for foreign WHT paid on TS dividend S. 113(1)(d) - Equal deduction for PS dividend but reduces ACB 24 Calgary Young Practitioners Group

13 Investment The Details Dividend Example Income calculation Dividend $300 WHT = 5% ES = $100 TS = $100 UFT = $10 90 Income inclusion $ (1)(a) ES dividend ($100) 113(1)(b) Grossed up tax on TS dividend ($ 30) 113(1)(c) Grossed up WHT on TS dividend ($ 20) 113(1)(d) PS dividend ($ 100) Income taxable in Canada $ 50 Tax Rate 25% Canadian Tax Payable $ 12.5 Total Tax Paid on Taxable Surplus Foreign $ 10 WHT $ 5 Canadian $12.5 Total tax $27.5 Canadian tax would otherwise have been: Taxable surplus-earnings before tax) $110 Canadian tax rate 25.0% Total tax $ Calgary Young Practitioners Group Investment The Details 93(1) Election Disposition of shares of a by is a taxable event Proceeds ACB = Capital Gain Undistributed profits could be reason that proceeds > ACB 93(1) election allows taxpayer to treat proceeds received on the sale of an s shares as a dividend Effect of election is to reduce capital gain that would otherwise arise on the sale ES no tax on these proceeds HS - no tax if foreign tax paid on profits is sufficient TS no tax if foreign tax paid on profits is sufficient 93(1) election does not require actual payment of dividend Should be no WHT in foreign jurisdiction Gain may still be taxable in the country of residence of the 26 Calgary Young Practitioners Group

14 Investment The Details 93(1) Election - Example Forco FMV = $100 ES = $30 ACB = $50 Disposition of Forco would result in a capital gain of $50 ($100 - $50) 93(1) election filed to reduce proceeds by $30 Result Capital gain reduced to $20 ($70 reduced proceeds - $50 ACB) Deemed dividend income inclusion of $30 Deduction for ES dividend of $30 27 Calgary Young Practitioners Group External Sale of Shares: Application of Section HS = $400 TS = $200 FMV = $900 ACB = $300 Assume that 1 is selling its shares of 2 to a third party Subsection 93(1.1) automatically applies to deem to have made a s.93(1) election Elected amount is equal to lesser of (i) capital gain otherwise realized ($600), and (ii) dividends that would be received if paid out its net surplus ($200) Proceeds on sale $900 Automatic election under s.93(1.1) (200) Revised proceeds 700 ACB of shares (300) Capital gain $400 TS = $ Calgary Young Practitioners Group

15 Investment The Details Foreign Holdco Example Canada Foreign Forco Holdco Forco Gain on disposition of Forco would be immediately taxable in Canada Gain on disposition of Forco by Holdco Holdco is normally in a jurisdiction that does not tax gains If Forco shares are excluded property, no CDN tax (i.e., no PI) Proceeds redeployed to other foreign businesses Holdco as a mixer 29 Calgary Young Practitioners Group Outbound Investment Overview and Update October 24, 2012 NWMM 30 Calgary Young Practitioners Group

16 Status of Foreign Affiliate Rules October 24, 2012 package includes August 19, 2011 draft legislation Significant changes to numerous provisions Introduction of Hybrid Surplus and Upstream Loans August 27, 2010 draft legislation Non-resident trust rules Foreign tax credit generator rules Bump and surplus computations on acquisitions of control PL carry-over periods Foreign affiliate deficit re-allocations 31 Calgary Young Practitioners Group Foreign Affiliate Distributions All pro-rata distributions treated as dividends regardless of foreign treatment Non pro-rata distributions treated as shareholder benefits New election allows distributions to be treated as qualifying returns of capital to extent of s paid-up capital Non-corporate taxpayers have ability to access cost base of shares Revised election allows distributions to be treated as preacquisition surplus dividends if otherwise exempt, taxable, hybrid surplus dividends Election previously only available for dividends paid to Canada can now elect pre-acquisition treatment between s Applies to dividends paid after August 19, 2011, but can elect retroactively back to December 2002 New rules allow election to be late-filed up to 10 years if just and equitable 32 Calgary Young Practitioners Group

17 Upstream Loans The General Idea 1 2 Loan $500 POD $1,000 ACB 0 Gain $1,000 ES $500 TS $500 UFT 0 Prior to August 19, 2011 draft legislation - Loans of taxable surplus by foreign affiliates back to Canada have generally occurred if payment of dividend not permitted under foreign corporate or other law triggers foreign withholding tax triggers Part I tax in Canada 33 Calgary Young Practitioners Group Upstream Loans Refresher Rules apply to loans made by a foreign affiliate (Lender ) or by a partnership in which a is member to a specified debtor Canadian taxpayer, non-arm s length persons, certain partnerships Excludes controlled foreign affiliates but only if controlled by Canadians NR Parent NR Parent Lender Lender Lender Debtor 34 Calgary Young Practitioners Group

18 Upstream Loans Refresher Loans excluded from rules if Repaid within 2 years from date loan made Made in ordinary course of creditor s business and arrangements made for repayment within reasonable period of time If loan included in income, deductions available for exempt surplus, hybrid surplus, taxable surplus of Lender 35 Calgary Young Practitioners Group Upstream Loans Changes to Rules Additional deductions available if loan included in income Cost base of Lender shares to Canadian shareholder Not applicable if loan is made to a non-resident Clarification that upstream and downstream surplus balances included in respect of Lender s chain of ownership No restrictions in deductions if actual dividends paid by Lender, other than rules to ensure no double-counting of surplus, cost base Back-to-back loans collapsed to prevent double-counting of income inclusions 36 Calgary Young Practitioners Group

19 Upstream Loans Pre- Acquisition Surplus Forco ACB $100 ES $60 Loan $200 Example 1 Direct dividend hypothesis if $200 dividend paid by to $60 - exempt surplus $140 pre-acq surplus Deduction for pre-acq surplus dividend restricted to ACB (clause 90(9)(a)(i)(D)) Result $200 income inclusion $160 deduction for s exempt surplus ($60) and ACB ($100) 37 Calgary Young Practitioners Group Upstream Loans Pre- Acquisition Surplus Forco ACB $100 ES $60 Loan $200 Example 2 Forco is a specified debtor Direct dividend hypothesis if $200 dividend paid by to $60 - exempt surplus $140 pre-acquisition surplus Forco is non-resident person with which does not deal at arm s length. No deduction for s ACB Result $200 income inclusion $60 deduction for s exempt surplus 38 Calgary Young Practitioners Group

20 ES $100 1 Loan $300 2 ES $100 3 Upstream Loans Downstream Surplus Example Previous if $300 upstream loan by 2 to, deduction for $100 exempt surplus Amendment 3 s exempt surplus elevated to 2 $200 deduction for 2 and 3 s exempt surplus 1 is not a downstream affiliate ES $ Calgary Young Practitioners Group Upstream Loans Transitional Rules If loan outstanding on August 19, 2011, grandfathering rules apply If repaid prior to August 19, 2014, rules not applicable If still outstanding on August 19, 2014, can treat as a new loan made on that date, have 2 years to repay Post August 19, 2011 loans subject to 2-year repayment period 40 Calgary Young Practitioners Group

21 Foreign Tax Credit Generators Set of new rules that will deny a deduction for foreign tax in respect of PI included in taxpayer s income Aimed at perceived abuses in amounts of foreign tax being claimed as deductions or credits in Canada Apply if there is a hybrid instrument in a foreign affiliate group Shares for Canadian purposes treated as debt in other jurisdiction Partnership interests subject to different income allocations under Canadian and foreign rules Rules have been narrowed in scope from previous version Rules are generally applicable to taxation years ending after March 4, Calgary Young Practitioners Group Foreign Tax Credit Generators If responses to questions are all yes, rules will apply Has a taxpayer () included amounts as PI in its income in respect of a particular foreign affiliate (PI )? Is there a hybrid instrument in place in s foreign affiliate group? Is owner of hybrid instrument either or one of its foreign affiliates? Is issuer of hybrid instrument a foreign affiliate in same ownership chain as PI? Is owner considered to own less shares in issuer under foreign tax law than under Act? 42 Calgary Young Practitioners Group

22 Foreign Tax Credit Generators Foreign Holdco Foreign Subco PI Canada => Preferred shares Foreign jurisdiction => Debt Has included amounts as PI in its income in respect of a particular foreign affiliate (PI )? = YES Is there a hybrid instrument in place in s foreign affiliate group? = YES Is owner of hybrid instrument either or one of its foreign affiliates? = YES, Is issuer of hybrid instrument a foreign affiliate in the same ownership chain as PI? = YES, Foreign Subco Is considered to own less shares in Foreign Subco under foreign tax law than under Act? = YES, under foreign law does not own any preferred shares in Foreign Subco Rules therefore apply to deny a foreign tax deduction for any foreign tax paid by PI 43 Calgary Young Practitioners Group Foreign Tax Credit Generators Foreign Holdco Foreign Opco PI Issuer (Lux) Canada => Preferred shares Luxembourg => Debt Has included amounts as PI in its income in respect of a particular foreign affiliate (PI )? = YES Is there a hybrid instrument in place in s foreign affiliate group? = YES Is owner of hybrid instrument either or one of its foreign affiliates? = YES, Is issuer of hybrid instrument a foreign affiliate in the same ownership chain as PI? = NO, Issuer is not in same chain as PI Rules therefore do not apply to deny a foreign tax deduction for any foreign tax paid by PI 44 Calgary Young Practitioners Group

23 Foreign Tax Credit Generators Funding Rules Additional rules will apply if PI has received funding from another of, or a of a related Canadian company Funding includes loans, advances, asset purchases, dividends, share redemptions If loan has arm s length terms and conditions, excluded as a source of funding Share acquisitions also excluded as a source of funding If such funding exits, PI can be in a different chain of ownership than hybrid instrument Funding rules apply to taxation years ending after October 24, Calgary Young Practitioners Group Foreign Tax Credit Generators Canada => Preferred shares Luxembourg => Debt Without funding measures, rules are not applicable as PI is not in same ownership chain as Issuer Issuer has indirectly funded PI As a result, PI can be in different ownership chain from Issuer Foreign Holdco Issuer (Lux) Rules therefore apply to deny a foreign tax deduction for any foreign tax paid by PI Foreign Opco Non-arm s length loan PI Non-arm s length loan 46 Calgary Young Practitioners Group

24 Inbound Investment Update Foreign Affiliate Debt Dumping Rules 47 Calgary Young Practitioners Group Foreign Affiliate Dumping Rules Rules introduced due to government s concern with two planning techniques that result in erosion of Canada s tax base Leveraging Canada to create an interest deduction where funds used to acquire shares distributions from potentially taxfree Paid-up capital creation in Canada, allowing for increased thin capitalization room and ability to return capital to non-resident with no withholding tax Draft legislation originally released August 15, 2012 with a one-month consultation period Final rules included in Bill C-45 October 18, 2012 Considered substantively enacted for Canadian GAAP and IFRS purposes has received First Reading Significant differences in two versions of rules 48 Calgary Young Practitioners Group

25 Foreign Affiliate Dumping Rules General application of rules unchanged Canadian resident corporation (CRIC) is controlled by a nonresident corporation CRIC makes an investment in a foreign affiliate () Investment includes Acquisition of shares of or contribution of capital to Loans from CRIC to, or acquisitions of loans owing by by CRIC from another person Excludes certain loans or acquisitions made in ordinary course of CRIC s business Excludes pertinent loans or indebtedness Extension of maturity date of a loan, or date of redemption, cancellation, acquisition of shares 49 Calgary Young Practitioners Group Foreign Affiliate Dumping Rules Base Case International Tax 101 New Rules Forco Forco Forco Foreign Canada FMV = $1,000 PUC = $100 Acqco FMV = $1,000 PUC = $1,000 CRIC => Acqco PSH Target PSH Target FMV = $1,000 PUC = $100 PSH Target => >75% of value 50 Calgary Young Practitioners Group

26 Foreign Affiliate Dumping Rules Results of application of rules Deemed dividend equal to value of property (other than shares of CRIC) transferred by CRIC related to investment Dividend deemed paid by CRIC to non-resident parent could result in 15% or 25% withholding tax if shares of CRIC not owned directly by parent Increase in paid-up capital (PUC) of shares of CRIC issued in respect of investment ignored Will impact thin capitalization debt-to-equity limits Rules apply to transactions occurring after March 28, 2012 If written agreement in place between arm s length parties prior to March 29, 2012, transactions that occur before 2013 will not be caught 51 Calgary Young Practitioners Group Foreign Affiliate Dumping Rules NR Parent Application of rules results in: PUC suppression = $700 Loan = $1,500 CRIC => Capital contribution for shares = $700 Deemed dividend = $1,500 + $300 PUC suppression could result in thin cap limits being exceeded interest deduction in deemed to be a dividend paid to NR Parent Investment = $2,500 If additional PUC balance remains in shares after PUC suppression, deemed dividend can be reduced 52 Calgary Young Practitioners Group

27 Foreign Affiliate Dumping Rules Exceptions Business purpose test Business activities of must be more closely connected to business activities of CRIC than to business activities of nonresident Stringent conditions to be met if test to apply Election to treat loan to a as a pertinent loan or indebtedness eliminates deemed dividend Results in imputed income inclusion equal to lowest prescribed rate (currently 1%) + 4% if non-interest bearing Certain reorganizations exempted Canadian reorganizations that could otherwise result in an acquisition of shares 53 Calgary Young Practitioners Group Inbound Investment Update Thin Cap 54 Calgary Young Practitioners Group

28 Thin Cap Base Case Partnership Loophole 0% WHT on Interest Loophole USco USco USco Debt 200 Equity 100 Interest Rate 10% WHT 0% Debt $300 Equity 0 Debt Interest WHT 0% Dividend Dividend WHT 5% 99% PSH Partnership Interest Expense $20 Interest Expense $30 No deduction for dividend or for interest in excess of 2:1 55 Calgary Young Practitioners Group Thin Capitalization Changes Maximum debt-to-equity ratio reduced from 2:1 to 1.5:1 for determining the deductibility of certain interest on debt owed to certain non-residents (e.g., related entities) Will apply to corporate taxation years beginning after 2012 Rules extended to include partnership debt in the debt-toequity ratio Will apply to corporate taxation years beginning after March 28, 2012 Disallowed interest now treated as a dividend to the nonresident creditor that may be subject to withholding tax (with potentially limited relief under a tax treaty) Will apply to corporate taxation years ending after March Calgary Young Practitioners Group