Canada's Treaty Shopping Proposals - Impact on Inbound Investment

Transcription

1 Elizabeth Johnson, Wilson & Partners LLP, Toronto Jodi Kelleher, KPMG LLP, Vancouver Stephanie Smith Department of Finance Timothy Wach, Gowlings LLP, Toronto Canada's Treaty Shopping Proposals - Impact on Inbound Investment Vancouver 2014 Refresher on OECD/G20Time Line > OECD/G20 Base Erosion and Profit Shifting Project identified treaty abuse as a priority item first BEPS Report Feb > March 2014 Public Discussion Draft on BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances hearings held April 2014 > September 16, 2014 Release of Action 6: 2014 Deliverable with somewhat revised proposal and expanded Commentary > November 21, 2014 Further Discussion Draft. Comment period ends January 9, Public consultation January 22, 2015 > Final recommendations expected no earlier than September

2 Background to Canadian initiatives > Finance not satisfied with state of the case law > Canadian case law in which treaty shopping challenged through assertion that beneficial ownership test not satisfied - > Velcro > Prévost Car > GAAR-based challenges > MIL Investments; Garron Trust; Antle 3 Refresher on Canadian initiatives > Budget March 2013 Finance announces it is considering an anti-treaty shopping rule > August Consultation paper released seeking input on domestic vs. treaty based approach > Submissions recommended: > Wait further work by OECD > Treaty based approach over domestic law approach > Reconsider GAAR > February 2014 Federal Budget proposed domestic anti-treaty shopping rule > Further consultation period requesting examples of when the rule would apply or not > But indicated not open to adopting a fundamentally different approach > Some expected rule would be in second Budget implementation bill (fall 2014) > August 29, 2014 Finance announced it would await further work by the OECD/G20 4

3 Basic Tenets of Canadian Approach > Main purpose test: no treaty benefit if one of the main purposes of transaction was to obtain the benefit > Conduit rule: presumption that main purpose is to obtain the benefit, if relevant income primarily used to pay, distribute or otherwise transfer an amount directly or indirectly at anytime to an entity that would not have been entitled to the treaty benefit > Safe harbour rules: (subject to conduit presumption) presumption that main purpose is not to obtain the benefit, if one or more of the following applies: > Active business test satisfied > Not controlled by entity not entitled to equivalent benefit > Publicly-traded > Relieving provision: benefits to be provided to the extent reasonable, having regard to all the circumstances 5 Key Aspects of OECD/G20 Approach > 3 pronged approach for countries to counter treaty shopping arrangements: > Title and preamble to tax treaties should include clear statement that intention of contracting states is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements > U.S. Style LOB (including possibility of competent authority relief) > One of the principal purposes test or PPT (change from one of the main purposes test in March 2014 discussion draft) 6

4 Options to Meet Minimum Standards > Combined approach LOB plus PPT > PPT only > LOB plus rules to address conduit arrangements, which may be a limited PPT in a treaty or domestic specific and/or general anti-avoidance rules 7 Derivative benefits > Optional derivative benefits rule - 2 pronged: > 95% ownership (votes and value) directly or indirectly owned by 7 or fewer persons that are equivalent beneficiaries (with any intermediate owner itself being an equivalent beneficiary) > Base erosion test less than 50% of gross income paid or accrued in respect of tax deductible expenses incurred directly or indirectly to persons who are not equivalent beneficiaries (exception for arm s length payments in the ordinary course of business for services or tangible property) > Equivalent beneficiary is a new concept very narrowly worded, may make rule have limited application 8

5 Other added anti-avoidance measures > Anti-dividend transfer measure Amendment to Article 10 (Dividends) to grant the 5% rate only if the share ownership test is met on a continuous basis for 365 days prior to payment of the dividend > Capital gains article presumably to counter stuffing transactions- proposes amendment to allow source state to tax gain on shares or comparable interest (eg. interest in partnership or trust) where value of the interest is more than 50% derived from source state immovable property at any time within the 365 day period prior to the date of the disposition 9 Comparison of General Treaty Shopping Rules Canada s Existing GAAR OECD Current Treaty Shopping Commentary (para. 9.5 in Article 1) OECD Proposed Treaty Shopping Rule Canada Proposed Treaty Shopping Rule tax benefit treaty benefit treaty benefit treaty benefit To negate avoidance transaction, onus on taxpayer to show primary bona fide purpose other than to obtain tax benefit must be misuse or abuse of relevant treaty provisions 10 one of the main purposes test must be contrary to object and purpose of relevant treaty provisions one of the principal purposes test unless it is established that treaty benefit accords with object and purpose of relevant treaty provisions one of the main purposes test (determined using rebuttable presumptions of conduit and safeharbour) unless it is reasonable in circumstances to provide treaty benefit

6 OECD Multi-lateral Instrument > Action 15 of OECD Action Plan > Instrument to implement a number of OECD recommendations that are bilateral in nature > Including treaty shopping > Effect of simultaneous renegotiation of several bilateral treaties > Significant impact quickly > Does this resolve Canada s concerns regarding an immediate solution? > Assumes the relevant treaty partner signs on to multi-lateral instrument 11 Collective Investment Vehicles - CIVs > Placeholder for possibility of special treatment for CIVs - to be further studied > Each country could have the flexibility to decide what constitutes the type of CIV that should be accorded treaty benefits and on what basis > Possible options would be to provide benefits on a full look-through basis or on a threshold percentage ownership by treaty residents basis > Canada has acknowledged the challenges of CIVs and CIV-like funds and the need to address them 12

7 Budget Example 2 Payment of Dividends Aco (State A) Cco (State C). Lower dividend withholding tax rate under treaty with State B Bco (State B) Canco Dividend income received is distributed by Bco to Aco and Cco immediately 13 Example Investment Holdco Individual resident in treaty country X Holdco formed and resident in country X dividends Canco 14

8 Budget Example 4 CIV Bona Fide Investments Non-Resident Investors Dividends subject to reduced withholding tax rate B-trust (State B) Canadian Canadian Investments Investments Canadian Investments 15 JCT submission example bad intermediary USCo CaymanCo IreCo Canco 16

9 Capital Gains Resource Properties NR Investor > Paragraph 4 of Article 13 of Luxembourg Treaty > "immovable property" does not include property in which the business of the company was carried on Luxembourg > Similar wording in many modern treaties > Interpretation confirmed by CRA views Canco > Canada ceding its right to tax gains from resource properties (and other real property) Resource Property > Finance confirmed no longer including in treaties 17