Strategies for Resolving Cross-Border Tax Controversies

Transcription

1 Strategies for Resolving Cross-Border Tax Controversies 11th Annual Conference on Canada-US Cross-Border Tax Strategies Council for International Tax Education (CITE) Toronto, ON October 17-18, 2005 Alan M. Schwartz, Q.C. Ron Choudhury

2 Exchange of Information Under the Canada-US Tax Treaty Information must be relevant to the Treaty and to all taxes imposed by Canada or US Not restricted to persons covered by the Treaty Disclosed only to persons and authorities involved in the assessment, collection, enforcement and administration of identified taxes

3 Exchange of Information Under the Canada-US Tax Treaty Information obtained as if requested state s own taxation was involved Provided in form requested No obligation to collect information in a manner at variance with the laws of the requested state or to obtain information that would disclose trade secrets

4 Exchange of Information Under the Canada-US Tax Treaty Information collected by a Treaty country pursuant to a request for information by the IRS, in contravention of US law is inadmissible as evidence against a US citizen Information collected by a Treaty country pursuant to a request for information by the CRA is admissible as evidence against a Canadian resident provided it was collected within the laws of the Treaty country US citizens and residents do not have the protection of the Constitution against summonses issued by the IRS pursuant to a request for information by a Treaty country

5 Exchange of Information Under the Canada-US Tax Treaty A simultaneous audit program exists between Canada and the United States The number of simultaneous audits performed is very limited

6 Exchange of Information Under the Canada-US Tax Treaty - Cases TG Andison v. MNR, 95 DTC 5058 (FCTD) Treaties have the force of law in Canada Minister can use same mechanisms available to enforce the Income Tax Act to obtain information requested under the Treaty These mechanisms are subject to the limitations on the power in the Income Tax Act

7 Exchange of Information Under the Canada-US Tax Treaty - Cases United States of America v. Schneider, [2002] BCJ No Request under Mutual Legal Assistance in Criminal Matters Act, R.S.C. 1985, c. 30. IRS agents participated in search and copied documents after search Failure to allow IRS agents to be cross-examined on their affidavits was a factor in considering whether documents seized should be turned over to the requesting authority

8 Exchange of Information: New OECD Model Agreements Agreement shifts responsibility to the requesting state Abolishes the dual criminality principle Lifts bank secrecy Introduces limited procedural rules

9 Exchange of Information: New Multilateral Agreements Canada is a recent signatory to the Convention on Mutual Administrative Assistance in Tax Matters Convention provides administrative cooperation in levying and collecting taxes, exchange of information, and service and delivery of documents Canada currently limits its participation to exchange of tax information

10 Exchange of Information: New Multilateral Agreements Memorandum of Understanding signed April 2004 among Canada, USA, Australia, and United Kingdom to set up Joint International Task Force on Tax Shelters Task Force aims to increase collaboration and coordinate information about perceived abusive tax transactions

11 Exchange of Information: New Multilateral Agreements Pacific Association of Tax Administrators released documents about operational guidance for members in respect of mutual agreement procedures and bilateral advance pricing arrangements

12 Creation of Centres of Expertise CRA has created 11 Centres of Expertise to address aggressive international tax planning Centres located at Laval, Halifax, Saint John, Montreal, Toronto West, Ottawa, London, Winnipeg, Calgary, Vancouver and Burnaby Centres will bring together auditors from international tax, special audits and tax avoidance Centres will ensure coordinated approach in addressing aggressive international tax planning and abusive use of tax havens

13 Assistance in Collection Under the Canada-US Tax Treaty Applies to all taxes collected by or on behalf of the Government of a contracting state, including: federal and provincial income taxes GST, HST, interest, penalties and costs Overrides traditional rule that a court judgment based on a tax debt is not collectable in a foreign jurisdiction Tax debt must be finally determined Requested state has discretion to accept or reject request

14 Assistance in Collection Under the Canada-US Tax Treaty Revenue claim has no priority over any other debts of the tax debtor No administrative or judicial action is available in the requested state No assistance is provided for claims against citizens of the requested state Applies to revenue claims finally determined at any time since 1985

15 Assistance in Collection Under the Canada-US Tax Treaty - Cases Chua v. Minister of National Revenue, 2000 DTC 6527 (FCTD) Mutual assistance provision infringes equality rights under the Charter for a select group of individuals Individual must have had a US tax debt arising in a year in which the individual was not a Canadian citizen Individual must have been notified of the tax debt after becoming a Canadian citizen and before the Article was proclaimed into force

16 Mutual Agreement Procedure, the Competent Authority Provisions Provides relief from double taxation and allocation issues resulting in potential double taxation. Six year time limit to make application Administrative and legal procedures available concurrently

17 Mutual Agreement Procedure, the Competent Authority Provisions Decision applicable regardless of time or procedural limitations Arbitration available if mutual agreement not successful

18 Mutual Agreement Procedure, the Competent Authority Provisions Most Competent Authority applications involve service fee expenses Often take two years to resolve Repatriation of funds a common remedy

19 Mutual Agreement Procedure, the Competent Authority Provisions MAP Program Report 92% of competent authority cases requiring negotiation resolved without double tax Competent authorities working to increase success rate CRA aims to complete requests for competent authority assistance within 24 months of receiving complete request CRA initiated more than 70% of its cases; foreign-initiated requests for competent authority assistance increasing

20 Mutual Agreement Procedure, the Competent Authority Provisions On June 3, 2005, Canada and the US entered into Memorandum of Understanding to establish principles and guidelines to improve performance and efficiency of MAP MOU places emphasis on reaching agreement, removing barriers that impede or delay resolution of MAP cases and resolving substantive issues in cases involving transactions between related parties Notification to be interpreted broadly under the Tax Treaty in order to be more inclusive

21 Mutual Agreement Procedure, the Competent Authority Provisions Raymond Brilla v. The Queen, 98 DTC 1502 (TCC) The Courts are not able to look beyond the Income Tax Act and resolve issues of double taxation

22 When to Pay and When to Protest - Canadian Objection and Appeal Prodecures Notice of Objection filed with CRA within 90 days of receipt of assessment Notice of Appeal filed with Tax Court of Canada within 90 days of receipt of confirmation of assessment Notice of Appeal to Federal Court of Appeal filed within 30 days of judgment of Tax Court of Canada Application for Leave to Appeal to Supreme Court of Canada filed within 60 days of judgment of Federal Court of Appeal

23 When to Pay and When to Protest - Subsection 215(6) - Liability for tax not withheld Provides that where a taxpayer is liable for tax it failed to properly withhold from a non-resident, the taxpayer may deduct the amount it was liable for from future payments to the non- resident. Query whether this provision is within the federal taxing power in subsection 91(3) of the Constitution Act.

24 When to Pay and When to Protest - Section 215(6) - Liability for tax not withheld Query whether a US court would enforce a Canadian debt judgement founded on the basis of subsection 215(6) There may be little practical utility in the right to recover provisions in subsection 215(6)

25 When to Pay and When to Protest - Security Costs Section 160 of the Tax Court of Canada Rules provides for the respondent (Minister of National Revenue) to bring a motion for security for costs Minister must have filed a Reply and Appellant must be a nonresident Appellant barred from taking further steps in the action until security provided Appellant can avoid providing security for costs by demonstrating residency or impecuniosity

26 When to Pay and When to Protest Ability of the CRA to enforce a judgement in the US Assistance in collection provision of the Treaty enables the CRA to collect taxes owing by non-us citizens residing in the US No way to enforce a Canadian tax liability owed by a US citizen residing in the US with no assets in Canada

27 When to Pay and When to Protest - Extradition for Tax Evasion Revenue offences are now extraditable offences under the Treaty on Extradition between Canada and the US Limited by the requirement that the offence be punishable in both countries by a term of imprisonment of at least one year

28 When to Pay and When to Protest - Guarantee Fees The CRA is imputing income to Canadian multinationals that do not charge guarantee fees to their foreign affiliates Arbitrary formulas determining guarantee fees between related companies may increase the risk of the fee being challenged by the CRA CRA is also applying deemed dividend withholding taxes on benefit derived by shareholder of company not being charged guarantee fee

29 When to Pay and When to Protest - Cross-Border Jurisprudence Specialty Manufacturing Limited v. The Queen 97 DTC 1511 (TCC) Thin capitalization Treaty does not allow the deduction of interest on a loan between non-arms length persons where the borrower is thinly capitalized

30 When to Pay and When to Protest - Cross-Border Jurisprudence Wildenburg Holdings Ltd. v. Ontario (Minister of Revenue) 2001 DTC 5145 (Ont. CA) Cannot rely on a partnership to avoid the application of the thin capitalization rules where documents support the fact that the corporate partners are directly liable for the debt and not the partnership

31 When to Pay and When to Protest - Cross-Border Jurisprudence Cudd Pressure Control v. The Queen, 98 DTC 6630 (FCA) To be eligible to deduct notional rents from the profits of permanent establishments, it must be reasonable that the permanent establishment would have paid the rent if it were an independent enterprise

32 When to Pay and When to Protest - Cross-Border Jurisprudence Stanley Coblentz v. The Queen, 96 DTC 6531 (FCA) Exclusion of elected amounts from US pension does not exclude amounts from Canadian taxable income To be excluded in Canada the pension amount must be excluded by operation of US law and not by virtue of an election

33 When to Pay and When to Protest - Cross-Border Jurisprudence Dudney v. R., 2000 DTC 6169 (FCA) Permanent establishment and fixed base have the same meaning for purposes of the Treaty Factors determining existence of a fixed base are use, control and degree to which premises are identified with the taxpayer

34 When to Pay and When to Protest - Cross-Border Jurisprudence Toronto Blue Jays Baseball Club v. Ontario, 2005 DTC 5360 (CA) Toronto sports teams argued that non-ontario game venues constituted permanent establishments for EHT purposes Court of Appeal set aside decision of Superior Court of Justice and held that non-ontario venues were not PEs Teams control of venues found to be too transitory to be considered fixed place of business, as held by trial judge Business activities (concluding contracts, selling tickets, licensing concessions, negotiating sponsorships, advertising, television and radio broadcasting rights) were conducted from home venue

35 When to Pay and When to Protest - Cross-Border Jurisprudence Cheek v. R DTC 1283 (TCC) Taxpayer was radio reporter for the Toronto Blue Jays baseball club Minister of National Revenue sought to tax income of taxpayer in Canada on the basis of Article XVI of Treaty Article XVI taxes income of US artistes and entertainers in Canada when the income is earned from activities exercised in Canada Court held that taxpayer was radio journalist and not entertainer Article XVI had no application and taxpayer was not taxable in Canada

36 Application of GAAR in Cross-Border Transactions RMM Canadian Enterprises Inc. v. R, 97 DTC 302 (TCC) GAAR must be applied to a transaction and then that transaction considered in accordance with the Treaty US tax avoidance purpose not sufficient to remove transaction from application of GAAR

37 Application of GAAR in Cross-Border Transactions Paragraph 7 of Article XXIXA Canada is permitted to deny the benefit of the Treaty where it believes that doing so would result in an abuse of the Treaty Income Tax Act amended to make GAAR applicable to treaty benefits Amendment is retroactive and applies with respect to transactions entered into after the introduction of GAAR

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