Mr. Speaker, I have the pleasure to rise today to speak to an important piece of legislation, Bill C-82, an act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting. The bill would, upon royal assent, modify up to 75 of Canada's bilateral tax treaties, also known as covered tax agreements, or CTAs, in order to combat base erosion and profit sharing, or BEPS, as it is more commonly known in taxation vernacular, for those watching at home.
For those Canadians I just mentioned, and indeed for the members of the House who are not tax lawyers, including me, Bill C-82 is quite a mouthful, but basically, the bill purports to make it more difficult for corporations to hide money in offshore tax havens. At this early stage in debate, it is worth discussing a few of the concepts inherent in the bill so that we can have a more fulsome discussion moving forward.
First, the multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting is a multilateral instrument, or MLI, which is the product of the Organisation for Economic Co-operation and Development's G20 BEPS project, which began in 2013. Base erosion and profit shifting, or BEPS, refers to tax-planning strategies that exploit loopholes in tax rules to artificially shift profits to low- or no-tax jurisdictions where there is little or no economic activity, allowing little to no corporate tax to be paid. Moderate estimates indicate annual losses of anywhere from 4% to 10% of global corporate income tax revenues, or $177 billion to $425 billion annually. In Canada, we are looking at somewhere between $3 billion and $6 billion annually in taxes that could go to pay for any number of important programs or projects to benefit all Canadians. It might even buy us a pipeline or maybe pay off a third of the annual deficit, if the Liberals were so inclined.
Leaders of the OECD and G20 countries, as well as over 60 other countries, jointly developed 15 actions to tackle tax avoidance, improve the coherence of international tax rules and ensure more transparent tax regimes. The purpose of the MLI is to allow signatories to swiftly implement tax treaty related measures to prevent BEPS. The goal of implementing the measures in the MLI is to end treaty abuse and treaty shopping by transposing, in existing tax treaties, these jurisdictions' commitment to minimally include in their tax treaties tools to ensure that these treaties were used the way the signatories initially envisioned. Once implemented, the MLI would modify up to 75 existing bilateral tax treaties with, at minimum, the adoption of the OECD treaty-abuse and improved dispute-resolution standards.
It is important to note that there are scales on which Canada can adopt the 15 actions included in the MLI. Its treaty-abuse standard consists of two parts. First is an amended preamble, suggesting that covered tax treaties are intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Second is a broad anti-avoidance rule, referred to as the principal purpose test, or PPT. Under the PPT, any tax benefit could be denied where it was reasonable to conclude that one of the main reasons for the transaction was to avoid paying taxes unless it was established that granting the benefit would be in accordance with the object and purposes of the relevant provisions within the treaty.
The other minimum standard is the adoption of mandatory binding arbitration to assist in resolving treaty-based disputes in a timely and efficient manner. Initially, Canada took a conservative approach toward the MLI, agreeing to implement the minimum standards. However, recently, the government has shifted that approach and has announced its intention to remove some of its initial reservations on optional MLI provisions, namely, those pertaining to dividends, article 8; capital gains, article 9; dual residency tie-breaker rules, article 4; and relief from double taxation, article 5.
I believe that this is an important factor to consider, because following ratification, Canada would be unable to add any reservations. However, signatories could withdraw or narrow a reservation following ratification.
The provisional MLI position of each country indicates the tax treaties it intends to cover, the options it has chosen and the reservations it has made. Signatories can amend their MLI positions until ratification. After ratification, countries choose to opt in with respect to optional provisions or to withdraw reservations. This makes the debate and analysis of Bill C-82 very important at committee stage.
Make no mistake, the Conservatives do support, in principle, Bill C-82. We want a full vetting at committee and we want to ensure the bill will meet the expectations of Canadians from coast to coast to coast. I think everyone in the House would agree we must get this right.
I would like to turn our attention now to the four additional provisions added to Bill C-82.
The first addition is to implement a one-year holding period to access treaty-based withholding tax reductions on dividends under a covered tax agreement. A covered tax agreement, or CTA, is an agreement for the avoidance of double taxation enforced between countries to the MLI and for which countries have made a notification that they wish to modify the agreement using the MLI. Double taxation is a taxation principle referring to income taxes paid twice on the same amount of earned income. It could occur when income is taxed at both the corporate level and the personal level.
Double taxation also occurs in international trade, when the same income is taxed in two different jurisdictions, and that is the area we are most concerned with here today. Income may be taxed in the jurisdiction where it is earned then taxed again when it is repatriated in the business's home country. To avoid these issues, countries sign treaties for the avoidance of double taxation. It is the abuse of that system which fosters the need for the bill we are discussing today.
The withholding tax reductions on dividends generally apply where the recipient of a dividend is a company that owns, holds or controls more than a certain amount of the shares or voting power of the dividend-paying company. However, article 8 of the MLI will deny access to the special relief if those ownership conditions are not met throughout a one-year period, including the day of the payment of the dividends.
The second optional provision would add an examination period of one year preceding alienation of the property in determining whether a CTA would exempt capital gains on the sale of equity interests that would not derive their value principally from immovable property.
According to Osler, Hoskin & Harcourt LLP's article, “Canada tables NWMM to ratify MLI; Updates MLI reservations”: It states:
Canada’s domestic “taxable Canadian property” rules impose a five-year lookback period for determining whether shares derive their value principally from certain types of Canadian properties (such as real property and resource properties). By contrast, many of Canada’s tax treaties exempt gains from being taxed in Canada where the shares sold by a resident of the other state do not derive their value principally from immovable property in Canada at the time of disposition. Article 9(1) of the MLI, which Canada proposes to adopt, will allow the source country to tax such gains if the relevant value threshold is met at any time during the 365 days preceding the disposition.
The new provision on capital gains will also extend the application of existing provisions in Covered Tax Agreements that do not already provide for such taxation to allow taxation of gains from both shares and other equity interests (such as interests in partnerships and trusts), in each case provided the relevant immovable property threshold is met during the 365-day testing period.
The third change [Article 4] is to adopt a provision for resolving dual resident entity cases...Article 4 of the MLI adds certain factors that the competent authorities should take into account when determining residency status: place of effective management, place where the entity is incorporated or otherwise constituted, “and any other relevant factors.”
The fourth and last addition is the adoption of a provision of the MLI that will allow certain treaty partners to move from an exemption system as their method of relieving double taxation, to a foreign tax credit system.
There are a number of considerations I would like to raise, considerations I hope will be addressed at committee.
On article 4, Osler, Hoskin & Harcourt LLP, in its analysis, warns:
The new article on dual resident entities does not provide for a clear result where the entity is a dual resident by virtue of a corporate continuance. Some such entities may be governed by the laws of both the jurisdiction under which they are created and the one to which they are continued. The U.S.-Canada treaty contains a tie-breaker rule that provides that such an entity would be resident only in the jurisdiction where the entity was created. By referring to the place where the entity is incorporated or otherwise constituted as a relevant factor, the new MLI provision may be signalling that a similar approach should be applied...
Whether there is a one-size-fits-all template that can be applied to address the concern or that this is best solved by an agreement between signatories is not clear. I again encourage the committee to look into this matter and provide some clarity on this.
Article 5 of the MLI allows countries to adopt one of three different options when removing such treaty-based guarantees. It is unclear at this moment which of the three options the government intends to implement. This may be a matter for the government to decide after ratification or it may not.
In any event, some time to consider witness testimony on the options available to eliminate the issues of double taxation will provide some guidance, I think, for the government when the time comes to implement an option.
The government did not announce an intention to remove its reservation on article 7(4), which would specifically allow treaty benefits that would otherwise be denied under the PPT to be granted in full or in part by the competent authorities in appropriate circumstances.
Osler, Hoskin & Harcourt LLP cautions that this is problem, illustrated with this example. It states:
...assume that an investor would be entitled to a 15% withholding tax rate on dividends had it made a direct investment into Canada, but instead invests into Canada through an intermediary that would have been entitled to a 10% withholding tax rate. A denial of treaty benefits under the PPT could lead to a 25% withholding tax rate on dividends to the investor.
Without the provisions in Article 7(4) the mechanism to allow for remedies will not exist.
According to Osler:
This is particularly important, for example, for private equity and other collective investors that may be resident in multiple jurisdictions. Canada has also not provided any additional guidance on when or how the PPT is intended to apply to private equity and other collective investment vehicles--despite many suggestions that further guidance is needed (either on a unilateral or bilateral basis).
I would strongly encourage the committee to examine this matter and pay particular attention to the very broadly worded PPT, which may be open to various interpretations.
Gowling WLG's partner, Laura Gheorghiu, in her article on the MLI tax treaty and what it means for taxpayers, brings to our attention concerns regarding article 8. She states that article 8:
...addresses the reduction of the 25% domestic dividend withholding rate under most CTAs to 5% where the dividend is paid to a corporation that, at the time of the payment, owns, holds or controls directly (and in certain CTAs, indirectly) at least 10% of votes (or in certain cases holds more than 10% of the shares) of the dividend payor. Article 8 will deny the reduced treaty withholding tax rate unless the applicable ownership conditions are met throughout a 365-day period that includes the day of the payment of the dividends. For this purpose, ownership changes resulting from corporate reorganizations (e.g. amalgamations) of the dividend payor or shareholder are ignored. This...holding period is meant to ensure that non-resident companies that engage in certain short-term share acquisitions will not benefit from the lower treaty dividend withholding tax rates.
The application of the hold period rule will be problematic in practice because the 365-day period can straddle the transaction date. Where the holding period test has not been met at the transaction time, the corporate dividend payor has a difficult choice to make. If it withholds at the lower rate, it exposes itself to the risk that the shareholder will not meet the holding period test and, therefore, the payor will be liable for the additional withholding tax and penalties. Alternatively, if it withholds on the dividend at the domestic rate, and the test is met, the shareholder will then need to apply for a refund of the excess withholding, which will engender additional costs and delays.
As of today, 84 countries have signed the MLI including Canada. Six more are interested in signing and 10 have ratified the convention.
It is interesting to me that the United States has chosen not to sign the MLI. Rather than pursuing legislation to recoup unpaid taxes in an investment like the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, the U.S. has chosen a different approach.
When the OECD first announced its plan to go after tax planning and double taxation by multinationals, the U.S. had the highest statutory corporate tax rate in the OECD. Since then, the U.S. has passed historic corporate tax cuts as part of the tax cuts and jobs act, lowering its headline corporate tax rate from 35% to 21%, less than the OECD average.
The U.S. has also made significant changes to the international taxation of its U.S. multinationals.
The U.S. has taken steps to address BEPS and non-taxation of multilateral income by creating strong incentives for companies to relocate investment, economic activity and profits in the U.S. through a more competitive tax code..
To be clear, I am not advocating for the abandonment of Bill C-82 As I mentioned earlier, the Conservatives support the principles behind the bill, but we also support lower taxes for Canadians and businesses. Lower corporate taxes, reducing red tape and creating an investor-friendly climate is something we need to do in concert with Bill C-82. The more investment dollars we can attract and retain in Canada, the less taxes we need to spend in pursuit of those who exploit loopholes in tax rules.
In 2013, the previous Conservative government supported the effort to establish the OECD G20 BEPS working group to curtail profit shifting and tax avoidance.
The Conservatives support measures to crack down on tax evasion. Aggressive tax avoidance is a major source of lost tax revenue for high tax jurisdictions like Canada. However, let us remember that the vast majority of citizens, residents and businesses in Canada pay their taxes and follow the rules. Having a fair tax system for all Canadians and corporations that do business in Canada is fundamental to a healthy and equitable economy.
I want to quickly talk about what is happening when there is a lower-tax environment, something we do when we lower regulations and red tape and allow businesses to thrive in open and free markets. We are seeing that, as I mentioned, in the United States. The last number I saw was that there were 6.7 million unfilled jobs in the United States. Obviously, when that happens, wages go up, which we are seeing that all across the board, unemployment goes down, bonuses are given out and employees are better off than they were before. More money in more people's pockets gives them more options, more choices in their own lives to spend on projects and things they feel are important to them.
When we look at what is going on in Canada, we are almost doing the exact opposite: taxes are going up; red tape and regulations are grabbing onto businesses, they are strangling them; and businesses are looking for options elsewhere. We are already seeing it in the energy sector.
We have lost out on tens of billions of dollars worth of investment because of the government. Investment is fleeing; we are losing jobs, families are worse off than they were before; and we are going in the opposite direction in what most countries are doing, including one of our competitors, the United States. This is important to note because those of us on this side of the House believe that lowering taxes, allowing free markets to weed out bad actors, allowing people to have more choice and freedom in their daily lives is the best way to have a free and open society, like we do here.
With careful consideration of the bill and amendments at committee, these measures would prevent treaty abuse, improve dispute resolution and reduce the incidence of tax avoidance. However, I also laid out another case as well.
