Thank you and good afternoon.
I am the tax director for AstraZeneca Canada but am appearing today as the vice-president for Canadian affairs for the Tax Executives Institute. TEI is the pre-eminent association of business tax professionals worldwide. Our 7,000 members work in-house for 3,000 of the largest companies in Canada, the U.S., Europe, and Asia. My comments are endorsed by TEI's approximately 900 Canadian members and other members whose firms have significant operations and investments in Canada.
The government's efforts to decrease the corporate income tax rate and broaden Canada's tax base have made our system globally competitive, increasing Canada's attractiveness to investors. By encouraging the provinces to adopt harmonized tax policies, the federal and provincial governments have realized substantial administrative savings, but Canada must remain vigilant as other countries restructure their tax systems, implement rate reductions, and lower marginal effective tax rates. In addition, the government should continue to reduce red tape and paperwork, increase electronic filing of tax forms, and ensure that CRA is well funded and streamlined in its audit and appeals procedures to maximize the efficiency of tax administration
Despite progress towards a competitive tax system, there is unfinished business. In 2008, the advisory panel on Canada's system of international taxation made two important recommendations that have not yet been addressed.
First, the panel recommended repealing the current process for issuing waivers of withholding taxes under regulations 105 and 102 and replacing it with a self-certification system for obtaining treaty benefits. Time does not permit me to explain why the current waiver process is not working. The advisory panel's 2008 report does that. A self-certification system for treaty benefits based on current information reporting requirements will maintain CRA's enforcement capability, but it will shift the compliance burden and costs to the certifying party. TEl urges adoption of the panel's recommendations for treaty benefit self-certification.
Second, the advisory panel recommended the Canada-U.S. tax treaty be renegotiated to eliminate withholding taxes on dividends between related group companies. The United States has negotiated a nil withholding rate for group dividends under many of its tax treaties. TEl recommends that steps be taken to ensure that Canadian residents benefit in the same way as do residents of other U.S. treaty partners.
Our final recommendation relating to Canada's international tax system is to go slowly in adopting the OECD's recommendations to curb perceived base erosion and profit shifting, known as BEPS. Over the last several budgets the government has already undertaken actions to curb base erosion, effectively implementing a "made in Canada" BEPS action plan. Those actions include adopting limitations on interest deductibility, curbing hybrid mismatches, and enhancing disclosure rules for aggressive tax planning. Also, Canadian taxpayers are required to provide substantial documentation of their foreign operations, which permits CRA to conduct risk assessments with respect to transfer pricing.
Because of varying economic conditions, budget constraints, and tax policies of participating countries, the OECD's recommendations may exacerbate the current patchwork of international tax rules and make it even more burdensome for taxpayers to comply while increasing the risks of multiple taxation. To avoid undermining Canada's tax system, TEl recommends implementing the OECD's BEPS recommendations only after careful consideration of their impact on the economy.
Our final recommendation is to improve the administration of the tax system by according CRA authority to settle disputes based on the “risks of litigation”. In 1997, the technical committee on business taxation pointed out that because of the “costs, delays and uncertainties involved in resolving issues at trial, it can be of benefit to all parties to achieve compromise” solutions. TEl concurs that, under a "risk of litigation” approach, a fair and impartial resolution can be reached that “reflects on an issue-by-issue basis the probable result in event of litigation, or one which reflects mutual concessions for the purpose of settlement based on relative strength of the opposing positions”. Large taxpayers are frustrated at their inability to resolve disputes with CRA at both the appeals and audit level.
Besides the uncertainty surrounding appeals and litigation, large corporations must pay 50% of the tax in dispute when it is reassessed. Prepaying amounts that may be refunded is a significant drain on financial resources that could otherwise be invested in the business and promote employment. More tools are needed to enable taxpayers and CRA to resolve disputes quickly. We believe our recommendation is one such step.
TEl thanks the committee for the opportunity to participate in this hearing, and I will be pleased to respond to any questions from the panel.