Finance Committee on Feb. 5th, 2019

[The Chair, Liberal, Wayne Easter]

I call the meeting to order.

This is our first full committee meeting in new digs. Welcome to everyone. Pursuant to the order of reference of Monday, October 15 of last year, we are here to discuss Bill C-82, an act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting.

To start on this bill, we have with us, from the Department of Finance, Stephanie Smith, Senior Chief, Tax Legislation Division; and Trevor McGowan, Director General, Tax Legislation Division.

Welcome to both of you. The floor is yours.

[Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance]

Thank you, Chair.

We appreciate the opportunity to appear before the committee today to speak about Bill C-82, an act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting. This convention is generally referred to as the MLI.

The substantive provisions of the MLI are based on the results of the OECD/G20 base erosion and profit shifting project, the BEPS project. This includes the final report on BEPS action 6, entitled “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”, and the final report on BEPS action 14, entitled “Making Dispute Resolution Mechanisms More Effective”.

The OECD and G20 BEPS project was initiated in 2013 with the objective of developing a coordinated approach to addressing concerns over BEPS. The project now involves not only OECD and G20 countries but also more than 120 jurisdictions known collectively as the “inclusive framework” on BEPS. BEPS is a term used to describe aggressive, but nonetheless legal, tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift income to low- or no-tax jurisdictions. Countering such strategies requires a coordinated international response. The MLI is an important component of that coordinated international response.

Over 100 jurisdictions participated in the negotiations that led to the conclusion of the multilateral instrument. To date, 87 jurisdictions have signed the MLI. Bill C-82 would bring the MLI into force with respect to Canada and allow Canada to swiftly modify the application of many of our bilateral tax treaties to include BEPS countermeasures without the need for separate bilateral negotiations.

The MLI represents a big step forward in strengthening international tax integrity and tax fairness. Specifically, the MLI would allow Canada to address treaty abuse in accordance with the minimum standards established by the OECD/G20 base erosion and profit shifting project. This includes the adoption of a new treaty preamble, which states that the object of a tax treaty is not to create opportunities for tax avoidance, and also a principal purpose test, which is a substantive anti-abuse rule designed to counter treaty abuse.

ln addition, the MLI would allow Canada to incorporate provisions in its tax treaties dealing with the resolution of tax disputes that are in accordance with the minimum standards and to adopt mandatory binding arbitration with many of our key treaty partners. Mandatory binding arbitration is a mechanism that obligates the parties to a tax treaty to submit unresolved cases to an independent and impartial decision-maker—an arbitration panel. The decision reached by the arbitration panel is binding on the parties and resolves the case.

Chair, this concludes my introductory remarks. My colleague and I would be pleased to answer any questions the committee may have.

[The Chair, Liberal, Wayne Easter]

Okay. Thank you both for being here.

We'll start round one with Ms. Rudd for seven minutes.

[Kim Rudd, Northumberland—Peterborough South, Lib.]

Thank you very much, Mr. Chair.

Thank you for coming. I have a few questions on the bill that I'm hoping you'll be able to answer.

First, the bill states that the MLI convention “shall be open for signature” as of mid-December 2016. What's the process for Canada to bring this treaty into effect?

[Stephanie Smith, Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance]

The bill was signed in June 2017. Following that, the government tabled this implementing bill, Bill C-82, to enact the MLI into Canadian domestic legislation. Following royal assent to this bill, Canada would be in a position to notify the depositary of this convention that it has completed all necessary procedures to implement the bill in domestic law. Then the multilateral instrument would be in force, in respect of Canada, a three-month period after such notification.

[Kim Rudd]

To follow up with a little more detail about process, the bill also states that the treaty will enter into force after the deposit of five instruments for ratification, acceptance or approval. How many instruments of ratification have been deposited by Canada thus far?

[Stephanie Smith]

Canada has not deposited its instrument of ratification yet. However, 19 other signatories to the multilateral instrument have deposited their instruments of ratification. The first five deposited them in the first half of last year. The treaty itself entered into force on July 1, 2018. However, even though the multilateral treaty is in force, it has no effect in respect of any of Canada's tax treaties until such time as Canada ratifies, and it is entered into force and effect.

[Kim Rudd]

I'm just trying to be clear here. At what step in the process is Canada? Other countries have deposited their instruments. When would we deposit our ratification notice?

[Stephanie Smith]

Canada would deposit its ratification notice after this bill receives royal assent. The Minister of Foreign Affairs would then seek an order in council to authorize her to send a notification to the depositary in respect of Canada's ratification of the instrument. Assuming that this bill was to receive royal assent before the end of this session, I would expect that such notification would be sent this summer.

[Kim Rudd]

What's our next opportunity to have this come into force? When you say it could be in the summer, are there deadlines, specific openings where this is done?

[Stephanie Smith]

There are no specified times within which you have to deposit your notice of ratification. Obviously the earlier the notice of ratification is deposited, the earlier the entry into force. Then the next step is the entry into effect of this instrument. Because of the way this multilateral instrument works, there is a bit of a lag between a deposit of ratification and its entry into effect. If we were to deposit our notice of ratification any time before the end of September 2018, generally speaking the MLI would have effect with respect to Canada starting January 1, 2019.

To the extent that we deposit our notice of ratification after September 30, 2018, there would generally be a year's delay in its entry into effect. Some provisions would have effect midway through 2019, but with respect to many of the provisions, there would be a delayed application until January 1, 2020.

[Kim Rudd]

I'd like some clarification. You're talking about September 2018, which is already past. Did you mean 2019?

[Stephanie Smith]

My apologies. I did mean September 2019.

[Kim Rudd]

Okay. I wondered about that. I just thought we needed to get that on record. We missed a big window there, then.

[Stephanie Smith]

Yes, I'm sorry.

[Kim Rudd]

Okay.

So we're really clear about this for the record, could you clarify what those timelines are and what our opportunity is? I'd really appreciate it.

[Stephanie Smith]

If we were to deposit our instrument of ratification prior to September 30, 2019, then the convention would come into force at the beginning of the three months after that date. So depending on the date we do it, it would be late 2019 or January 1, 2020. As long as we get an entry into force by January 1, 2020 at the latest, it would enter into effect on the same day. But if we go beyond the September 30 date, we would have an entry into force three months after the deposit of the notice of ratification. However, the entry into effect would generally be delayed by a full calendar year, to January 1, 2021.

[Kim Rudd]

Thank you very much.

[Stephanie Smith]

My apologies for the confusion.

[Kim Rudd]

I know there were a lot of dates, so I really appreciate that.

[The Chair, Liberal, Wayne Easter]

Thanks to both of you.

Before I turn to Mr. Kmiec, what's the difference between “entry into force” and “entry into effect”?

[Stephanie Smith]

Typically, conventions, and specifically tax conventions, have a differing entry into force and entry into effect. It would be in force in respect of Canada; however, it would have no effect on any of our tax treaties, on any transactions that taxpayers undertook, until the date of entry into effect.

There are two different dates of entry into effect depending on the particular tax that would be impacted by the convention. Most of those that would be impacted—or many of them—are withholding taxes. That is where you get the potential full calendar year delay, because it enters into effect on January 1 of a calendar year. That's generally to allow companies, businesses, to adjust withholding systems, etc., to reflect changes in the treaty.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Kmiec.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

I think we'll all agree that it's a scintillating subject.

Thanks for coming here to explain this bill. I think I called it “a tax treaty for tax treaties” in the House during debate. I'm not a tax lawyer or a tax accountant, so it's all very foreign to me.

One thing here I would ask the analysts from the Library of Parliament to note with regard to the bilateral tax treaties to which the convention applies is to make sure that it's clear that it says “South Korea”, and not “Korea”. It just says “Korea” right now. I'm sure we don't have a tax treaty with North Korea. It would be nice to differentiate between the two. I'm nitpicking, but I think it's important.

Ms. Smith, is the United States a party to this agreement?

[Stephanie Smith]

The United States is not a party to this agreement. While it participated in the early days of the negotiation of this instrument, towards the end of the negotiations it indicated that it did not intend to become a signatory to this convention.