Evidence of meeting #64 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was agreement.
A recording is available from Parliament.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Holy smokes, you're generous today.
I'll just ask two very simple questions. On Bill S-4, in a situation where a company has its headquarters in Israel or Taiwan, would it receive any tax benefits related to its Canadian subsidiaries if Bill S-4 were to become law?
General Director, Tax Policy Branch, Department of Finance
Yes, potentially it would. If a Taiwanese shareholder of a Canadian company.... If there were such a case and if it received dividends, interest, or royalties from that company, then lower withholding tax rates would apply, unlike in a case where there was no arrangement in place.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Okay.
Just generally, why is it so important to have these tax treaties in place, especially for non-residents to encourage them to invest?
General Director, Tax Policy Branch, Department of Finance
Well, we see a value generally in having tax treaties in place because of the certainty that they provide, as we discussed earlier. In these particular cases, it's helpful for firms to know that they have this lower withholding tax, and other taxes, in place to give them certainty with respect to their investment. We are aware of some firms that are actually contemplating investments, and the treaty or arrangement would influence those decisions. We think it would be a positive thing if they could be brought into force for that purpose.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
I'll just make a last comment. These tax treaties are important because history and evidence show that they do facilitate trade and investment in each other's countries.
Liberal
The Chair Liberal Wayne Easter
Thank you, Mr. Sorbara.
Thank you to our witnesses: Mr. Ernewein, Ms. Smith, and Mr. McGowan.
We will suspend for five minutes while the witnesses come forward for the next round.
Liberal
The Chair Liberal Wayne Easter
We'll begin by welcoming the witnesses on Bill S-4.
We'll start with Ms. Rebolledo from Export Development Canada.
Go ahead, Ms. Rebolledo.
Luisa Rebolledo Chief Asia Representative, Export Development Canada
Thank you very much, Mr. Chairman and honourable members, for inviting Export Development Canada to come and speak to you today. We appreciate your interest in EDC's work as it relates to Canadian exporters and our perspective as it relates to this issue today.
My name is Luisa Rebolledo, and I am the chief representative for Asia at Export Development Canada. EDC is a crown corporation whose mandate is to support and develop trade. This is done by helping Canadian exporters respond to international business opportunities. We provide insurance and financial services, bonding products, and small business solutions for Canadian exporters and investors, as well as their international counterparts.
EDC is financially sustainable and does not receive any appropriation from the government. That's particularly interesting to us, as we paid a $500-million dividend back to the Canadian government. Many Canadian exporters do benefit from EDC. Almost 7,400 Canadian exporters, of which 81% were small and medium-sized businesses, used EDC's services that facilitated $104 billion in trade. As it relates specifically to Taiwan, Taiwan is Canada's eleventh-largest trading partner. If you've been to Taiwan, you understand that Taiwan has a very dynamic economy and has a growing middle class, making it particularly appealing to Canadian companies.
Today I come before you to address the benefits that the proposed arrangement on avoidance of double taxation may have for Canadian exporters and how it will make these exporters more competitive when doing business with Taiwan. I should note that I am limiting my comments specifically to EDC's business and to EDC's mandate, and therefore I will allow my partners here to provide their expertise on other parts of the arrangement.
Current tax laws in Taiwan require borrowers to withhold 20% of interest payable on any loan. Practically, that means that Taiwanese borrowers must withhold 20% of interest and give it to the government. As is customary with most loan agreements, when there is a withholding required, the borrower has to gross up their payments such that the bank receives the full interest they are entitled to. From the borrower's perspective, this increases their costs on the interest by 20%. This very much dampens the competitiveness of a Canadian exporter's bid.
The proposed changes in article 11, paragraph 3(a), of the agreement specifically relate to EDC and EDC's activities as they relate to Taiwan. Essentially, when a loan or a credit is guaranteed or insured by EDC, the taxes payable on the interest are subject to Canadian tax laws. Given that EDC is tax-exempt, no withholding tax would be required on those loans.
In addition to making EDC loans tax-exempt, another key impact of the arrangement will be that many cross-border payments, such as dividends and royalties between Canada and Taiwan residents, will attract lower Canadian tax. In effect, this arrangement should reduce the tax costs of repatriating income or profits from Taiwan to Canada. EDC believes this arrangement will help create a friendlier environment for bilateral investment, especially considering the potential for further co-operation in technology, health care, clean tech, sustainable development, and the services sectors that Canadian companies are particularly strong at.
I would welcome any questions after my panel continues.
Liberal
The Chair Liberal Wayne Easter
Thank you very much.
Mr. Houlden from the University of Alberta, the floor is yours.
Prof. Gordon Houlden Director, China Institute, University of Alberta
Thank you very much, Mr. Chairman and honourable members.
It is my great pleasure to be here representing the University of Alberta, the China Institute, where I'm the Director and Professor of Political Science.
In an earlier life I served as Executive Director of the Canadian Trade Office in Taipei and later as Director General for East Asia, but my comments today are as a private citizen.
I can take questions in both official languages.
Since establishment of relations on October 13, 1970, between Canada and PRC, it's not possible for Canada to sign formal international agreements with Taiwan. However, under that formula of those negotiations, which concluded in 1970, there was space retained for commercial and people-to-people contacts. Given that Taiwan has developed subsequently into a very dynamic economy, one of our premier economic partners in Asia, it befits us to do what we can to facilitate that relationship. Others I've heard today, including a former colleague from EDC, have spoken in detail of those arrangements and of some of the facilities that may offer.
One can be reminded it was only in 2014 that our total trade with Taiwan was surpassed by India. The population of India is 50 times the size of Taiwan. So this is a substantive trading partner. It is of relevance to this agreement as well that the number of citizens living in each jurisdiction is also significant. Some 50,000 Canadian citizens live in Taiwan. The Government of Canada estimates that some 200,000 Taiwanese are living in Canada. That's something quite unique developing on that far side of the Pacific, with over 350,000 in Hong Kong, perhaps; and I think at least 100,000 in China, perhaps. We're now getting a situation where those human contacts are very large, notwithstanding the distance.
Of course, on the case of double taxation, Taiwan has already included some 30—I'm not going to read them—arrangements on double taxation with states including Japan, Singapore, Australia, Belgium, France, Netherlands, the U.K., and others. There also have been, and this began in 1979, over 20 arrangements of various sorts between Canada and Taiwan. Most of these are economic and commercial to bring order, I believe, to this substantive trade.
I recall working in government previously when there was a great gap in the fisheries arrangement in the Pacific. All the internationally recognized states subscribed to the international covenants on fishing, and one in particular, drift-net fishing. Because Taiwan is not a state, they could not join the relevant organization, and there's a great gaping hole there, which we along with others managed to fill through informal relationships. Taiwan is too big and too important to simply leave aside. It leaves a great gap, either with our arrangements in that place or in the international arrangements between states and in the international community.
Beijing, in my opinion, sometimes more and sometimes less has shown considerable tolerance and maturity with regard to foreign contacts with Taiwan where these arrangements do not imply the establishment of state-to-state relations with Taiwan. Therein is that question you posed to one of the previous witnesses, why the term “arrangement” and not “agreement”, which generally carries with it an implication of recognition between states.
This “space” is not unlimited, but it has allowed Canada to promote a substantive interest with Taiwan while observing limits on the form of such contacts. In my view, that's the trick: how to get the substance in dealing with Taiwan without violating the form to the point where it creates an impediment in our relations with the PRC.
The tenor of the relationship between Beijing and Taipei is a factor as well. The better those two are getting along, the more space there's been traditionally, the less the Chinese tend to be hyper-sensitive. When those two are not getting along—I fear we're sliding into another one of those phases—the tolerance tends to decline again.
Given the magnitude of Canadian interest in that relationship with an emerging superpower that is the PRC, and the parallel importance of maintaining contacts with the lively democracy that has emerged in Taiwan, both caution and perseverance are warranted.
Thank you, Mr. Chairman.
Liberal
The Chair Liberal Wayne Easter
Thank you very much, Mr. Houlden.
Next is Ms. Alepin, as an individual.
Brigitte Alepin Tax Expert, Agora Fiscalité, As an Individual
Thank you, Mr. Chair.
Ladies and gentlemen, Canadians, my name is Brigitte Alepin. I am a Tax Expert, tax policy specialist, author, and scriptwriter.
Since I was invited on short notice, I will focus on my analysis of the agreement with Hong Kong. I also looked briefly at the agreement with Taiwan. Here are what I consider the most important findings of my analysis.
Since the corporate tax rate in Hong Kong is 16.5%, there must be an agreement to avoid double taxation of the corporate revenues of Canadian businesses in Hong Kong. However, since Hong Kong is a special case, where interest income, dividends, and capital gains are not taxed, and there is no tax deduction at source, we might expect that this convention between the two countries would reflect this, which does not appear to be the case at all right now.
Moreover, the proposed amendment in Bill S-4 must be considered in the context of the existing convention with Hong Kong. The bill provides as follows:
[...] references to a “country” or a “state” are, with such modifications as the circumstances require, to be read as including the Hong Kong Special Administrative Region of the People’s Republic of China.
Does that mean that, without Bill S-4, the current agreement between Canada and Hong Kong is not operative? In fact, the terminology used in the bill is not consistent with that used in the Income Tax Act, the Income Tax Conventions Interpretation Act, and the Income Tax Regulations.
Moreover, in Canada, all tax conventions are covered by the prevailing domestic legislation, pursuant to the Income Tax Conventions Implementation Act, 1999. Is this terminology legally appropriate in view of the latter act?
It would be helpful to have a clear answer to this question because, if the amendment proposed in Bill S-4 makes the tax convention between Canada and Hong Kong operative whereas it is not really at present, that means that the amendment proposed in Bill S-4 would be more important than a mere administrative adjustment. In that case, the issues involved would be more complex.
I know that the trade relationship with China is very important to Canada. Bill S-4 simultaneously approves tax conventions between Canada, Hong Kong and Taiwan. In the present circumstances, I think we should be concerned about how China would interpret this action by Canada in the era of the Trudeau government.
As to the added provisions specifically included in Bill S-4 regarding the convention with Hong Kong, I also wonder about the impact of the tax convention with Hong Kong that Prime Minister Stephen Harper himself signed on November 11, 2013. The world has changed since then in terms of taxation and politically. While the tax convention with Hong Kong is open and certain changes are being made to it, Canada should perhaps consider using the opportunity to make sure the agreement complies with the international commitments Canada has made since November 11, 2013.
Consider for example the automatic sharing of information. The current agreement and its protocol provide for the sharing of information at the request of tax administrations only, which runs counter to the commitment Canada made in 2015 to measures for the automatic sharing of tax information and the statements by the Minister of Finance, Mr. Bill Morneau, with regard to information sharing.
That concludes my presentation. I will be pleased to answer all of your questions.
Thank you.
Liberal
The Chair Liberal Wayne Easter
Thank you.
Next is Ms. Taylor from the Department of Foreign Affairs, Trade and Development. She is the director general for North Asia and Oceania.
Go ahead, Ms. Taylor.
Sarah Taylor Director General, North Asia and Oceania, Department of Foreign Affairs, Trade and Development
Mr. Chair, honourable members, thank you for this invitation to appear before you today. I am pleased to be here today to speak to you about Bill S-4, An Act to implement a Convention and an Arrangement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and to amend an Act in respect of a similar Agreement.
My name is Sarah Taylor. As mentioned, I'm the Director General for North Asia and Oceania bureau at what is now called, because we love to change our name, Global Affairs Canada. Given these areas of responsibility, my remarks today will focus principally on the avoidance of double taxation arrangement between the Taipei Economic and Cultural Office in Canada and the Canadian Trade Office in Taipei.
Why is a double taxation arrangement necessary with Taiwan?
Double taxation conventions or arrangements are specifically used to eliminate tax barriers to trade and investment. Canada has an extended network of double taxation conventions, with 92 in force.
Overall, the entry into force of this arrangement will assist to further solidify Canada's strong economic links with Taiwan by removing tax barriers to cross-border trade and investment.
As the Prime Minister said recently at APEC in Peru in November, "Trade and investment with Asia Pacific economies are critical to our country's economic future and to growing our middle class."
Taiwan is Canada's twelfth-largest trading partner and fifth-largest trading partner in Asia. In 2015 our exports to Taiwan exceeded $1.46 billion, and our imports exceeded $5.46 billion. In 2015 bilateral trade grew year on year by over 14%, from $6 billion to $6.91 billion. However, Taiwan is one of the few of Canada's large trading partners not covered by a double taxation convention.
Investment relations between Canada and Taiwan remain underdeveloped, as a result, in the context of Canada's overall inward and outward FDI, or foreign direct investment. According to figures from Statistics Canada, the stock of Taiwanese FDI in Canada stood at $108 million at year-end 2015. By the same token, the stock of Canadian direct investment in Taiwan at the end of 2015 was $115 million. This is partly due to the lack of an avoidance of double taxation arrangement, as many Taiwanese and Canadian companies are forced to make investments through an indirect route by going through a third country that already has an existing ADTA. This is a significant barrier to investment, in our view.
Taiwan clearly offers great potential for Canadian investors: it is a vital link to Asian and global supply chains, especially in the information, communications and technology sector, and is used by many businesses as a test site for products aimed at wider Chinese markets.
We've heard from Canadian and Taiwanese businesses, and they welcome this arrangement, as it will significantly reduce their tax burden and make investing in each other's jurisdictions more compelling. Further, it will support the competitiveness of Canadian companies vis-à-vis companies from other countries that already have a double taxation agreement with Taiwan.
Just very briefly—Mr. Houlden also mentioned it—why has this been concluded as an “arrangement”? In keeping with our one China policy, the arrangement with Taiwan is an arrangement, rather than an agreement, between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada. Canada has arrangements in a wide range of areas with Taiwan—air transportation, agricultural market access, visa exemptions, etc. The arrangement is also consistent with what other countries that have a one China policy have done in their respective double taxation conventions or arrangements with Taiwan. Taiwan has accepted Canada's position to present this instrument as an arrangement.
To conclude, Global Affairs Canada fully supports Bill S-4. It will facilitate trade between and investment between Canada and Taiwan and lead to job-creating investment for our Canadian businesses.
I would be pleased to take your questions afterwards.
Liberal
The Chair Liberal Wayne Easter
Thank you very much, Ms. Taylor.
We'll turn now to Mr. Weston.
John, you're quite familiar with this table and many others around here. The floor is yours.
John Weston International Lawyer, McMillan LLP
Thank you Mr. Chair and members of the committee. I am very pleased to be here with you today, albeit in a different capacity.
I served as the MP for West Vancouver—Sunshine Coast—Sea to Sky Country for eight years, between 2008 and 2015, before being liberated by the electors last October.
International Lawyer, McMillan LLP
I am now practising international law with a firm named McMillan, which has offices in Hong Kong, Vancouver, Ottawa, and other places, but I am confident that the reason the committee invited me is that I resided in Taiwan for 10 years and did business throughout the Pacific Rim. I also had the honour of being one of the first two Canadians who served at the Canadian Trade Office in Taipei, so there is some history there. We've heard, throughout the day, about the arrangements that led to that rather interesting office.
Ironically, when I received your invitation, I was putting the finishing touches on a book, Seeking Excellence in Leadership, criticizing the effectiveness and relevance of committees, and here you are, studying something that could not be more relevant to people who want to do business and invest in Taiwan, Hong Kong, and Israel. For obvious reasons, I will be focusing on the Taiwan part of the agreement.
I lived in Taiwan between 1986 and 1997, a very eventful decade. When I arrived, martial law was in force, and when I left, they had an independent judiciary, free elections, free newspapers, freely trading currency, and people who could freely travel to mainland China. Just note the number of times I used “free” in that sentence. It is truly one of the world's most robust democracies.
Voting participation rates in the last five Taiwan presidential elections have averaged over 76%, and they have very high-calibre, well-educated leaders to serve: for instance, in the persons of Ma Ying-jeou, the past president, and Tsai Ing-wen, the current president. She has achieved international fame as the first female president of Taiwan—and, after last weekend, someone who knows how to place an important phone call.
International Lawyer, McMillan LLP
From 2013 through 2015, I headed the Canada-Taiwan Parliamentary Friendship Group, known for its hard work, cross-party camaraderie, and productivity. In that group, we learned the virtues of the type of agreement you are considering today. Such agreements are typical signs of progress between jurisdictions that encourage friendship, free trade, investment, and increased exchange between people.
Let me quickly cover ten benefits I see in this agreement. Deft drafting and careful diplomacy have eliminated the one impediment that delayed this agreement for the 20 years of negotiations it has taken.
One, it encourages trade with a decidedly democratic jurisdiction. Two, it allocates taxing rights between the two jurisdictions so that taxpayers are not subject to double taxation. Three, it reduces the risk of excessive taxation that may arise because of high withholding taxes on payments of dividends, interest, remittances, and royalties paid by a resident of one jurisdiction to a resident of the other. Four, it ensures that taxpayers will not be subject to discriminatory taxation in the foreign jurisdiction. Five, it provides greater certainty to taxpayers regarding their potential tax liability in the foreign jurisdiction. Six, it encourages adherence to the rule of law for people by promoting tax compliance. Seven, it increases tax revenues. Eight, it discourages good Canadians—those of Taiwan background—from renouncing their citizenship. In my experience, Canadians who hold dual U.S. citizenship are renouncing their U.S. citizenship in increasing numbers due to arbitrary and capricious practices by the IRS and the U.S. Treasury Department. Nine, the ADTA paves the way to other promising economic arrangements, including a foreign investment protection agreement and a free trade agreement. And ten, it takes advantage of great timing. There is peace across the Taiwan Strait, so it's easier for Canada to engage with both Beijing and Taipei while adhering resolutely to our one China policy.
In terms of the impact on Canada-Taiwan investment, we've heard about the underperforming rates of investment that are just out of step with the patterns of cross-border trade and the number of people in both places. On two-way investment, the CTOT reports that Taiwan is currently Canada's twelfth-largest trading partner, but we are looking at Taiwan as being only the 40th-largest investor in Canada, so there is much more that can be done in that file.
The CTOT also reports that a number of bilateral investment deals are pending that would benefit from the provisions within the ADTA. They can't be disclosed for reasons of confidentiality, but there is real margin to be had by getting this agreement passed.
The one negative downside has been alluded to by various persons who have testified. This agreement was signed in January of this year and passed by the Taiwan legislature in February. It took two decades to get here, and that is due solely to the concern of offending the one China policy. But the deft drafting includes words such as “territory” and “jurisdiction”, deliberately in there to avoid offending a state-to-state kind of...or proposing that there's a state-to-state kind of relationship here.
The signatories are the two trade offices, not governments directly—another sign of the genius behind this accord. It has been carefully designed to navigate the tightrope that all but Donald Trump require when promoting relations with Taiwan.
In conclusion, this accord is expected to help facilitate increased two-way investment by significantly lowering withholding tax rates. As I related, there are at least ten concrete benefits and no serious downside risks. If the committee and the House can get this through by Christmas, there will be a whole extra year of more value-added investment between the two sides.
I highly recommend that the committee support Bill S-4.
Liberal
The Chair Liberal Wayne Easter
Thank you very much, Mr. Weston.
Turning to questions, we'll go through one round. I know that Mr. Albas wanted to lift a motion off the table, and he can do that at any time. So as not to disrupt witnesses, we'll go through the first round, then he can move his motion.
Go ahead, Mr. Sorbara.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Thank you, Mr. Chair.
Welcome, everyone.
My first question is to you, Mr. Weston. With your experience in living in Taiwan and dealing with Taiwan-Canada issues, going forward with Bill S-4, if it's implemented and comes into effect January 1, what sectors in both Canada and Taiwan will this deal benefit? Where do you see growth in trade and investment coming from with the implementation of Bill S-4?
International Lawyer, McMillan LLP
Thank you for the question.
Traditionally there has been considerable interest in trade and investment in areas like IT, engineering and consulting services, environment-related services, and natural resources. In terms of investment in the two places, it creates an opportunity to capitalize on the really good personal relationships that have developed over the years among people of Taiwanese and Canadian backgrounds.
Really, the sky is the limit in that this is one of the most obvious barriers that would prevent all those many Taiwanese people—we heard between 150,000 and 120,000 people in Canada have a Taiwanese background. They're buying houses, they're sending their children to school, but they're not investing in our country in the ways we would like. There are many opportunities. In the past couple of years, there have been joint ventures involving high tech. They've typically been conducted through intermediary countries. Again, that was required because of the lack of an ADTA.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Okay.
To Luisa from EDC, I found it interesting, in the example you used, where you had a 20% withholding tax on interest payables. I think that was the number you had used. What happens if you're a borrower and you have to gross up? I wonder if you can elaborate further on how big an impediment it is to have a flow of capital from one jurisdiction to another.