Finance Committee on Dec. 5th, 2016

[Luisa Rebolledo]

It does play a significant role in being able to increase trade. You're absolutely right that the current tax environment requires there to be a 20% withholding tax. With this particular arrangement, the withholding tax percentage would go down to 10% for other financial institutions, and go down to 0% for Export Development Canada loans.

When you look at EDC's arsenal of products that we have available to promote trade, there really are three of them: accounts receivable insurance, bonding, and financing. If we look at the history we've had with Taiwan, we've basically done no financing for transactions with Taiwan. All of our deals have been accounts receivable insurance. It's a very good product in terms of...if a Canadian has an export to a Taiwanese company, we insure payment, but a good tool for promoting trade is lending a Taiwanese borrower money to buy Canadian goods. That has been completely lost in this particular market. That is a result of the withholding tax in part, if not in large part.

From our perspective, I think this does have quite a significant role in expanding the trade between the two countries.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Okay. Thank you.

To Ms. Taylor from Global Affairs, I do want to ask about how the arrangement with Taiwan is in keeping with Canada's one China policy.

[Sarah Taylor]

You may have noticed that more commonly we have ADTAs. The “A” stands for an agreement, so those are formal agreements between two governments. In this case we recognize a single China and therefore we don't have a formal government-to-government relationship with the Taiwanese government on the same footing we would with other governments. As a result, we have arrangements rather than agreements, again, signed between the two offices rather than signed by government representatives.

We have a lot of shared interests with Taiwan, in the commercial area but in other areas as well, so over the years we've set up these various arrangements. We've never seen any concern from the Chinese side that these somehow represent a recognition of the Taiwanese government as a formal government, so both the title and the basis on which we set them up allows us to interact with Taiwan as an important economy and a partner in various areas without implying a formal recognition of the government.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you.

Mr. Chair, I'm finished.

[The Vice-Chair, Conservative, Ron Liepert]

Thank you.

Mr. Albas.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Vice-Chair.

To all the witnesses, I appreciate your testimony. Thank you for taking the time to be with us here, and for our public servants, thank you for the work you do for Canadians every day.

I'd like to actually start with you, Ms. Rebolledo. We heard earlier from EDC about the importance that your agency has, particularly when we look at the Americans. They basically have restrained themselves by not being able to offer loans at a low level. We heard about some relocation of General Electric facilities to Canada, which is a big score for Canada, so thank you for that.

With regard to the withholding tax, again, you've illustrated a point where just for the loan, that 20% added to that extra investment basically made it less attractive for many people. Would you also say that the extra paperwork that goes along with that, including the fact that the person making the sale has a requirement to withhold and to deal with the government on that, makes it less likely for someone to do business that could expand our economy?

[Luisa Rebolledo]

Certainly a company whose main focus is not finance would find that an additional burden for them to bear, so I believe the answer is absolutely yes, it would be more difficult for them to want to do cross-border finance if they have to do additional paperwork.

Most companies are quite adept at withholding personal income tax. You get your paycheque at the end of the two weeks or whatever, and a certain amount is deducted immediately for a whole slew of different taxes. They are not accustomed to doing that with their financial arrangements, and therefore it becomes a lot easier for them to simply get financing locally rather than going internationally.

However, on an international scale, like EDC, we would actually be able to give them very good financing terms and therefore promote more purchases from Canada.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

So this tax treaty will also allow EDC to be more effective in drawing in that kind of investment.

[Luisa Rebolledo]

Absolutely we would be more effective.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you. I appreciate that.

Mr. Weston, thank you for your service to our country. In regard to your comments, I believe you mentioned that there are natural progressions here, and I do really appreciate your explaining the many benefits of dealing with Taiwan, both as an economic power but also as a friendly democratic country.

You mentioned the next steps would be a FIPA or a free trade agreement of some sort. Can you explain what you meant by that a little bit further?

[John Weston]

In the course of developing trade and investment between any two territories, it's a natural progression to make it easier to exchange goods and services without punishing taxes. We're doing that by looking at Bill S-4.

A foreign investment protection agreement is something that's been discussed widely in Canada recently because of the agreement with China. It's an agreement that gives equal status to a foreigner who invests in your country who will therefore face no discrimination because of the origin of the investment. The free trade agreement is designed to promote more flow in goods and services. We've seen many of those. You can remind me of the number that were passed under the previous government, which greatly enhanced the prosperity of Canadians.

All of these things are in the interest of Canada and of Canadian people. You mentioned the word “democracy” in your question. Many Canadians like the notion of dealing with other democratic places, and certainly Taiwan has a great track record in that respect.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you for your answers.

Ms. Taylor, Mr. Weston has raised the importance of negotiating. I believe in your comments you did also say that it is important to have things like FIPAs and free trade agreements with the various countries. Does your department organize, similar to CRA, as to which countries we should be aiming to have such agreements—I guess the term would be “arrangement”, Mr. Vice-Chair—in place with?

[Sarah Taylor]

Just to clarify, I don't believe I did mention either FIPAs or FTAs in my remarks, but they are certainly types of economic agreements that we have with different countries and partners.

Yes, Global Affairs Canada, as the department responsible for our international trade policy, would be the lead department on making decisions about which countries to propose negotiations with and then carrying out those negotiations. Obviously it has to be mutually agreed. We may have interest, but the other partner has to be interested too.

Mr. Weston raised, for example, the FIPA that we concluded a few years back with China. That was one that our department led in terms of the negotiations. So we would have that responsibility. We do also a regular process of review within the department based on a combination of the resources that are available for negotiations and then also what are our priority markets. There would be a constantly updated list of which countries would be the next ones we would want to look at for those kinds of agreements.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

In keeping with the one China policy, then, wouldn't we just naturally say, “Listen, we have an agreement with China here on the Canada-China FIPA; would you be amenable to taking the exact same terms to expand those things?” I do think that there's a number of provisions in there that help make sure that when Canadians are investing abroad there are some protections.

[Sarah Taylor]

I'm not a trade policy expert, so I wouldn't want to get too deep into the details of FIPAs.

What I would say on those is that for those agreements, while we do have some relatively standard language and approaches for FIPA that we will usually use as a starting point, the decision about whether to enter into discussions around a FIPA with any country or market would be based on a look at the Canadian interests in play in that particular country or market. Each one would be looked at on an individual basis.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Okay, but would you say there's a significant amount of market activity with Taiwan—enough to look at that?

[Sarah Taylor]

I couldn't comment on what constitutes a sufficient amount of activity. I can say, as I mentioned earlier, that it is a fairly significant trading partner for us in Asia. It's our twelfth-largest trading partner overall and our fifth-largest in Asia.

[The Vice-Chair, Conservative, Ron Liepert]

Dan, I have to cut you off there.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Okay.

[The Vice-Chair, Conservative, Ron Liepert]

Go ahead, Mr. Dusseault.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

Thank you to the witnesses for being with us here today.

I would like to begin with Ms. Alepin.

Thank you for agreeing to appear on short notice.

Thank you also for the new information you provided today, which could mean the re-opening of the debate on the tax convention between Hong Kong and Canada, in a context in which one might believe that, if the proposed amendment is not made, the agreement itself is inoperative as we speak.

In this regard, I asked departmental officials earlier if they saw any danger in having such tax conventions with jurisdictions with low tax rates, such as Hong Kong. I would like to know if you think this poses a risk. The purpose of the bill, as the title indicates, is to avoid tax evasion. Do you think that, instead of fighting tax evasion, it could in fact increase it? Do you think that some people, in order to pay less tax in Canada, might use these tax conventions as a way of avoiding double taxation? Barbados is an obvious example in this regard.

Do you see a danger in these agreements that would allow taxpayers to avoid paying a certain amount of tax in Canada?

[Brigitte Alepin]

Thank you for your question.

Earlier I heard finance department officials answer your question. You had asked whether the current convention between Canada and Hong Kong was fully functional and legal. I know that the Canada Revenue Agency has given its interpretation of this. It said that the convention could apply to transactions between Canada and Hong Kong.

We should question, however, whether the convention in force really complies with international law. International law uses words such as “state” and “country” whereas these words are not mentioned in the current model of the convention.

So we should ask this question since we want to be clear on what we are talking about right now. Is it a minimal technical amendment or something that allows for the full operation of the convention with Hong Kong?

If that is the case, having seen how China can react to certain recent decisions in the United States, we have to consider how China will react to this. Would Canada be simultaneously approving two tax agreements, that is, an arrangement and an agreement with Hong Kong and Taiwan?

I know we are being careful not to offend China by being mindful of the wording of the agreement with Taiwan. We are being careful not to suggest that Taiwan is a country. I understand all that, except that Hong Kong and Taiwan are fiscally competitive with China, so much so that in trading with China it is standard practice to go through Hong Kong.

So I think we have to understand the conventions so we can agree and legislate on the tax treatment between Canada, Taiwan and Hong Kong, which are fiscally competitive with China. It is as though a Canadian province or a U.S. state decided to separate and became a major fiscal competitor.

Today we are talking about agreements that other countries would conclude given that those governments had just separated. So we have to be mindful of these issues. As I said in my remarks, I know relations with China are very important to Canada. From what my colleagues said, I understood that people are quite comfortable with China's reaction, but your question was worth asking. It is important.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

To get back to what is probably tricky diplomatic ground for Ms. Taylor, I understand that the negotiations were conducted by the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada. Technically, these are not negotiations between two governments, but between two non-governmental institutions.

Is this merely a facade? Did the governments actually negotiate the agreement between Canada and Taiwan through these institutions?

[Sarah Taylor]

I will answer your question and, if I may, I will also pick up on some of what Ms. Alepin said about China's possible reaction.

Our current relationship with Taiwan is somewhat complicated. The agreement was in fact signed by the two offices. The staff of the Canadian office in Taipei are from the government of Canada. They are Canadian public servants, primarily from our department, but also from other departments. Similarly, the staff of the Taipei office in Ottawa are from Taiwan's foreign affairs department. So they are officials from the two governments.

As to the personnel, there is not much difference. There is, however, a legal difference owing to the fact that it is an arrangement and that it is signed by the offices. These offices are organizations that have already been mutually accepted. In our case, we accept the presence of the Taiwanese office in Ottawa. This office has a certain legal status in Canada as an organization working in Canada. On the other hand, we do not accept the Taiwanese foreign affairs department in the same way. This is why the document was signed by the two offices. From a strictly legal point of view, there is a difference.

As to China's reaction, I have two comments.

First, I would say Taiwan is a bit different from Hong Kong. The situation is always a bit trickier with Taiwan. From China's point of view and ours, Hong Kong is indeed part of the People's Republic of China. The only difference is that it is a separate customs territory.

Moreover, China accepts that Hong Kong and Taiwan are members of APEC, a multilateral organization whose members are economic members rather than countries. So China has already accepted the principle that Hong Kong and Taiwan can operate in a multilateral, international context as economies rather than countries.

In both cases, we already have that type of agreement with China. The change with Hong Kong is really a technical change. As to Taiwan, we are proceeding with something that we already have in place with China. In our opinion, China's reaction should not be a problem. If we had done the opposite, if we had made an arrangement with Taiwan first, that might have caused a problem.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you.