Madam Speaker, the purpose of Bill S-2 is to implement reciprocal tax treaties-or conventions-between Canada and Hungary, Nigeria, Argentina and Zimbabwe that will eliminate double taxation on income tax. As well, this bill implements a protocol to revise the current tax convention between Canada and the Kingdom of the Netherlands.
I would first like to comment on the desirability and the role of tax treaties. A tax treaty between countries is an important tool to provide the benefits of certainty and stability regarding
tax regimes-benefits that concretely promote and facilitate international trade and investment.
Such certainty and stability is achieved because such treaties enshrine the basis, as well as the rate, of applicable taxes. This means that a treaty rate of tax cannot be increased unless the treaty itself is modified or terminated.
In fact, termination is a rare event, while revision of such treaties is a lengthy process requiring the concurrence of both governments. And in either case, taxpayers will normally receive considerable advance notice of the impending changes.
Another benefit of such tax treaties is that they also reduce annoyance in the operation of the national tax systems involved in several ways. First, they eliminate the necessity of paying tax on business profits in the source country if there is no permanent establishment in that country. As well, they provide a mechanism to settle problems encountered by taxpayers.
More importantly, tax treaties eliminate or alleviate double taxation in instances where international transactions are involved that may give rise to the same income being taxed by more than one country.
Let me expand on how this works. For the purpose of eliminating double taxation, the tax treaties establish two categories of rules. Firstly, in the case of a number of specified items of income, an exclusive right to tax is conferred on only one of the contracting states. In this way, the other contracting country accepts that it cannot tax this income, and double taxation is thus absolutely avoided.
Secondly, for other items of income, the right to tax is not an exclusive one. These provisions confer on the source country (or situs) a full or limited right to tax. In turn, under the treaty, the country of residence of the taxpayer must allow relief for the tax paid in the other country. Ultimately, this again ensures there is no double taxation.
I should remind this House that the treaties enacted by this bill are the latest within a long-standing process. The major reform of Canada's income tax legislation in 1971 required Canada to expand its network of double taxation conventions (tax treaties) with other countries. Since that time negotiations for the conclusion of new treaties or the revision of existing ones have been entered into with almost 75 countries.
In this bill, the four tax conventions under review follow the general pattern of the conventions previously approved by Parliament. The number of Canadian tax treaties in force now stands at 52. I would now like to briefly highlight if I may, the main elements of these new tax treaties covered by this bill. I will deal with the Protocol to the Netherlands Convention at the end of my remarks.
These treaties provide generaly that dividends may be taxed in the source country at a maximum rate of 15 per cent.
However, in the case of company dividends, the rate is often reduced if the company receiving the dividends holds an equity interest in the company paying the dividends.
Such a reduced rate has been set at 10 per cent for the countries covered here (execpt for Nigeria, where it will be 12.5 per cent).
Regarding interest paid by a resident of one country to that of another country, the rates set out in this bill are 10 per cent in the case of Hungary, 12.5 per cent for Argentina and Nigeria; and 15 per cent in the case of Zimbabwe.
There are, however, a number of exceptions. Interest paid on a bond or similar obligation of the national government, a political subdivision or local authority will be exempt from tax in the country in which it arises.
Also, these treaties (except that with Zimbabwe) contain a provision that will allow interest paid on loans or credits extended, guaranteed or insured by certain state entities (in Canada, for example, by the Export Development Corporation-EDC) to be taxable only in the country where the recipient of the interest payment resides.
These treaties also address the taxation of royalty payments. They provide for a general rate of source taxation of 10 per cent in the case of Hungary and Zimbabwe, 12.5 per cent in the case of Nigeria, and from 3 to 15 per cent in the case of Argentina, depending on the nature of the royalty.
Copyright royalties are exempt under the treaty with Hungary.
There are also a number of other matters dealt with in these tax treaties, such as capital gains. The treaty provisions dealing with capital gains reflect the standard Canadian position enabling the source country to tax profits from the sale of real estate, business assets and shares in real estate companies.
Second, non-discrimination. Under the conventions, discrimination on the basis of nationality is prohibited. This ensures nationals of one country equal treatment with nationals of the other country in the same circumstances. However, this does not prevent a country from providing fiscal incentives (for example, Canada's small business deduction) on the basis of the residence of the taxpayer.
Third, pensions. Canada has preserved its right to tax pensions paid to residents of the countries covered by this bill. In the cases of Argentina, Zimbabwe and Hungary, the maximum rate of tax applicable in the source country to periodic pension and annuity payments is 15 per cent. In the case of Nigeria, there
is no stated maximum rate of tax applicable to periodic pension payments.
Finally, war veterans pensions are generally exempt from tax under the four treaties.
Fourth, double taxation relief. The treaties provide that in Canada, double taxation of foreign source income of Canadian residents is alleviated by way of a foreign tax credit, in accordance with the limitations provided for in the Canadian legislation.
In addition, devidends received by a company resident in Canada from the exempt surplus of foreign affiliates resident in a treaty country are exempt from tax in Canada. Reciprocally, relief from double taxation is granted in the other treaty country in accordance with the method recognized by that country.
Let me turn now to a final undertaking enacted by this legislation. Bill S-2 will implement a protocol to the tax convention signed by Canada and the Kingdom of the Netherlands in 1986. This protocal updates this existing treaty to take into consideration changes made to the respective laws and policies of the two countries.
For example, in Canada's 1992 federal budget, the government announced it was prepared, in tax treaty negotiations, to reciprocally reduce the withholding tax rate on direct dividends. This was seen as a valuable incentive to encourage direct international investment. And in the 1993 budget, the governement affirmed its desire to negotiate, on a bilateral basis, exemptions from withholding taxes on payments made for the use of computer software.
I am pleased to say that the Netherlands is the first country with which we have signed such an agreement.
Under this bill, in cases where a dividend recipient holds 25 per cent or more of the capital, or 10 per cent or more of the voting rights, of the dividend-paying corporation, the withholding tax will be reduced to 5 per cent from the current 10 per cent. This reduction will take place over a five-year period starting from 1993. As regards interest payments, the protocol reduces the rate to 10 per cent from the current 15 per cent.
As well, the agreement eliminates the withholding tax on royalties for computer software and on interest paid to pension funds.
To conclude, on balance, the terms of the four tax conventions and the protocol provide some equitable solutions to the various problems of double taxation existing between Canada and these countries. Each of these countries hopes to implement the bilateral convention as soon as possible. Consequently, I commend this bill to the House and urge its speedy passage.