Finance indicated in the 2013 federal budget that it would release a consultation paper on possible measures to prevent treaty shopping. According to Finance's consultation paper, the Government continues to actively negotiate and conclude tax treaties to:
- Reduce barriers to international trade and investment
- Combat tax evasion and avoidance
- Strengthen Canada’s bilateral economic relationships
- Create enhanced opportunities for Canadian businesses abroad.
Tax treaties generally promote these economic objectives by establishing rules for the prevention of double taxation and reducing rates of withholding taxes imposed on cross-border payments. Finance says that:
As another purpose of tax treaties is to prevent tax avoidance and evasion, it is important that safeguards exist to ensure that taxpayers cannot make improper use of Canada’s tax treaties. Treaty shopping arises when, for example, a person who is not entitled to the benefits of a tax treaty with Canada uses an entity in a country with which Canada has concluded a tax treaty and, to obtain Canadian tax benefits, earns or realizes income sourced in Canada indirectly through that entity. [...] Treaty shopping defeats the purposes of Canada’s bilateral tax treaties and poses risks to the Canadian tax base.
Distinguishing between acceptable uses of a tax treaty and treaty shopping can be difficult given the complexity of international transactions and the increasing sophistication of international tax planning. Nevertheless, there is both direct and circumstantial evidence that treaty shopping exists and that the unintended consequences of treaty shopping are significant. Many other countries are better positioned to address treaty shopping, either as a result of favourable judicial decisions or having taken more decisive steps to address treaty shopping in their domestic laws or tax treaties.
The intention of this consultation process is to examine a range of possible approaches to address the practice of treaty shopping into Canada. The purpose of this paper is to serve as the basis for a discussion aimed at reaching a workable solution to the problem of treaty shopping. In finding a solution to treaty shopping, the main goals are to ensure that Canada remains an attractive destination for foreign investors and that all of the purposes of Canada’s tax treaties are achieved.
Treaty shopping questions
Finance is inviting comments in seven areas:
Question 1 - The advantages and disadvantages of a domestic law approach, a treaty based approach, or a combination of both.
Question 2 - The relative merits of the various approaches to treaty shopping identified by the OECD as well as whether there are other approaches and types of rules that should be considered by Canada in evaluating how best to address the problem of treaty shopping.
Question 3 - Whether a general approach is preferred over a relatively more specific and objective approach.
Question 4 - Whether a main purpose test, if enacted in domestic tax laws, would be effective in preventing treaty shopping and achieve an acceptable level of certainty for taxpayers.
Question 5 - Which of the approaches (a main purpose approach or a more specific approach) strikes the best overall balance between effectiveness, certainty and simplicity, and ease of administration.
Question 6 - (For stakeholders who favour a more specific approach over a main purpose approach) the design of the conditions and the exceptions (e.g., the substantive business operations and derivative benefits exceptions) under a more specific approach as well as any other exceptions that should be considered under this approach with a view to ensuring the measure is effective and applies in a reasonably straightforward manner with predictable outcomes.
Question 7 - Whether or not a domestic anti-treaty shopping rule should apply if a tax treaty contains a comprehensive anti-treaty shopping rule.
For more information, contact your KPMG adviser.
Information is current to August 13, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500