Canadian-based multinationals and foreign corporations investing in Canada will want to closely follow proposals and consultations announced in Canada’s 2014 federal budget that appear to strengthen Canada’s intentions to address tax base erosion and profit shifting. These developments clearly indicate that Finance is laying the foundations for its own Canadian plan to align with the OECD Action Plan on Base Erosion and Profit Shifting (BEPS). Finance has requested input on which international tax areas it should focus on to implement BEPS, and has set a four-month consultation period for interested parties to provide input by June 11, 2014.
Finance’s positions, as outlined in the budget, are in line with the OECD’s push for greater tax transparency and its ambitious Action Plan that Canada and other G20 leaders signed in July 2013. The OECD Action Plan recommends establishing international coherence of corporate income taxation, greater transparency through the disclosure by multinational enterprises of tax planning arrangements and updates for OECD transfer pricing guidelines, among other proposals.
OECD Action Plan — Background
The OECD Action Plan, which was presented at the meeting of G20 Finance Ministers on July 19, 2013, makes 15 recommendations that focus on key areas including the digital economy, hybrid mismatch arrangements, controlled foreign corporation (CFC) rules, excessive intercompany interest payments, harmful tax practices, treaty abuse, avoidance of permanent establishment status, transfer pricing, aggressive tax planning, and greater transparency and disclosure. (See TaxNewsFlash-Canada 2013-27, “OECD Action Plan Could Signal a Shift in the Global Tax Landscape”).
The OECD’s recommendations may lead to new rules that could have a significant effect on multinational corporations that undertake generally accepted tax planning, including transfer pricing and intra-group financing transactions. In addition, the OECD proposes that countries should largely complete the action on tax base erosion and profit shifting in a two-year period, which may present a significant challenge for countries.
Finance released a statement on July 20, 2013 to declare that it fully endorses the OECD Action Plan, however it was unclear what steps it intended to take to meet the OECD’s aggressive deadlines.
Finance released Canada’s 2014 budget on February 11, 2014. (See TaxNewsFlash-Canada 2014-08 "2014 Federal Budget Highlights").
Interestingly, many of the measures and related consultations proposed in the federal budget correspond with the following initiatives in the OECD Action Plan, as well as more generally with Actions 8, 9 and 10, “Transfer pricing and substance”, and Action 11, “Understanding and measuring BEPS”.
Challenges of the digital economy (OECD BEPS Action 1)
The budget announced that Finance is inviting input by June 11, 2014 on the effective collection of sales tax on e-commerce sales to Canadians by foreign-based vendors.
Strengthen controlled foreign corporation rules (OECD BEPS Action 3)
The budget proposed amendments to the rules that apply to controlled foreign affiliates that are captive insurance companies earning income through the use of derivative “insurance swaps”. The budget also proposed to effectively limit non-regulated Canadian financial institutions from setting up internal banks.
Limit base erosion through interest deductions (OECD BEPS Action 4)
The budget proposed to expand existing anti-avoidance rules to certain “back-to-back loans” that were seen as circumventing the thin capitalization rules and Canadian withholding tax.
Increase focus on transparency and substance (OECD BEPS Action 5)
The budget reiterated Canada’s commitment to the OECD work relating to automatic exchange of information. The OECD released a document on the new Standard for Automatic Exchange of Financial Account Information on February 13, 2014.
Prevent treaty abuse (OECD BEPS Action 6)
The budget announced further public consultation on a proposed rule to prevent treaty shopping. Comments are due no later than 60 days of the budget date.
Finance requests input on Canada’s BEPS priorities
In the budget, Finance also announced that it is seeking comments on which international taxation areas Canada should focus on to implement the OECD Action Plan. Finance asked the public consultations to address the following specific questions related to international tax planning and other cross-border tax integrity issues:
- What are the impacts of international tax planning by multinational enterprises on other participants in the Canadian economy?
- Which of the international corporate income tax and sales tax issues identified in the OECD Action Plan should be considered the highest priorities for examination and potential action by the government?
- Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the Government?
- What considerations should guide the government in determining the appropriate approach to take in responding to the issues identified – either in general or with respect to particular issues?
- Would concerns about maintaining Canada’s competitive tax system be alleviated by coordinated multinational implementation of base protection measures?
The budget’s announced international tax planning consultations may give the impression that Finance is taking a step back to assess issues that have already been discussed extensively at the OECD. However, it appears that these consultations are intended to ensure all stakeholders are able to comment ahead of critical decisions that the OECD will make in the fall of 2014 in line with the OECD Action Plan timetable. Specifically, these consultations indicate Finance’s commitment to consider the input and concerns of Canadian taxpayers.
Finance has indicated that it intends to comply with the aggressive timeline in the OECD Action Plan and has asked for most comments by June 11, 2014.
We can help
Your KPMG adviser can help you assess the potential impact of the proposals in the 2014 federal budget on your corporate structure and international tax planning. For more details on these developments and their potential effect, contact your KPMG adviser, David Francescucci (National Leader, Transfer Pricing and Value Chain Management), Jodi Kelleher (National Leader, International Corporate Tax) or Iain MacIntosh (National Tax Transparency Leader).
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Information is current to February 14, 2014. The information contained in this TaxNewsFlash-Canada 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.
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