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October 3, 2007 No. 2007-06
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Transfer Pricing Highlights of New Canada-U.S. Tax Treaty Protocol Canada’s Minister of Finance and the U.S. Treasury Secretary signed a new protocol to the Canada-U.S. tax treaty on September 21, 2007, which includes several changes that may affect transfer pricing. The main features of the protocol affecting transfer pricing are highlighted below. Arbitration procedure The protocol adds an arbitration procedure to the Mutual Agreement Procedure (MAP) in Article XXVI of the treaty. Background The MAP procedure helps taxpayers resolve cases of double taxation or taxation not in accordance with a tax treaty. The MAP procedure is included in Canada's bilateral tax conventions; under these treaty provisions, residents of either country can ask for help in resolving an issue covered by the treaty. In Canada, authority for resolving tax disputes is delegated to senior Canada Revenue Agency (CRA) officials known as the Competent Authority. Arbitration will be available for competent authority cases that have gone on for two years or more from their “commencement date”. The commencement date is the earliest date upon which both competent authorities have the information necessary to undertake substantive consideration of the MAP request. For arbitration to be available, the following conditions must be met: · Tax returns were filed with at least one of the contracting states. · The case involves one or more articles of the treaty that the competent authorities have agreed in an exchange of notes can be the subject of arbitration. · The competent authorities agree that the case is suitable for arbitration. · A non-disclosure agreement has been reached by all concerned persons relating to the arbitration. KPMG observations We hope that the required exchange of notes between the competent authorities will occur quickly and will refer, at a minimum, to Article V (permanent establishment), Article VII (business profits) and Article IX (related persons).
The requirement that the competent authorities agree that the case is suitable for arbitration seems to leave them with residual discretion not to accept a case for arbitration, even if it meets all the other requirements. After the arbitration concludes, taxpayers may refuse its result just as they can refuse the result of other MAP proceedings. Unlike other articles of the protocol, the new measures applying to the MAP, including arbitration, apply immediately when the protocol comes into force. For cases already under consideration, the commencement date will be the date on which the protocol enters into force. Since the first arbitration cases would be heard two years after the protocol comes into force, these cases would be heard in September 2009 at the earliest. Taxation of guarantee fees The treaty now specifies that guarantee fees shall be taxable only in the state of residence of the recipient of such guarantee fees, unless such fees are business profits attributable to a permanent establishment in the payor’s state of residence (see new paragraph 4 of Article XXII). Withholding tax on interest New Article XI indicates that interest arising in a contracting state and beneficially owned by a resident of the other contracting state may be taxed only in that other state, effectively eliminating withholding tax on interest. This elimination of withholding tax will be gradual: the withholding rate will drop to 7% during the first year the protocol comes into force and to 4% during the second year, before being eliminated altogether. Exchange of information New Article XXVII (exchange of information) makes the following minor changes: · The information that may be exchanged is “such information as may be relevant” rather than “such information as is relevant” under current Article XXVII. (As such, the relevance criteria are broader.) · A contracting state cannot invoke the reason that it has no domestic interest in certain information to decline to provide such information. · A contracting state cannot rely on certain information being held by a bank or other similar institution to refuse to provide such information. · A requested state shall allow representatives of the requesting state to enter the requested state to interview individuals and examine books and records with the consent of persons subject to examination. KPMG observations The change requiring a requested state to permit representatives of the requesting state to enter should simplify taxpayers’ lives as they were often asked by the CRA to “invite” its auditors to perform an audit in the U.S. but without informing the U.S. competent authority. This method arguably goes against the principle that Canadian authorities cannot apply Canada’s laws in another country.
Under the new protocol, the U.S. competent authority must grant the request if the taxpayer agrees with the audit on U.S. soil. The new provision also means, indirectly, that the U.S. competent authority must be informed of the proposed audit.
For more information on the new protocol, see KPMG’s TaxNewsFlash-Canada 2007-26, available from your KPMG adviser or at www.kpmg.ca.
For details on these or other transfer pricing matters, please contact François Vincent, National Leader, Canada and Americas Leader, Global Transfer Pricing Services, or your KPMG adviser, or any of the following:
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Information is current to September 21, 2007. The information contained in this Transfer Pricing 60 Seconds 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. KPMG LLP, a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG, a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 144 countries and have more than 104,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. KPMG International provides no client services. KPMG's Canadian Web site is located at www.kpmg.ca © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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