On May 28, 2018, the Department of Finance sent draft legislation to the House of Commons relating to the Base Erosion Profit Shifting (“BEPS”) initiative. Specifically, the “Multilateral Instrument in Respect of Tax Conventions Act”, if passed by both Parliament and the Senate, would ratify the OECD’s “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting” (more commonly known as the MLI).
The initiative was first discussed in the G20 meeting in 2012 as a fallout from the Financial Crisis of 2008-2009. The use of transfer pricing to shift profits from high-tax to lower-tax jurisdictions had become more public by that stage (specifically with larger companies such as Apple, Google, and Starbucks). As a result, cash starved governments and the general public had a strong will to tackle perceived abuses by multinational enterprises (“MNEs”). After the G20 meeting, the OECD was charged with the task of forming a BEPS task force to address global issues related to erosion of tax bases as well as profit-shifting transactions and legal structures.
In 2015, the BEPS task force released final reports for the 15 actions plans that had been drawn up earlier. Some of the action plans dealt with international tax issues surrounding the use of hybrid instruments, interest deductibility, and permanent establishments. Action Plans 8-10 and 13 specifically address transfer pricing concerns, including the requirement for larger MNEs (with revenues greater than €750 million) to prepare Country-by-Country (“CbC”) legislation that would be part of a global sharing initiative between tax authorities that have ratified the MLI.
If Canada passes the legislation, Canada will formally adopt the minimum standards, which require modifications to Canada’s tax treaties to reflect new anti-abuse rules. In addition, three optional standards will be adopted, which will:
- impose a 365-day holding period for shares of Canadian companies held by non-resident companies. The holding period will ensure that the lower treaty-based rate of withholding tax on dividends will not be available to non-resident companies that engage in certain short-term share acquisitions;
- impose a 365-day test period for non-residents who realize capital gains on the disposition of shares or other interests that derived their value from Canadian immovable property. The test period will guard against certain transactions designed to obtain a treaty-based exemption from Canadian taxes on capital gains; and
- incorporate the MLI provision for resolving dual resident entity cases. This provision employs an effective approach to resolving dual resident cases to prevent potential double taxation, while providing protection against companies and other entities that attempt to manipulate their tax residence to avoid or reduce their taxes.
Canada signed an intention to ratify the MLI in 2017 along with introducing new Section 233.8 in December 2016 which outlined the requirement to prepare CbC documentation. CbC must be prepared by taxpayers exceeding the threshold and it is applicable to all taxation years beginning on January 1, 2016 or afterwards. The first exchanges of reports began in June 2018.