Lexpert US Guides

64 | LEXPERT • June 2019 | www.lexpert.ca/usguide be able to show there is real business being carried on." Canada's clampdown is having an im- pact on deal structuring, Gibney says, while the broader consensus appears to be that the OECD's efforts have so far barely made a dent. So while US companies coming into or through Canada are more careful about the use of transfer payments, many con- tinue to structure through Canada's tax treaties and arrangements to get access to lower-tax jurisdictions. In some cases, that is the United States. Under President Donald Trump the Republicans introduced the 2018 Tax Cuts & Jobs Act, slashing corporate taxes to 21 percent from roughly 35 percent. A US company putting a division in Ontario today would be taxed at 26.5 percent, Gib- ney says. And that 5 percent difference is "absolutely" having an impact in how deals are structured. "Businesses that otherwise would have come into Canada, we're now trying to structure into the US because of the 21 percent corporate tax rate. I've had cli- ents – Canadian and American – who want to put a new division in and the question is where? "In the past, part of the equation used to be that Canadian tax rates are lower, so they're better off having it in Canada. But I have several clients who are moving parts of their business to the US." At the end of the day, the use of tax ha- vens reflects a divide that plagues efforts to harmonize tax globally. Corporate enti- ties see tax minimization as good business sense. e public and governments see it as companies using legal loopholes to offload their fair share of taxes. Brussa calls it "a battle, with high-tax jurisdictions and their revenue authori- ties on one side and multi-nationals and countries like Switzerland, Luxembourg and Ireland who are trying to bolster their own economies by importing income on the other. "It's bit of a lightning rod in the global- ization debate. e real question is how pa- triotic should multi-nationals be in paying their tax?" to encourage foreign investment. e court said anti-avoidance rules could not be used to rectify an "unintended gap in the Treaty." Canada's federal Department of Finance came close to implementing a domestic anti-treaty-shopping rule several years ago, but backed down following consultations with the business community. In 2017, however, it did become a sig- natory to the OECD's Multilateral Con- vention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shiing, which came into effect in the summer of 2018. Designed to harmonize tax regimes and equalize the playing field by making pay- ments and structures more transparent, the instrument allows the roughly 100 sig- natory countries to pick the specific bilat- eral treaties they are willing to amend and which provisions they are open to amend- ing. If the other jurisdiction agrees, the changes are made. e concept is a tough sell in many tax havens — especially Caribbean island na- tions whose economies depend heavily on the tax work and corporate presence that comes with it. "ey're under a lot of pres- sure not so much to give up their treaties, but to raise their tax rates, for example," says Nikolakakis. "To stop having special regimes that give tax benefits. ey're very, very concerned. "ey justify their tax regimes on sover- eignty, although they may give an inch [on the OECD initiative] to prevent losing a mile. What are they supposed to do? eir tax regimes have allowed their people to develop some good skills over the years and climb out of poverty. Realistically, they're just trying to survive." Many of the them have chosen a bare minimum, one or two, potential treaties and amendments, says Nikolakakis. Cana- da? "Canada has basically chosen the bare minimum plus a couple of others," he says. Brussa of Burnet Duckworth says the Canada Revenue Agency is also clamping down on tax havens through a variety of made-in-Canada measures. Ottawa is actively pushing to renegotiate the older bilateral treaties and "aggressively auditing transactions in what I would call these 'straw countries.' "e CRA has quite a presence down in Barbados," he says. "So if a Canadian com- pany says it had a Barbados subsidiary that's earning a lot of income, the auditors make sure that, one, it's actually resident in Bar- bados and, two, that it's not a paper com- pany. at it's a real company." at's making it more difficult for anyone buying in Canada to use another country to reduce taxes through transfer pricing — the price one division pays another for goods or services. Transfer payments have long been a way of shiing taxable income offshore. Paul Gibney, a partner at orsteins- sons LLP, a tax boutique, says transfer pricing "is probably the biggest area of review by the CRA these days on interna- tional transactions. We've had a number of audits where auditors have gone to the jurisdiction to look at the company's of- fice and operations there. "Historically it was much easier to assign functions in those jurisdictions. But now you have to hire people to the ground and Tax "(Countries classified as tax havens) justify their tax regimes on sovereignty, although they may give an inch [on the OECD initiative] to prevent losing a mile. What are they supposed to do? Their tax regimes have allowed their people to develop some good skills over the years and climb out of poverty. Realistically, they're just trying to survive." Angelo Nikolakakis, a partner of EY Law LLP in Montréal

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