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Canada LLP in Edmonton. "There have been increasing efforts
to do so at the policy level despite the fact that the issues are very
complex and becoming more so."
The upshot is that Canada may already be significantly onside
with BEPS.
"The Ministry of Finance has been ahead of the curve in terms
of domestic rule-making that counters the perceived problems,
so I don't think that Canada has a whole lot to do on the BEPS
front," says Claire Kennedy of Bennett Jones LLP in Toronto.
By way of example, Canada amended its foreign affiliate
dumping rules to counter perceived abuses by foreign-controlled
corporations several years ago and dealt with hybrid issues in the
2008 protocols to the Canada-United States tax treaty. "Overall,
our rules are pretty sophisticated," Kennedy says.
The Canada Revenue Agency has also introduced an Offshore
Tax Informant Program. "The OTIP offers financial awards to
individuals who provide information relating to certain types of
'major international tax non-compliance,'" says Michael Fried-
man of McMillan LLP in Toronto. "Over the past year, it has re-
ceived 1,920 separate contacts from potential informants under
the OTIP, which led to over 200 written submissions and 110
cases that are currently being reviewed."
Still, it goes without saying that authorities need to be on their
toes to stay ahead of the tax planners.
"Companies will look at the rules and continue to try to find
ways through the minefields," says Jack Blackier of Cox & Palm-
er in Saint John, New Brunswick. "I see BEPS as an attempt to
catch up to what commercial organizations are already doing, but
it's very hard for tax authorities to keep in front of them."
Yet BEPS is long on principle but short on substance. "BEPS
articulates certain minimum standards that participating na-
tions have 'morally' undertaken to adopt and certain best prac-
tices that they may not adopt," Boidman says. "But in point of
fact, treaty shopping is the only substantive area where the BEPS
negotiators have actually agreed on minimum standards."
To be sure, the budget did announce the federal government's
intention to adopt certain BEPS transfer-pricing guidelines with-
out amending s. 247 of the Income Tax Act, which articulates the
"arm's-length principle" that is the basic statutory rule governing
transfer pricing in Canada. But adopting the international stan-
dards without legislative action flies in the face of the Supreme
Court of Canada's pronouncement that the OECD transfer
guidelines are not per se law in Canada, and subsequent judicial
interpretations that enunciate a domestic standard for the arm's-
length principle that differs from the BEPS standards.
"The budget indicates that the CRA intends to effectively
ignore the Supreme Court and try to use BEPS transfer-pricing-
related recommendations in its interpretation and enforcement
of the ITA, a move that quite likely will increase disputes and
litigation between multinationals and the CRA," Boidman says.
As well, while the policy behind BEPS is generally sound and
international cooperation is on the rise, the competition for in-
vestment remains intense.
"The ideal would be to have capital flow seamlessly around a
uniform set of rules, but that would work against the competitive
interests of various jurisdictions who will continue to carve little
niches for themselves," says Robert McCue of Bennett Jones in
Calgary. "I doubt that the reality of BEPS will be anywhere near
as large and potent as it appears to be."
If there's going to be further substantive change, it will likely
come in relation to interest deductibility.
"OECD is advocating an approach that would look at overall
limits on debt owing to affiliates and third parties, while current
Canadian rules focus on debt from within the group," Kennedy
points out.
Still, BEPS will likely have its greatest impact at the margins.
"The BEPS proposals will result in pressure on tax havens, flush
out more and more whistleblowers and generally smoke out the
very worst of tax evasion," McCue says.
Most of all, BEPS will impact administratively: the CRA, for
example, has for some time been intensifying its scrutiny of inter-
national transactions.
"Transfer pricing is all the rage," says Glenn Ernst of Good-
mans in Toronto. "Everyone's talking about the increased audit
activity and waiting for the shoe to drop in terms of how the case
law continues to develop."
What is looming is a regime that is considerably more onerous,
especially for multinationals. "BEPS has encouraged the CRA to
seek more information from foreign jurisdictions and place more
importance on documentation, including very comprehensive
new reporting requirements on a company's operations in every
country in which it does business," Friedman says.
The sheer volume of information the CRA is requesting can be
overwhelming, even for a multinational.
"We are seeing tax authorities, with increasing frequency, mak-
ing far-reaching requests where the burden to the taxpayer out-
weighs the benefits to the auditors," says Steve Suarez of Borden
Ladner Gervais LLP in Toronto. "Many of these are of question-
able relevance and need to be pared back."
But the fact remains that BEPS represents a new global dynam-
ic in relation to tax policy.
"Previously, tax laws were the result of one-off, totally uncoor-
"We are seeing tax authorities, with increasing frequency,
making far-reaching requests where the burden to the taxpayer
outweighs the benefits to the auditors. Many of these
are of questionable relevance and need to be pared back."
Steve Suarez
Borden Ladner Gervais LLP
TAX
