66 LEXPERT MAGAZINE
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JANUARY/FEBRUARY 2018
ture, foreign nationals could
compete in the US on a play-
ing field that wasn't even,
because they could avoid tax
easier than US companies,"
he says. "ey won't be able
to do that anymore."
Leading the clampdown
on foreign nationals is a
frontal assault on their use
of leverage or debt costs to
avoid taxes. One key provi-
sion limits the deductibility
of net interest expense for
a US member of a multi-
national group to the proportion of the
multinational's profit represented by US
earnings, regardless of whether the inter-
est is paid to a related company or other-
wise. Combined with this measure is a
limitation of net interest deductions of any
taxpayer to 30 per cent of profit, again re-
gardless of whether the interest is paid to a
related company.
en there's what amounts to a 20-per-
cent excise tax on payments made by US
corporations to foreign affiliates, with the
tax payable by the US corporation. e tax
would also affect US companies that resort
to "inversion" transactions to move their
headquarters elsewhere.
"Effectively, this excise tax places a US
tax on what might be legitimate profits of
Canadian operations," says Claire Ken-
nedy, a tax partner in Bennett Jones LLP's
Toronto office. "e impact on Canada is
uniquely negative because of the integra-
tion of supply chains with the US. It's a
form of exported taxation that is unfair,
unwarranted and a marked departure from
the norms of international taxation."
Indeed, some commentators have sug-
gested that the excise tax contravenes vari-
ous US tax treaties and is merely a disguised
form of what was originally put forward as
a "border adjustment tax."
"is tax would apply automatically,
whether or not there is any tax avoidance
motive on taxpayers' part," Seraganian
says. "It could be a game-changer for cross-
border businesses with large amounts of
intercompany services or payments.
As Kennedy sees it, the excise tax is
merely an extension of the Trump admin-
istration's continuing effort to onshore ac-
tivity to the
US. "We've already seen that
happen in the Bombardier-Airbus deal
that resulted in Canada losing jobs to Ala-
bama," Kennedy says.
Other measures affecting foreign multi-
nationals provide exemptions for 100 per
cent of foreign-sourced dividends paid by a
foreign company to a US entity that owns
at least 10 per cent of the foreign corpora-
tion. ere is, however, no parallel exemp-
tion for gains by foreign parents who sell
shares in a US company in which they have
10-per-cent ownership.
Finally, US parents would have to pay
20-per-cent tax on 50 per cent of any
"high returns" (the excess over a stipu-
lated baseline rate) earned by controlled
foreign corporations — whether the
earning were actually distributed to the
US company or not.
Otherwise, Canadians should keep an
eye on other developments, such as the
provisions that subject US state and local
governments to "unrelatable business tax-
able income" in the same way as tax-exempt
entities such as charities.
"Traditionally, the US has treated for-
eign governmental entitles similarly to
domestic governmental entities," he notes.
"If this were to change, it could have an
adverse impact on Canadian governmental
pension funds that borrow to acquire assets
or that invest in partnerships that do so."
IN DECEMBER the US Senate approved
the most sweeping overhaul of the Amer-
ican tax system in more than 30 years.
What will the revised tax code mean for
Canada now that the reforms have passed?
On the bright side, there's the assuaging
view that anything that promotes econom-
ic growth in the US can't be all bad for Can-
ada, especially for Canadian-based export-
ers who aren't part of a US multinational
corporate group. But Paul Seraganian, a
tax partner in Osler, Hoskin & Harcourt
LLP's New York office suggests that the im-
pact of President Donald Trump's reforms
on US economic growth is as yet unclear.
"ere's a lively debate about whether
these amendments will actually invigorate
the economy as the Republicans say it will,"
he says. "You can see it in the widely dispar-
ate growth projections and the extent of
the academically informed disagreement
that have emerged on the issue."
Nonetheless, Seraganian predicts that
the rules of engagement and norms that
have evolved as to how Canadian (and
other foreign) capital is invested in the US
will change.
"We've been living through an extended
stretch of time where, looking at the big pic-
With the recent US tax law reform, rules for how Canadian capital is invested there may change BY JULIUS MELNITZER
Tax Reform and Cross-border Commerce
PHOTO:
SHUTTERSTOCK
| TAXATION |
THE BORDER
