www.lexpert.ca/usguide | LEXPERT • June 2018 | 73
be able to do that anymore."
Leading the clampdown on foreign na-
tionals is a frontal assault on their use of
leverage or debt costs to avoid taxes. One
key provision limits the deductibility of
net interest expense for a US member of
a multinational group to the proportion
of the multinational's profit represented
by US earnings, regardless of whether the
interest is paid to a related company or
otherwise. Combined with this measure
is a limitation of net interest deductions of
any taxpayer to 30 per cent of profit, again
regardless of whether the interest is paid to
a related company.
Then 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 corpora-
tion. The tax would also affect US compa-
nies that resort to "inversion" transactions
to move their headquarters elsewhere.
"Effectively, this excise tax places
a US tax on what might be legiti-
mate profits of Canadian operations,"
says Claire Kennedy, a tax partner
in Bennett Jones LLP's Toronto office.
"The impact on Canada is uniquely
negative because of the integration of
supply chains with the US. It's a form of
exported taxation that is unfair, unwar-
ranted and a marked departure from
the norms of international taxation."
Indeed, some commentators have sug-
gested that the excise tax contravenes
various US tax treaties and is merely a
disguised form of what was originally put
forward as a "border adjustment tax."
"This 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,"
says Kennedy, when Canadian jobs moved
to Alabama.
Other measures affecting foreign mul-
tinationals 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
corporation. There is, however, no paral-
lel exemption for gains by foreign parents
who sell shares in a US company in which
they have 10-per-cent ownership.
