Tuesday, 12 April 2016

Canada’s 2016-17 federal budget affects back-to-back arrangements

On 22 March 2016, Canada’s Minister of Finance introduced the first budget of the new Liberal government. The budget contains limited measures with respect to international tax, including a modest response to the OECD’s base erosion and profit shifting (BEPS) project. However, certain measures that are proposed to be effective in 2017 are particularly important since they will require foreign parent companies of Canadian subsidiaries to examine the cross-border arrangements for financing and licensing property to those subsidiaries. In addition, new shareholder loan rules that are proposed to be effective immediately require an examination of the use of the excess cash of the subsidiaries through arrangements such as cash pooling, as well as the security provided by the subsidiaries to third-party lenders in respect of group finance arrangements.

Response to BEPS proposals
The government outlined its intentions with respect to the BEPS project, although the government response was restrained (for coverage of the proposed country-by-country reporting requirements, see Canada global transfer pricing alert, 24 March 2016). The government will adopt the minimum standards recommended in the report on action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances). In particular, to address treaty shopping, tax treaties should include either a principal purpose test or a limitation on benefits rule. This will be achieved through bilateral treaty negotiations or the proposed multilateral instrument that is being negotiated by a working group, of which Canada is a member. There was no mention of the prior government’s proposals to introduce a domestic anti-treaty shopping rule, which had been placed on hold pending the outcome of the BEPS initiative, although it is possible this proposal could reappear if no agreement can be reached on a multilateral instrument. Note, however, that the budget proposals to significantly expand the existing back-to-back rules are effectively anti-treaty shopping rules.

Canada will adopt the minimum standard for the exchange of certain tax rulings. Following the budget announcement, the Canada Revenue Agency stated that such exchanges would begin as from 1 April 2016. A revised information circular will be released in the near future. No other BEPS actions were specifically mentioned – the budget documents simply stated that “the government is continuing to examine the recommendations pertaining to the other aspects of BEPS.”

Source & more info: Deloitte