(Disponible en français : La lutte contre la planification fiscale abusive des sociétés : un défi national et mondial)
Aggressive tax planning by multinational corporations has had an adverse impact on the tax revenues of a number of countries, including Canada.
In its Annual Report to Parliament 2013–2014, the Canada Revenue Agency (CRA) stated, “Aggressive tax planning is a global problem threatening to undermine the ability of nations to generate tax revenues they need to advance and prosper.”
According to the 2014 Spring Report of the Auditor General of Canada, Canadian companies’ use of aggressive tax planning methods involving offshore affiliates and offshore insurance plans has resulted in $9.8 billion in income being untaxed in Canada.
Canada’s Income Tax Act and some bilateral tax treaties contain measures to combat aggressive tax planning by multinational corporations.
As well, some countries are considering the recommendations made by the Organisation for Economic Co-operation and Development (OECD) and the Group of 20 (G20) countries in the context of their Action Plan on Base Erosion and Profit Shifting (BEPS) and their BEPS Project. For Canada, this examination is occurring with a view to ensuring that domestic business activity does not escape taxation at home and in other countries.
Three tax Act measures
The Minister of National Revenue and the CRA use three types of provisions in the Income Tax Act to deny the tax benefits resulting from a multinational corporation’s aggressive tax planning activities:
- specific anti-avoidance provisions;
- the General Anti-Avoidance Rule; and
- the transfer pricing rules.
The numerous specific anti-avoidance provisions in the Income Tax Act are designed to restrict the application of a tax benefit to defined business activities. For example, a cross-border loan to a Canadian affiliate is included in the taxable income of that affiliate unless it is to be repaid within two years.
According to the General Anti-Avoidance Rule, the Minister and the CRA can deny a taxpayer the benefits of certain aggressive tax planning schemes that might comply with a literal interpretation of – but not the object, spirit or intent of – the Income Tax Act.
Between 1988 and September 2013, the CRA applied the General Anti-Avoidance Rule to 897 tax planning schemes; of these, 54 were litigated in the courts, and the Minister was successful on 28 occasions.
The transfer pricing rules allow the Minister and the CRA to adjust the price paid by a corporation for goods and services from a related non-resident entity.
With transfer pricing, the objective is to ensure that the price paid is similar to that which would be paid by an arm’s-length entity. In certain cases, the price adjustment can result in the non-resident entity having a higher tax liability.
Bilateral tax treaty measures
Bilateral tax treaties generally reduce the overall amount of tax payable by multinational corporations. This outcome is achieved by limiting the amount of tax that may be collected by the country where income is earned.
To prevent the abuse of tax treaties by multinational corporations that might lead to “double non-taxation,” or no tax liability, some of the tax treaties that Canada has concluded with other countries have anti-avoidance rules.
These rules limit the application of treaty benefits to two situations: transactions by entities that meet strict residency requirements; and amounts paid between related entities in Canada and another country that would be reasonable between arm’s-length parties.
When a multinational corporation engages in “treaty shopping,” it undertakes sequential transactions between or among multiple affiliates to receive the benefits of a tax treaty.
In August 2013, the Department of Finance published a consultation paper on the development of an anti–treaty shopping rule, and held public consultations that concluded in December 2013.
During the consultation, certain tax professionals and accounting firms expressed concerns that the proposed rule could limit foreign investment in Canada. Elements of a proposed rule were published in the 2014 federal budget. The Department of Finance has indicated that it will await further work on the BEPS Project before implementing an anti–treaty shopping rule.
The General Anti-Avoidance Rule applies to all tax benefits, including those resulting from a tax treaty, when taxpayers’ activities are inconsistent with the object, spirit or intent of the Income Tax Act. However, the rule has not been used to prevent treaty shopping by multinational corporations.
OECD and G20 recommendations
In 2013, the OECD and the G20 countries launched the Action Plan on BEPS and the BEPS Project. These measures are designed to address corporate tax planning strategies that enable multinational corporations to exploit tax gaps and loopholes by shifting profits to jurisdictions with more favourable domestic tax regimes and advantageous tax treaties.
In September 2014, the OECD and G20 published seven reports that aim to assist countries in reducing corporate tax planning that affects domestic tax revenue. The reports address the following matters, among others:
- transfer pricing issues associated with intangible property;
- the abuse of tax treaties;
- the feasibility of developing a multilateral instrument to enable synchronized amendments to bilateral tax treaties; and
- improved transparency for tax administrators through country-by-country reporting of income and tax paid by multinational corporations.
This last issue is also discussed in a January 2015 report that recommends such reporting, by each affiliate, for taxation years after 1 January 2016.
During its 2014 pre-budget consultation process, the House of Commons Standing Committee on Finance heard comments on these issues. Some witnesses, including business tax professionals and a tax specialist with an accounting firm, said that Canada should implement the recommendations in the Action Plan on BEPS only after assessing the impact of the recommendations on the Canadian economy and only after their implementation by Canada’s trading partners.
Department of Finance Canada. Submissions for Consultation on Tax Planning by Multinational Enterprises.
Fleury, Sylvain. Abusive Tax Planning: The Problem and the Canadian Context. Publication no. 2010-22-E. Parliamentary Information and Research Service, Library of Parliament, Ottawa, 3 October 2012.
House of Commons, Standing Committee on Finance. Tax Evasion and the Use of Tax Havens. Report 17. 1st Session, 41st Parliament, May 2013.
Organisation for Economic Co-operation and Development. Aggressive tax planning.
Yong, Adriane. Loopholes in the International Taxation System. Publication no. 2013-15-E. Parliamentary Information and Research Service, Library of Parliament, Ottawa, 27 March 2013.
Author: Mark Mahabir, Library of Parliament