Feb 25, 2020
A recent article in Lexpert looks at the Oganisation for Economic Cooperation and Development’s (OECD) action plan on domestic tax base erosion and profit shifting (BEPS), which is coming into force among countries that have signed on to BEPS. According to the article, the OECD project’s objective is to “stop billions of dollars being lost annually to tax avoidance by multinational companies operating in foreign jurisdictions, particularly in developing countries, which suffer from BEPS disproportionately owing to their higher reliance on corporate income tax.”
On January 1, 2020, one of the 15 “BEPS Actions,” the Multilateral Instrument (MLI), entered into effect in Canada. The MLI amends “existing bilateral tax treaties to implement international tax measures developed by the OECD’s BEPS project; this includes rules relating to treaty abuse and improving the dispute resolution process between participating jurisdictions.”
Of the provisions in the MLI, the one that may get the most attention is the broad anti-avoidance rule, or the Principal Purpose Test, under which treaty benefits can be denied if one of the principal purposes for the transaction is to avoid the relevant Canadian tax, Patrick Marley, Co-Chair of Osler’s Taxation Group, tells Lexpert.
“The big issue that Canadian taxpayers face is the uncertainty that’s been added,” states Patrick. According to the article, Canada’s General Anti-Avoidance Rule (GAAR) applies for the purposes of tax treaties, and GAAR “states that where a transaction or series of transactions results in a reduction, avoidance or deferral of taxes owing, and the transaction or series of transactions are being attempted only for the tax benefits, the transaction or transactions themselves may be invalidated.”
“So, now, we have a second broad anti-avoidance rule [under the MLI’s Principal Purpose Test] that applies, or that could apply,” says Patrick. “And while our domestic General Anti-Avoidance Rule has a few decades of case law and interpretation that have built up that allows a fair degree of certainty in terms of how that rule will be applied and administered, we have no precedent or history on this new anti-avoidance rule in the tax treaties.”
If the Canada Revenue Agency (CRA) were to provide guidance consistent with Canadian law, “the ambiguity would go away,” says Patrick. Instead, the CRA will use GAAR but also the MLI Principal Purpose Test, he adds. “That’s wrong and costly.”
“Over time, we’ll eventually get certainty when cases go to court or if we see how broadly or narrowly the CRA decides to interpret the rule,” explains Patrick.
For more information, read the full Lexpert article, “New tax rules hit business” in Lexpert’s Special Edition: Finance and M&A 2020.