Last December we discussed from a Canadian perspective the final reports1 issued by the OECD on the 15 action items in its base erosion and profitshifting project.2
We expressed the view that Canada is unlikely to adopt - at least in the near term - any of the OECD's substantive recommendations, except those in relation to action 6 (treaty abuse), but we foresaw the adoption of several of the BEPS procedural recommendations. Those predictions have been borne out by the March 22 budget from Canada's new Liberal Party federal government, also containing an unexpected extension of the 2014 anti-back-to-back financing rules, which could be seen to be inspired by the BEPS project. The budget also, unusually, encourages the Canada Revenue Agency to employ most of the action 8-10 recommendations on transfer pricing, even though the Supreme Court made clear in its 2012 decision in Glaxo that the OECD transfer pricing guidelines do not, per se, make law in Canada.3
This article discusses those aspects of the 2016 budget.
In October 2015 the OECD released the final BEPS package, which was endorsed by the G-20 (including Canada) in November 2015. (Prior coverage: Tax Notes Int'l, Oct. 12, 2015, p. 103.) The BEPS recommendations fall into four categories:
new minimum standards;
revised existing standards;
common approaches; and
guidance drawing on best practices.
Only the new minimum standards are backed by a commitment of all OECD and G-20 countries to consistent implementation.
According to the explanatory statement,4 minimum standards have been agreed to in four areas:
country-by-country (CbC) reporting;
fighting harmful tax practices; and
improving dispute resolution.
Existing standards have been updated in the areas of tax treaties and transfer pricing. Further, according to the explanatory statement, the countries participating in the BEPS project have agreed to a general tax policy direction in some areas, such as hybrid mismatch arrangements and interest deductibility.5 The final package contains guidance based on best practices that purportedly would support countries intending to act in the areas of mandatory disclosure initiatives and controlled foreign corporation legislation.
The 2016 budget proceeds with a cautious and very limited implementation of the BEPS proposals, focusing mainly on the new minimum standards.
Implementation of BEPS Recommendations Action 6 - Treaty Abuse
The final report on action 6 recommends three possible changes to tax treaties to deal with treaty shopping.6 One change would see the inclusion of a clear statement that the states entering into a tax treaty intend to avoid creating opportunities for nontaxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements. A second possible change would be the inclusion of a U.S.- style limitation on benefits rule that limits the availability of treaty benefits to entities that meet specific conditions.7 Finally, another possible modification is the inclusion of a general antiabuse rule based on the principal purposes of transactions or arrangements (the PPT rule) to address other forms of treaty abuse, including treaty-shopping situations that would not be covered by an LOB rule.8 Significantly, the minimum standard agreed to by all G-20/OECD countries is to be implemented by countries by both including in their tax treaties the general anti-treaty-shopping statement of intention, and at their option, including in their treaties:
the combined approach of an LOB and PPT rule;
the PPT rule alone; or
the LOB rule, supplemented by a mechanism that would deal with conduit financing arrangements not already dealt with in tax treaties.
In other words, the OECD's formulation of the minimum standard effectively avoids setting a single common standard for combating treaty shopping. We previously wrote in these pages that action 6 is the only substantive BEPS item that is likely to gain traction in Canada because since 2013 Canada has focused on implementing a new BEPS-inspired antitreaty- shopping approach. The process started when in its 2013 budget, the government announced it would consult on an anti-treaty-shopping rule. Later that year a consultation paper was issued, and despite opposition from the Canadian tax community, in its 2014 budget the Department of Finance proposed adopting a PPTtype domestic anti-shopping treaty override. But then in August 2014 the government announced it would not move ahead until the OECD's BEPS work was complete.
Now that the final package has been released, shortlisting treaty shopping among the four minimum standards, the 2016 budget confirms the government's commitment to addressing treaty abuse in accordance with the BEPS proposals. According to the budgetary materials, in the future Canada will consider using either the LOB article or principal purpose test approach to address treaty shopping, depending on the particular circumstances. The budget notes that amendments to Canada's tax treaties to include a treaty antiabuse rule could be achieved through bilateral negotiations, the multilateral instrument that will be developed in 2016, or a combination of the two.
We have a few observations regarding the 2016 budget announcements. First, and most significantly, in line with the BEPS proposals, Canada seems to have abandoned its initiative, presented in the 2014 budget, to adopt a domestic anti-treaty-shopping rule that would serve as a treaty override. This is a welcome development.
Second, the 2016 budget suggests that Canada will not be using the OECD's preferred approach of including both an LOB article and a PPT rule in its treaties.
Third, regarding the statements that Canada's antitreaty- abuse strategy may be implemented through the action 15 multilateral instrument, as we have previously written, we are not certain that Canada is prepared to forgo the bargaining chip benefits of the bilateral treaty negotiation approach, which would be lost if action 15 were adopted.
Action 13 - CbC Reporting
The action 13 report establishes a new minimum standard that requires the adoption of a standardized approach to transfer pricing documentation. Under this approach, multinationals will be required to provide (i) high-level information regarding their global business operations and transfer pricing policies in a master file that will be available to all relevant tax administrations; and (ii) detailed transactional transfer pricing documentation by way of a local file specific to each country, identifying material related-party transactions, the amounts involved in those transactions, and the company's analysis of the transfer pricing determinations it has made regarding those transactions.
Large multinational enterprises will be required to file a CbC report that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax, and income tax paid and accrued. MNEs will also need to report their number of employees, stated capital, retained earnings, and tangible assets in each tax jurisdiction. Finally, the minimum standard requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities in which each entity engages. The action 13 report states that the new CbC reporting requirements should be implemented for fiscal years beginning on or after January 1, 2016, and should apply, subject to a 2020 review, to MNEs with annual consolidated group revenue equal to or exceeding [euro]750 million.
Predictably, the 2016 budget announced that Canada is moving ahead with the OECD's new minimum standard regarding CbC reporting for large MNEs for years beginning after 2015.
Action 5 - Spontaneous...