Canada to Discuss Its Response to BEPS …Affirms Its Commitment to a Free Trade Agreement with Europe…Some Implications for OFCs

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Canadian tax experts from industry and the public sector will discuss what Canada’s response should be to the OECD Base Erosion and profits Shifting (BEPS) agenda. Hosted by Bloomberg BNA and Baker and McKenzie the talks will be facilitated through two events : The 3rd Annual Global Transfer Pricing Conference: Toronto, which will take place August 29-30, and the 2nd Annual International Tax Conference: Canada and Beyond on August 31.

The outcome of these talks plus the others to follow should be of special interest to Offshore Financial Centres whose economic hinterland is Canada precisely because Canada’s orientation to BEPS implementation methodology, content and timetables will have a significant impact on how Canadian multinationals organise their business models for sustained growth and international tax compliance.

Small& Medium Sized Companies

It is also useful to note that BEPS will not be a financial and compliance burden on large corporates only but it is expected that small and middle sized, externally oriented entities, will incur disproportionate adjustment costs relative to their larger counterparts. This is an important point for those OFCs whose international business model may have focused on this demographic.

This reality will lead to a significant re-ordering of priorities by the Canadian government and industry in the coming months and years as BEPS implementation targets start to crystallise.

Tax Treaties

Importantly for tax treaty-based OFCs, BEPS is not just about transfer pricing rules other compliance obligations. BEPS is also mandates new disciplines for amending tax treaties to further the overarching programme to redress tax avoidance. This means that the immediate post-BEPS environment is likely to see a flurry of tax treaty renegotiation to reflect BEPS best practice in tax diplomacy expressed through tax treaties.

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BEPS in the Canda 2016 Budget

  • Adoption of the remaining OECD BEPS Project minimum standards on harmful tax practices (BEPS Action 5),
  • Prevention of  treaty abuse (BEPS Action 6)
  • Application of the transfer pricing provisions found in the BEPS Action 8 through 10 recommendations.
  • Country-by-Country (CbC) reporting (BEPS Action 13)
  • Dispute resolution mechanisms (BEPS Action 14)

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Canada-EU FTA

OFCs who have been able to attract business from Canada will soon have another variable to consider once the Canada-EU FTA is in place. First to access the EU market and expected benefits under a arrangement, the the Canadian company will likely have to meet criteria that satisfy the rules of origin of its goods and perhaps services. This means that unless some dispensation is agreed the trade benefit of being resident in an OFC  for Canadian trading company is doubtful. Put differently it becomes a disincentive if not an impossibility for Canadian companies to use a OFC to trade in Europe.

EU Tax Reform

It is also possible, perhaps even highly likely that the EC ‘good tax governance’ agenda which is decidedly OECD-plus will require its FTA -partners to elements of its regional tax diplomacy which would impose rules about third state entities connected to the Canadian company taking advantage of the trade and other benefits of the proposed FTA.

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