TEI-Canadian Department of Finance liaison meeting - income tax issues - Tax Executive Institute's December 11, 1996 meeting

Tax Executive, The, May-June, 1997

Given the prevalence of PSAs in a globalized and highly competitive petroleum industry, we renew our inquiry whether the Department will support policy or legislative changes to temper the relative disadvantage visited upon Canadian companies that are not permitted to credit such taxes. Canadian employment in the petroleum industry may be diminished should companies restructure their operations in order to avoid the adverse tax consequences of rulings such as the aforementioned one. Has Finance requested and received additional information from Revenue Canada in respect of Revenue's denial of credits for such foreign taxes, thereby permitting Finance to resolve this issue?

Finance response: Officials from Revenue Canada and the Department of Finance have met and discussed the issue. Officials in both Ministries have, in general, a much better understanding of the issue through the recent consultations that have been held with industry. A recommendation for possible changes to mitigate the problem will be made "in fairly short order" and almost certainly within the next year. However, it is too early to tell whether the changes will be legislative or administrative in nature.

Treaties

A. Withholding Taxes

The Government's policy of seeking reduced withholding tax rates in certain areas, such as dividends, interest, and computer royalties, has been implemented in only a few treaties. What progress can be reported in implementing the goal? In particular, the timing for review of further reductions in withholding taxes with our major NAFTA partner, the United States, would seem propitious. Can you provide a report on the prospects for such a review?

High withholding taxes are a significant disincentive to increasing the level of foreign investment in Canada. Moreover, reluctance to negotiate reciprocal reductions in withholding tax rates increases the tax burden for Canada's global corporations conducting business overseas. Hence, TEI urges the government to review the results of reducing various withholding tax rates in the Canada-U.S. protocol with a view to moving to the European and, indeed, the U.S. model with a zero rate as the target for intergroup dividends, interest, and royalties.

Finance response: The Department is not considering further reductions in withholding taxes with the United States. Finance is prepared to discuss the lower rates currently found in the revised U.S. treaty with other countries. Some countries have approached the Department to discuss reductions in withholding taxes with Canada.

TEI expressed concern with the delay in reducing all withholding taxes with our treaty partners in line with the recent U.S. protocol.

TEI was disappointed to learn that the Department has not yet started to review the adequacy of the withholding tax reductions in the U.S. Treaty with a view to further decreases. TEI considers that such reductions would bring Canada more in line with international norms and also enhance Canada's attractiveness for foreign direct investment.