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A Canadian Tax Lawyer’s Guide to the OECD BEPS Project – Tax

What is the BEPS project?

Have you ever heard of the “Double Irish, Dutch Sandwich”? It is a complex tax arrangement involving a parent company and three subsidiary companies: a Dutch company and two Irish companies, one located in Ireland and the other located in a tax haven. According to the Irish Times, Google used this type of arrangement to transfer US$75.4 billion out of Ireland in 2019.

As ABC News (Australia) describes, the companies in an “Irish, Dutch double sandwich” actually form a chain or pathway that allows money to flow between them in the following order: parent company, Irish company (Ireland), Dutch company and Irish company (tax haven). To move the money legally with minimal tax incurred, each company charges expenses to the previous company in the chain and offsets the income it earns by paying expenses to the next company in the chain. The tax haven company does not need to offset its income because it benefits from a corporate tax rate of 0%. These companies take advantage of local tax laws and international tax agreements to avoid paying taxes on funds in a particular country, or when funds are moved between countries.

“Double Irish, Dutch Sandwich” is also an example of base erosion and profit shifting – or BEPS. According to the Organization for Economic Co-operation and Development (OECD), BEPS occurs when multinational corporations take advantage of inconsistencies between countries in tax law and tax administration to avoid taxation. BEPS practices are largely not illegal, but rather exploit current tax laws to benefit the company trying to avoid paying taxes. The OECD estimates that BEPS costs countries billions of dollars in lost tax revenue every year. To combat BEPS, the OECD presented its BEPS project which coordinates efforts among member countries to limit exploitable inconsistencies in tax administration and eliminate tax evasion.

How does the OECD BEPS project eliminate BEPS?

The OECD BEPS Project website describes the 15 actions currently involved in the BEPS Project. These can be summarized as follows.

Taxation in a digital economy

The growth of the digital economy has raised vast challenges for countries, both increasing the mobility of businesses and individuals, and creating ways to circumvent outdated tax laws that are often based on physical location. Action 1 focuses on coordinating a global effort to address these issues.

Pillars 1 and 2 of the OECD’s BEPS project recommend that countries remove any tax on sales of digital services and goods known as digital services tax until member states reach an agreement multinational on digital services tax. This multinational agreement would ensure consistent application of the digital services tax across all countries. Although many countries have agreed to work on this multinational agreement, Canada, among other countries, continues to implement the digital services tax. In a press release, Canada’s Department of Finance described the proposed 3% tax as an interim measure to ensure that Canada does not lose potential tax revenue while negotiating a multinational agreement.

Transparency, research and mandatory reporting

Actions 11 to 13 focus on information. These actions involve monitoring the impact of the BEPS project, as well as reporting data to identify aggressive tax planning and increase transparency vis-à-vis large multinational companies. Canada enacted Section 233.8 of the Income Tax Act to address the Action 13 Country-to-Country Reporting. Country-to-country reporting requires multinational companies to disclose certain financial information, which increases transparency of their operations and where taxes are paid, allowing countries to better administer tax audits and other tax enforcement measures. ‘tax.

Target specific BEPS strategies and tools

Actions 2 to 10 target specific laws and legal instruments that large multinational companies use to engage in BEPS. For example, action 6 deals with treaty shopping. Many countries have entered into bilateral agreements (ie an agreement between two countries) to limit double taxation of individuals and companies. For example, a tax treaty may require that pension income be taxed in the country where the payer is located even if the beneficiary is located in another country. Treaty shopping refers to individuals or companies who put in place arrangements that allow them to benefit from these tax treaty arrangements.

Like many BEPS strategies, treaty shopping is generally completely legal. Individuals and companies who engage in treaty shopping follow the letter of the law, but result in unintended benefits that cost countries tax revenue. In a recent case of Canada v. Alta Energy Luxembourg SARL, the Supreme Court of Canada even found that treaty shopping did not violate the general anti-avoidance rule – a Canadian tax rule aimed at detecting tax avoidance behavior that is not strictly covered by the rule current. provisions of the Income Tax Act. Through Action 6, strategies such as model tax treaty provisions are implemented to limit opportunities for treaty shopping.

Dispute settlement

Action 14 – Mutual Agreement Procedure aims to give the competent authority of each country – such as the Canada Revenue Agency here in Canada – the means to effectively resolve differences in the interpretation of tax treaties in order to ensure proper implementation of tax treaties.

Multilateral instrument

Action 15 is the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (the “Convention”). This treaty is designed to amend existing bilateral tax treaties to create consistency in international tax rules without requiring each individual tax treaty to be amended. Each country becoming a signatory and party to the Convention provides a list of its tax treaties to which it wishes the Convention to apply. If both countries that are parties to a particular bilateral treaty list the same treaty, that treaty is considered “matched” and the Convention applies to it.

As an example of BEPS in action, the OECD recently announced that member states, on a voluntary basis, will implement a minimum tax rate of 15% on multinational corporations with worldwide revenues exceeding 750 millions of euros. (approximately C$1,112 million). The minimum corporate tax rate will limit the possibilities for large corporations to transfer their profits to foreign countries to avoid corporation tax.

Critique of BEPS

Although a full review of criticism of the OECD BEPS project would be too extensive for the scope of this article, it is worth noting a few examples of criticism the project has received.

  • Switzerland, according to the European Network on Debt and Development, has previously indicated that it will prioritize sharing information with the countries with which it has the closest relations. If Switzerland and other countries engage in this selective sharing of information, it undermines the transparency principles of the BEPS project.

  • Many concerns have been expressed that developing countries are not receiving the same benefits from the BEPS project. For example, Daniel Oberko explains in his article “Developing countries and their workers left behind by OECD in a tax reform proposal” how an OECD proposal to distribute the profits of individual companies between countries according to where the sales are made would hurt developing countries which tend to have relatively small markets.

In her article “Global tax deal seeks to end tax havens, criticized for ‘lack of teeth'”, Leigh Thomas addressed the criticisms that have been raised about the 15% minimum tax rate discussed above above, in particular by fearing that the provisions contain too many loopholes to be applied effectively. and that the goal of applying this tax rate by 2023 is too onerous for some countries.

Pro Tax Tips: What does BEPS mean for Canadian individuals and corporations?

The impact of the BEPS project for Canadian individuals and businesses is both direct and indirect. Ideally, the BEPS project will allow Canada to recover additional tax revenue that it currently loses to BEPS. These tax revenues can be used for public spending projects and other perquisites. Actions such as the digital economy may be more directly noticed by individuals and businesses, such as price changes to account for any taxation on digital goods. It should be noted that many of the BEPS actions target large international companies and corporate groups, which means that Canadian individuals and most Canadian companies will not be directly affected by these actions.

The BEPS project will also likely require additional work to understand applicable tax legislation. For example, an experienced Canadian tax lawyer simply interpreted the bilateral tax treaty and the applicable case law. Now, that same Canadian tax lawyer may need to review the tax treaty, treaty, case law, and any dispute resolution rulings, if any, to interpret the same agreement. Our experienced Canadian tax lawyers can help you interpret the impact of the BEPS changes on your tax returns.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.