By: Catherine Anne Brown, Professor, University of Calgary Faculty of Law
Joseph Bogle, JD 2020
It has been nine months since the OECD’s Multilateral Convention (MLI) came into effect for 94 of Canada’s tax treaties. The uncertainty created by the new measures contained in the MLI and their true long-term impact on these treaties remains.
It is expected by many that the measures will substantially lower the bar to deny tax treaty benefits set by Canada’s general anti-avoidance rule (GAAR) and challenge the current status quo—that for tax purposes, “treaty shopping” is not in and of itself “inherently proper or improper.” But, as we demonstrated in the article, the new measures may have a bark louder than their bite when applied in Canada.
What is known for certain, is that the new measures will result in the application of at least five different tax avoidance regimes to Canada’s 94 tax treaties and add considerable uncertainty about the future tax treatment of Canadian businesses with international operations. The global implementation of the MLI also raises important questions for Canadian businesses about how treaty partners are responding to it.
The answer to such questions varies widely under Canada’s tax treaties. One reason is that the MLI offers a range of options for treaty partners to combat tax avoidance. These include the introduction of either a principal purpose test (PPT), simplified (SLOB) or detailed limitation on benefits (DLOB) provisions to deny treaty benefits, or a combination.
Among the many questions are: Which of Canada’s treaty partners will implement the MLI? More importantly, is a treaty partner implementing the MLI’s broad PPT, or has the treaty partner opted for a DLOB to deny treaty benefits? How will the MLI provisions be administered by a treaty partner, and how will this impact Canadian businesses who rely on the tax treaty in their international business activities?
In the end, however, the two most important questions are likely to be:
- How will the new preamble now included in Canada’s tax treaties to combat tax avoidance be applied?
- How will the PPT, which operates to deny a treaty benefit unless the benefit is in line with the object and purpose of the treaty, be interpreted both in Canada and by Canada’s treaty partners?
Our paper lays the foundation for understanding how the MLI will be interpreted and applied in Canada. How the provisions will be administered by our treaty partners is part of our ongoing research.
Next steps include engagement and exchange of information with experts in the international tax community. This process started in May of 2020 through an International Tax Global Symposium hosted by the University of Vienna. Tax experts worldwide provided insight into how their respective countries will apply the MLI. The Dalhousie paper helped to inform our perspective when sharing Canada’s implementation plan as part of that forum.
Our ongoing research involves utilizing information from these global tax experts to better understand the potential impact of the MLI on Canadian businesses going forward. The sampling of responses below by some of Canada’ major trading partners to the MLI options demonstrates the potential importance of this research. As will be immediately apparent, there is a wide range in responses that Canadian businesses can anticipate in the global fight against tax avoidance, especially by treaty partners applying the PPT
The US has opted out of the MLI completely. Canada’s tax regime with the US will therefore remain unchanged. The Canada–US treaty will continue to operate with a DLOB provision that lays out the specific criteria a taxpayer must meet to access treaty benefits.
Canada has stated its intention to replace its current adoption of the MLI’s broadly worded PPT with a similar DLOB provision in its other tax treaties through bilateral negotiation. This should bring greater certainty and predictability. Unfortunately, the Government of Canada has not given a timeline to achieve this result.
The Chinese government is applying the MLI to 102 of its tax treaties, including the Canada–China treaty. China opted to include the PPT and has not signalled an intention to move towards a SLOB or DLOB.
According to Chinese tax experts, Canadian businesses operating in China should also anticipate being subject to a business purpose test under Chinese domestic law and to other domestic anti-avoidance rules when the PPT is interpreted and applied by Chinese authorities.
The United Kingdom
The UK has also opted to apply the PPT and rejected a SLOB as too rigid and mechanical. Unlike the Chinese government, the UK is open to the negotiation of a DLOB provision through bilateral negotiation. Canadian businesses can therefore expect the PPT to be a temporary measure when operating in the UK.
On a happy note, the UK has allowed itself greater discretion under the MLI than Canada when applying the PPT and will grant treaty benefits in some circumstances.
The European Union
The European Union (EU) has not signed onto the MLI as one entity and the implementation plan by each country is not uniform.
For example, France has strongly backed the PPT and rejected a SLOB as less compatible with French domestic anti-abuse legislation. As discussed in the paper, the PPT is very similar to the EU Anti-Tax Avoidance Directive (ATAD), and it is expected that the directive will influence the European application of the PPT. The tax avoidance regime that applies under the Canada-France treaty will be modified accordingly.
Unlike France, Italy has opted for a PPT and a SLOB (one of the few developed economies to do so). The SLOB provision will, however, only apply to agreements where the other signatory has opted to include it. The Canada–Italy agreement does not.
Canadian businesses operating in Europe should also anticipate the application of both national level anti-avoidance legislation under the PPT and EU supra-national law such as ATAD.
Rapidly growing economies like that in India will also play a strong role in the application of the MLI.
India opted for a PPT with a SLOB provision as part of its implementation plan. India is also expected to be very proactive in negotiating DLOB provisions in the immediate future, following rulings by the Indian Supreme Court upholding treaty shopping arrangements due to the absence of such provisions. In the interim the PPT will serve as the primary tool to combat tax avoidance under its tax treaty with Canada.
Canadian business will clearly face ongoing challenges from the implementation of the MLI both in Canada and abroad. The eventual negotiation of DLOB provisions by Canada with treaty partners will provide greater certainty in the long term. Until then, the PPT is the new reality and the global implementation plan for the MLI should be well understood by Canadian businesses and their advisors.