1. Advisory Panel on Canada’s System of International Taxation Enhancing Canada’s International Tax Advantage
Nick Pantaleo, FCA
PricewaterhouseCoopers LLP
Leader, Canadian National Technical Services
June 25, 2008

2. Panel Members
Advisory Panel on Canada’s System of International Taxation - Members
Peter Godsoe, FCA (Chair)
Kevin Dancey, FCA, (Vice-Chair)
James Barton Love, QC
Nick Pantaleo, FCA
Finn Poschmann, CD Howe Insitute
Guy Saint-Pierre, CC
Cathy Williams, former CFO, Shell Canada

3. Panel Background
Mandate: Advise the federal government regarding an international tax policy framework – recommendations due Dec. 1, 2008
Focus: Canadian businesses investing abroad and foreign businesses investing into Canada
Consultation paper released April 25, 2008

4. Current Tax Environment in Canada
Canada’s combined corporate income tax rate is dropping from about 34.3% in 2007 to about 25% by 2012 (assuming a 10% provincial rate)
The government wants to have the lowest effective tax rate on new business investment in the G7
Average corporate rate of member countries of the OECD has dropped from 34.1% in 2000 to 27.8% in 2007
Investment flows from tax-exempts

5. Canada’s Current Tax System Canadian Source Income of Non-residents
CDN source income taxed at normal rates
Income from employment
Income from business carried on in Canada
Capital gains from disposition of taxable CDN property
CDN source income – interest, dividends, royalties, branch income – subject to W/H 25%
Tax treaty overrides (tax base and rates)

6. Canada’s Current Tax System Foreign Source Income of Residents
Foreign source income – employment, business, property, capital gains from disposition of foreign property – taxed at normal Part I tax rates
Relief from double taxation
Tax treaty overrides (base and rates)

7. Canada’s Current Tax System Foreign Source Income of Foreign Affiliates
Two main subset of rules
Foreign accrual property income (FAPI)
Foreign active business income (ABI)
FAPI taxed on an accrual bases (CDN tax base protection)
ABI taxable when repatriated but exempt if earned in treaty or TIEA country
Interest deductible on funds borrowed to invest in FAs, subject to anti-tax haven initiative (starting in 2012)
CDN tax relief for foreign tax on FAPI and ABI earned in non-treaty countries

8. Panel’s Initial Views on Current System
In general, the current international tax system has served fairly well
Outbound: Current system should be retained as the basic foundation, modifications should make the system more efficient, simple and competitive
Inbound: Level playing field and need to ensure Canadian source income is properly measured and taxed

9. Consultation Paper http://www.apcsit-gcrcfi.ca/
Outbound issues
Foreign affiliates
FAPI
Inbound issues
Withholding taxes
Administrative issues

10. Principal Outbound Issues Related to Foreign Affiliates
Introduce full exemption system for foreign affiliate dividends from ABI?
Exempt capital gains on sale of shares of a foreign affiliate?
Allocation of expenses to foreign source income
Treatment of other returns from foreign affiliates (interest, rents and royalties)

11. Principal Outbound Issues Related to Foreign Affiliates
Broader exemption system for foreign affiliate dividends from ABI
Currently exempts dividends from treaty countries and TIEA countries
All others – credit method applies (with exception for countries who refuse a TIEA, they will be taxed on accrual basis)

12. Foreign Accrual Property Income – Passive Income
Taxing FAPI on an accrual basis is appropriate for controlled foreign affiliates only?
Is taxing FAPI under credit method appropriate for non-controlled foreign affiliates or will FIE rules suffice?
Will it still be appropriate if Canada moves to a broader exemption system?
Does scope of FAPI need to be refined if a broader exemption system introduced? For example, would more base erosion type-rules be needed

13. Principal Inbound Issues
Review the rules affecting inbound investment
Interest deductibility rules
Current thin cap approach
What level of debt is appropriate?
Other options
Arm’s length principle approach
Thin cap on all companies
Earnings stripping rules
Treaty shopping

14. Treaty Shopping Is this a problem?
General anti-avoidance rules v. detailed anti-treaty-shopping provisions in treaties
Which approach is preferable?
Options
Create definition of “beneficial owner” in domestic law
Update each tax treaty with detailed anti-treaty-shopping rules
Adopt anti-treaty-shopping rule in domestic law

15. Withholding Withholding taxes – should more be eliminated? Which ones?
Non-arm’s length interest
Dividends paid by affiliates to their foreign parents
Royalties

16. Administration of the International Tax System
Transfer pricing
Foreign parties rendering services in Canada
How to make the system easier to administer and to comply with?

17. Consultation Period
Until July 15, 2008

18. Submissions Submissions E-mail: advisorypanel@apcsit-gcrcfi.ca Post:
Advisory Panel on Canada’s System of International Taxation
Submission
Attn: David Messier
333 Laurier Avenue West, 15th Floor
Ottawa ON K1A 0G7
Fax:
Phone: