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

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

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

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

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 tax @ 25% Tax treaty overrides (tax base and rates)

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)

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

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

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

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)

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)

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

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

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

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

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?

Consultation Period Until July 15, 2008

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: 613-947-2289 Phone: 613-947-9482