Budget 2022 did not contain any significant new international tax measures. However, there are several measures that will impact organizations that operate internationally, we summarize them below:
Pillar One and Pillar Two
As part of the Organisation for Economic Co-operation and Development (OECD) initiative on Base Erosion and Profit Shifting (BEPS), Canada has joined a two-pillar plan (known as Pillar One and Pillar Two) along with 137 member countries on international tax reform.
Pillar One will ensure that large multinational corporations will be allocated their fair share of tax in the jurisdictions where their users and customers are located. The federal government is actively working with its international partners to develop the multilateral convention to bring the new rules into effect. In Budget 2022, the government confirmed it will continue to move forward with the previously proposed Digital Service Tax (DST) if this multilateral convention has not come into force.
Pillar Two will ensure that multinational enterprises are subject to a minimum effective tax rate of 15% on their profits globally. The Pillar Two framework is now largely finalized and countries are taking steps towards their own domestic implementation. Budget 2022 confirms that the government will be launching public consultation on the implementation of Pillar Two rules.
Read our Tax Alert, Landmark Announcement by the OECD on Global Minimum Tax, for more information about how these rules will impact your organization.
Interest coupon stripping
Taxpayers making interest payments to non-residents are subject to a 25% withholding tax, which may be reduced under a tax treaty. Taxpayers have entered into arrangements to avoid this withholding tax, by selling the rights to future interest to a party that is either not subject to a withholding tax or at a reduced rate. Budget 2022 proposes amendments such that the total withholding tax paid under an interest coupon stripping arrangement is the same as if the arrangement had not been undertaken.
Hybrid arrangements can be used to exploit tax differences between Canadian and foreign tax laws. Budget 2021 proposed to eliminate the tax benefits from hybrid mismatch arrangements. To date, the government has yet to provide more details on how they will do this. Budget 2022 confirmed the government's intention to proceed with these measures.
In Budget 2021, the government announced its intention to consult on Canadian transfer pricing rules given recent Canadian court decisions. To date, the consultation paper has not yet been released. Budget 2022 confirmed the government's intention to proceed with these measures.
On Feb. 4, 2022, the government released draft legislation relating to Excessive Interest and Financing Expenses Limitation (EIFEL) which will affect multinational corporations, cross-border investments, and other Canadian public and private enterprises. As currently proposed, the EIFEL rules will limit the deductibility of net interest expense to a fixed ratio, ultimately to be 30% of taxable income before interest, taxes, depreciation, and amortization (referred to as tax EBITDA). The consultation period for these measures ends on May 5, 2022 when it is expected that the government will then proceed to finalize the legislation and introduce it as a bill. These rules are currently set to apply for taxation years beginning on or after Jan. 1, 2023.
For more details on how the EIFEL rules will impact your organization, read our Tax Alert Details and Impacts of New Interest Deductibility Rules.
For more information, please contact:
Dave Walsh, Managing Partner, Tax Service Line
Harry Chana, Partner, International Tax Practice Leader and Transaction Tax Leader
The information in this publication is current as of April 7, 2022.
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