Canada urged to dump its "foreign affiliate dumping" proposal.
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In its 2012 Budget, the Government of Canada unveiled an unpleasant surprise for foreign-owned multinational groups: a proposal to curtail "foreign affiliate dumping" for investments in nonresident corporations by corporations resident in Canada (CRIC) controlled by foreign parent corporations. Under the proposal, covered investments will result in a deemed dividend to the foreign parent subject to withholding tax; in addition, no amount will be added to the paid-up capital of the CRIC and no amount will be added to the contributed surplus of the CRIC for purposes of determining its capital under Canada's thin capitalization rules.
Covered investments include the acquisition of any shares (or options on shares), a contribution to capital, a transaction that creates an amount owing from the nonresident corporation to the CRIC, and an acquisition of a nonresident corporation's debt by the CRIC. Cross-chain share purchases and redemptions made by Canadian subsidiaries pursuant to section 304 of the U.S. Internal Revenue Code are clearly covered by the proposal, but its reach is far broader.
TEI's June 6, 2012, comments discuss the interaction of the foreign affiliate dumping proposal with the upstream loan proposal in the Foreign Affiliate Amendment package released last August and subsection 15(2) of income Tax the Act. The Institute explained that, taken together, these provisions will so restrict a CRIC's ability to manage and invest its cash flows that the effective corporate income tax rate on nonresident corporate groups will increase from 25 to approximately 30 percent (or more) depending on the withholding rate on dividends. TEI President David Penney observed that, "The proposal reverses the tax rate reductions the Canadian government has been implementing."
TEI acknowledged that government's targeting of abusive tax-motivated transactions was foreshadowed by the report on a government...
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