TEI comments on Canadian budget Consultation on Tax Planning by MNEs (a/k/a BEPS).

• Position: Tax Executive Institute, multinational enterprises, base erosion and profit shifting

On June 11, 2014, Tax Executives Institute submitted comments on the Consultation on Tax Planning by Multinational Enterprises announced in Annex 2 of the 2014 Canadian Budget Message. The comments were prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is Bonnie Dawe of Finning Corporation. Contributing substantially to the development of TEI's comments were: Jason Vincze of General Electric Canada, Carmine Arcari of the Royal Bank of Canada, and Grant Lee of HSBC Bank Canada. Also contributing to the comments were: Giovanna Baragetti of Hydro One Networks, Inc.; Rob Dhindsa of Rogers Communications, Inc.; Patricia Likogiannis of General Motors of Canada Limited; Caroline Morin of Spectra Energy Corporation; Michael J. O'Connor of SunLife Financial; Doug Powrie of Teck Resources Limited; and Ella Stuart of Shaw Communications, Inc. Jeffery P. Rasmussen of the Institute's legal staff coordinated the preparation of the comments for the Committee.

On February 11, 2014, the Government announced its 2014 Budget, setting forth its spending priorities for the coming year, proposing numerous tax measures, and inviting comments on several important consultations. On behalf of Tax Executives Institute (TEI), I am writing to express our comments and concerns about the Government's consultation on tax planning by multinational enterprises (hereinafter "the Consultation"). These comments focus on the corporate income tax considerations.

Background on Tax Executives Institute

TEI is the preeminent international association of business tax executives. The Institute's more than 7,000 professionals manage the tax affairs of nearly 3,000 of the leading companies in North America, Europe, and Asia. Canadians constitute approximately 15 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver. TEI members must contend daily with the planning and compliance aspects of Canada's business tax laws, including its treaties. Many of our non-Canadian members (including those in Europe and Asia) work for companies with substantial activities and investments in Canada. The comments set forth in this letter reflect the views of TEI as a whole, but more particularly those of our Canadian constituency.

TEI concerns itself with important issues of tax policy and administration and is dedicated to working with government agencies to reduce the costs and burdens of tax compliance and administration to our common benefit. In furtherance of this goal, TEI supports efforts to improve the tax laws and their administration at all levels of government. We believe that the diversity, professional training, and global viewpoint of our members enable us to bring a balanced and practical perspective to the issues raised by the Consultation on tax planning by multinational enterprises.

General Comments

The Organisation for Economic Co-operation and Development (OECD) has launched a project aimed at addressing the perception that its Member States, including Canada, and other G-20 countries are losing corporate tax revenue because multinational enterprises (MNEs) engage in "base erosion and profit shifting" (BEPS) strategies. The project has resulted in the publication of a 15-step Action Plan on Base Erosion and Profit Shifting (hereinafter "the Action Plan") as well as publication of numerous consultation documents pursuant to the Action Plan. The Government of Canada has initiated this consultation to "set its priorities and inform Canada's participation" in the international discussion. Before responding to the questions posed by the Government in its 2014 Budget, TEI has several prefatory observations and comments.

First, the countries participating in the BEPS project have widely varying economic conditions, budget priorities, and tax policies. As a result, it is unlikely the Action Plan will produce a single, consistent framework and it is questionable whether the outcomes in respect of any of the Action Plan's multiple steps will be consistently adopted or applied by all countries. Thus, contrary to the OECD's desire to develop a consensus approach to international taxation and to curbing BEPS, TEI believes that countries will tackle the issues that are problematic in their particular jurisdiction, adopt policies that are inconsistent with others, exacerbate the current patchwork of international tax rules, and increase the risks of multiple taxation. To minimize the potential for undermining the competitive ness of Canada's tax system, TEI recommends that Canada act on OECD BEPS recommendations only after careful consideration of the potential impact to the Canadian economy and particular industries and then only where consensus on a specific course of action is reached by all or substantially all OECD members (taking account of the actions of Canada's principal trading partners and economic interests).

Next, during the last several budget announcements, the Government has undertaken targeted actions that parallel the BEPS initiatives, effectively resulting in a "Made in Canada" BEPS Action Plan. Those actions include adopting limitations on interest deductibility (through the introduction of the foreign affiliate dumping rules and the enhancement of the thin capitalization regime) and curbing hybrid mismatches through the introduction of foreign tax credit generator rules. Canada has also taken measures to counter aggressive tax planning through enhanced disclosure rules (e.g., section 237.3 of the Income Tax Act) and adopted substantive, targeted technical measures to address potential base erosion through loss trading, character conversions, offshore insurance, and synthetic disposition transactions. In addition, recent amendments to the controlled foreign affiliate rules (especially the introduction of the upstream loan rules) and the evolving anti-Treaty-shopping proposals will have far-reaching (and potentially unintended) effects. As a result, Canada is at the forefront of curbing perceived base erosion and profit shifting. Before considering additional BEPS-related initiatives recommended by the OECD, the Government should consider the individual and combined effects of its actions to date as well as their potential interaction with the OECD initiatives.

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