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International companies using Canada as a base of operations – and this would include a stack of global mining companies – need to pay close attention to tax amendments announced in the last federal budget that might erode the benefits of doing business in Canada.
Finance Minister Jim Flaherty’s March 29 budget plan rolls out several changes that are supposed to close tax loopholes, among them a “targeted measure” to curtail the use of something called “foreign affiliate dumping transactions.”
The proposals have caught the attention of mining lawyers and other Canadian legal and tax advisors who work with multinational companies that have decided to manage their foreign assets out of Canada.
A joint committee on taxation made up of members of the Canadian Bar Association and the Canadian Institute of Chartered Accountants has filed a submission with the federal Department of Finance to point out some of their concerns with the proposals.
“The proposals clearly change the rules in this area, and create a big problem for existing structures set up in reliance on the old rules,” says Emmanuel Sala, a lawyer and tax expert in the Montreal office of Blake, Cassels and Graydon LLP. “Unless these rules are loosened, this may deter foreign investors from investing in Canada in the first place, or at least from building international groups out of Canada.”
Canada’s reputation as a world leader for mining finance makes it a natural place for global miners to base the holding companies they create to manage their international assets. Not only can these holding companies access Canadian capital markets, they also benefit from favourable Canadian tax treatment.
The multinationals transfer or “dump” the debt from their foreign affiliates into Canada, where they can benefit from tax rules that let them deduct interest payments from income. And assuming the parent company is resident in a nation covered by a tax treaty with Canada, these holding companies can transfer profits generated by their foreign holdings back to the parent without having to pay the Canadian government withholding tax.
Budget 2012 promises “immediate action” to discourage such transactions in the future. It’s one of a handful of anti-loophole provisions the government expects to yield $120-million in the 2012-13 fiscal year, rising to $320-million by 2013-14.
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