Canada Explains Tax Treaty Changes To Prevent Abuse
The Canadian Government has explained how it will incorporate into its tax agreements new provisions to counter base erosion and profit shifting, having signed the OECD’s multilateral instrument on tackling treaty abuse.
The Canadian Government said that the minimum standards consist of the inclusion in existing treaties of a new preamble and a substantive technical rule. This rule is intended to prevent so-called “treaty shopping,” whereby businesses and investors structure their activities to obtain treaty benefits in inappropriate circumstances.
Canada will introduce the “principal purpose test” provided for by the Convention, which would deny a benefit under a tax treaty where one of the principal purposes of an arrangement or transaction is to obtain a benefit under the tax treaty.
Over the longer-term, Canada will, where appropriate, seek to negotiate on a bilateral basis a detailed limitation of benefits provision that would also meet the minimum standard.
Canada has also chosen to adopt a provision to improve dispute resolution.
The implementation of the minimum standards will affect a majority of Canada’s tax treaties. However, for the amendments to apply, the relevant treaty partners must also ratify the Multilateral Convention and list its tax treaty with Canada. In certain cases, the Canadian Government may find it preferable, or necessary, to update particular treaties bilaterally.
Other than the minimum standard provisions and binding mandatory arbitration, Canada will register a reservation on the Convention’s other provisions. It will continue to assess whether to adopt these provisions at a later date. A country may expand the scope of its commitment under the Convention, but cannot narrow its commitment by adding or broadening a reservation at a later date.
