Blakes Slides for Canadian Luncheon

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Tax Executives Institute –
Dallas Chapter
U.S./Canada Tax Update – March 12, 2013
Update on International Tax Cases from
Canada/Commonwealth Countries
Kathleen Penny
Blake, Cassels & Graydon LLP
[email protected]
416-863-3898
Foreign Entity Classification Cases
• Basic approach to foreign (including U.S.)
entity classification taken by Canadian and
U.K. courts
• R. v. Sommerer (2012, Canadian Federal
Court of Appeal)
– Austrian foundation classified as trust for
Canadian tax purposes
2
Foreign Entity Classification Cases
• HMRC v. Anson (2013, U.K. Court of Appeal)
– U.S. LLC classified as “opaque” entity, i.e. not “tax
transparent” for U.K. tax purposes (even though was
“tax transparent” for U.S. tax purposes)
– result was that U.K. resident who was member of U.S.
LLC did not get foreign tax credit in U.K. or double tax
relief under U.K./U.S. treaty, for U.S. federal and state
tax paid in U.S. on his share of LLC’s profits (resulting in
total effective tax rate of 67%)
– similar issue in Canada where Canadian resident
individual is member of U.S. LLC
3
Foreign Entity Residence Case
• Canadian resident person/entity subject to Canadian tax
on worldwide income/gains (subject to any treaty
relief/foreign tax credits)
• Garron Family Trust (2012, Supreme Court of Canada)
– trust with Barbados trustee (and formed under Barbados
law)
– residence of trust not necessarily = residence of trustee
– residence of trust is where central management and
control take place
– similar to corporate residency test based on place of
central management and control
4
Classification and Residence of U.S.
Entities for Canadian Tax Purposes
• U.S. “per se” corporation (“C” or “S”) = corporation for Canadian tax
purposes
– U.S. residence only due to treaty “tie-breaker” rule
• U.S. limited liability company (LLC) = corporation for Canadian tax
purposes
– Canada/U.S. tax treaty status
– residence for Canadian tax purposes based on place of management
and control if not a corporation for U.S. tax purposes
• U.S. general or limited partnership = partnership for Canadian tax
purposes
• U.S. trust = true trust for Canadian tax purposes (unless “bare” trust)
– Canada/U.S. tax treaty status of U.S. grantor trust
5
“Beneficial Ownership” Cases
• Velcro Canada Inc. (2012, Tax Court of Canada)
– Netherlands licensor found to have “beneficial ownership” of
royalties paid by Canadian taxpayer
– back-to-back licenses (Canada/Netherlands and
Netherlands/Netherlands Antilles) but no automatic passing
through of royalties and other favourable facts
– not under appeal
• HMRC v. Anson (2013, U.K. Court of Appeal)
– not really a “beneficial ownership” case, but note that LLC’s
profits treated as belonging to LLC and not its members, in spite
of automatic allocation provisions
6
Tax Treaty Interpretation, and Impact of
Retroactive Domestic Tax Legislation
• Sanofi Pasteur Holding SA (2013, India High Court)
– sale (in 2009) by French taxpayer of shares of French
corporation, sole assets of which were shares of Indian
companies
– retroactive legislation passed by India to reverse results of
Vodafone decision was applied, and this was upheld by court
– however, court applied exemption under India/France tax treaty
– French taxpayer did not derive gain from the alienation of shares
in an India resident company, was not the legal or beneficial
owner of shares of underlying Indian companies
– court stated that “see through” approach would be a “strained
construction” of treaty provisions
7
Other Important Canadian Cases in
2012/2013
• GlaxoSmithKline Inc.(2012, Supreme Court of Canada
– pharmaceutical company transfer pricing case
– license agreement with one non-Canadian affiliate and
purchases of active ingredients from another non-Canadian
affiliate
– case still ongoing
• Daishowa-Marubeni International Ltd. (pending in 2013,
Supreme Court of Canada)
– important case re: Canadian tax treatment of contingent
liabilities, possible impact on handling of contingent liabilities in
M&A, real estate and resource transactions
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