Our inaugural issue
Welcome to the inaugural thought leadership newsletter of the Tax Policy Forum Committee. By way of background, FEI Canada has active thought leadership committees comprised of FEI Canada members and National Strategic Partners who are subject-matter experts in areas such as, Corporate Reporting, Governance and Risk Management, Information Technology, Pensions, Treasury and Capital Markets and Taxation.
Over the years, the Taxation Committee has made submissions and presentations to the House of Commons Standing Committee on Finance. With an increased focus on tax policy and legislative changes by both domestic and international government bodies, we are pleased to launch a reinvigorated Tax Committee under the leadership of a new Chair, Sandra Pereira.
Introducing the Tax Policy Forum Committee members:
(Chair) Sandra Pereira, Tricon Capital Group, Senior Vice President & Global Head of Tax
(Past Chair) Peter Effer, George Weston, Group Head of Tax
Grant Smith, Minto Group of Companies, Vice President-Taxation
Doug Clarke, Chorus Aviation Inc, Manager Taxation
Patrick Uy, Amacon, Corporate Tax Director
Cynthia Maier, SAIT Polytechnic & Retired CRA
Brendon Cameron, Sorrell Financial, Professional Advisor
Arvin Mahesan, Hyundai Capital Canada, Director
US Tax Reform
A major policy platform of President Donald Trump was to reform the US tax system that was identified by the Organization for Economic Cooperation and Development (OECD) as no longer competitive. Effective January 1, 2018, a set of comprehensive tax policy initiatives were enacted into law. Essentially, the top federal corporate tax rate was reduced from 35% to 21%, and the top federal personal tax rate was reduced from 39.6% to 37%.
Furthermore, the corporate alternative minimum tax was repealed and the estate tax will now only apply for estates valued in excess of $11M. These measures were intended to lower the US tax rates and broaden the US tax base, with the overall goal of making the US tax regime more competitive with other OECD member countries. It is yet to be seen whether the more competitive tax regime will attract incremental foreign financial capital and human capital to the US market.
Finance executives should be aware that one major tax legislative change limits the deductibility of interest and other financing costs. US companies will only be able to deduct interest expense up to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA).
This essentially is a thin capitalization rule, and finance executives should review their US capitalization policies to ensure they are maximizing the tax efficiencies of financing strategies. Also, financial reporting note disclosure may be impacted. Finance executives should have a discussion with the Board and shareholders on the overall impact of US tax reform to the company’s effective tax rate.
Base Erosion and Profit Shifting
The OECD began a project several years ago to introduce a set of international tax standards to stem tax planning strategies that exploit gaps and mismatches between tax regimes of various countries, and shift profits from higher tax jurisdictions to lower tax jurisdictions. The project named Base Erosion and Profit Shifting (BEPS) was very broad in scope and resulted in the introduction of 15 recommended action items.
The overarching theme of the 15 elective action items was to stop international tax planning strategies undertaken where there is little or no economic substance and results in little or no value creation to the company. The OECD wanted to preserve the fairness and integrity of international tax systems because businesses that operate across international borders can use various tax strategies to gain a competitive advantage over enterprises that operate within domestic borders.
OECD countries were encouraged to sign a multilateral instrument (MLI) which would modify their respective tax treaties to adopt the recommended action items. Since the recommendations are elective, they can only be enforceable if the OECD member countries adopt the new international tax planning standards. On June 7, 2017, Canada and 67 other countries signed the OECD’s MLI, a big first step in international tax law. On January 31, 2018, Canada began its domestic procedures to ratify the MLI and the adoption of some specific measures.
Finance executives should review their international financing structures and cross-border servicing fee and intangible asset arrangements to assess the impact of the BEPS recommendations and MLI adoption to the effective tax rate.
We want to hear from you
We hope you find our inaugural leadership thought piece a useful read. We would like your feedback, so please reach out to members of our Committee with ideas and recommendations for future tax policy discussions. The next newsletter will be issued in May before the FEI Canada National Conference. Hope to connect with you in Halifax.