International Tax Measures
International Tax Reform
The Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting has developed a two-pillar plan to reform the international tax system, as part of the “BEPS 2.0” initiative. On October 8, 2021, Canada and 135 other countries in the Inclusive Framework committed to adopt this plan The budget provides an update on the two pillars of this international tax reform initiative.
Pillar One
Pillar One will introduce new rules for allocating taxing rights between countries, to address challenges raised by the digital economy. These rules will generally apply to multinational enterprises (MNEs) with annual revenue above €20 billion and profit margins above 10%. The right to tax a portion of these MNEs’ profits will be reallocated to market countries (i.e. the countries where the MNEs’ users and customers are located).
The budget notes that Canada is currently working with its international partners to develop model Pillar One rules and a multilateral convention to implement these rules (the OECD has released packages of draft rules for public comment, which were consolidated in progress reports released in July and October 2022). The budget also notes that the government intends to release a revised draft of the Digital Services Tax (DST) legislation; the DST could be imposed as of January 1, 2024 if the multilateral convention has not come into force. The DST would take effect in respect of revenues earned as of January 1, 2022. The budget states that the government’s hope and underlying assumption is that the timely implementation of the Pillar One rules will make this DST unnecessary.
Pillar Two
Pillar Two will introduce a 15% global minimum tax. This tax will generally apply to MNEs with global revenues of at least €750 million. These MNEs will be required to compute their effective tax rate (ETR) in each country where they operate. If the ETR for a particular country is below 15%, a top-up tax will be imposed, to raise that ETR to 15% (this top-up tax may be reduced by a substance-based income exclusion, which is computed based on the payroll costs and net book value of tangible assets located in the jurisdiction).
The top-up tax will be collected under two charging rules. The main rule is the Income Inclusion Rule (IIR), which generally requires the ultimate parent of the MNE to pay the top-up tax computed for its foreign subsidiaries (and can also apply in certain other circumstances). The Undertaxed Profits Rule (UTPR) is a backstop rule, which collects any top-up tax that is not collected by the IIR. The UTPR allocates this residual top-up tax amongst all countries in which the MNE operates (and which have adopted the UTPR), based on the employees and tangible assets located in those countries. A country may also choose to adopt a domestic minimum top-up tax, which is based on the Pillar Two rules but collects top-up tax on the income of entities located in that country (rather than foreign entities). Model rules to implement Pillar Two were released by the OECD in December 2021. The OECD also released commentary on the model rules in March 2022, an implementation framework addressing key elements of the rules in December 2022, and further administrative guidance in February 2023 (including guidance on the interaction of Pillar Two with the U.S. Global Intangible Low-Taxed Income (GILTI) regime).
The budget restates Canada’s intention to implement Pillar Two, along with a domestic minimum top-up tax (which will apply to Canadian entities of MNEs that are within the scope of Pillar Two). The IIR and domestic minimum top-up tax will come into effect for fiscal years of MNEs that begin on or after December 31, 2023; the UTPR will come into effect for fiscal years of MNEs that begin on or after December 31, 2024. For these purposes, an MNE is considered to have the same fiscal year as its ultimate parent entity.
The government intends to release draft legislation for the IIR and domestic minimum top-up tax for public consultation in the coming months; draft legislation for the UTPR will follow at a later time. The draft legislation will closely follow the model rules, and the commentary and administrative guidance on those rules, particularly regarding the application of safe harbours. The budget also states that the government will continue to monitor international developments as it proceeds with the implementation of Pillar Two.
Sales tax measures
GST/HST treatment of payment card clearing services
As a result of a recent court decision that found that GST/HST does not apply to supplies of payment card clearing services rendered by a payment card network operator, the budget proposes to amend the GST/HST definition of “financial service” to clarify that these services are excluded from the definition, to ensure that such services generally continue to be subject to the GST/HST.
This measure will apply to a service rendered under an agreement for a supply if any consideration for the supply becomes due, or is paid without becoming due, after March 28, 2023. This measure will also generally apply to a service rendered under an agreement for a supply if all of the consideration for the supply became due, or was paid, before March 29, 2023, except in certain situations.
Other tax measures
Alcohol excise duty
The budget proposes to temporarily cap the inflation adjustment for excise duties on beer, spirits and wine at 2% for one year only, as of April 1, 2023.
Cannabis Taxation
The budget proposes to allow all licensed cannabis producers (instead of only certain smaller licensed cannabis producers) to remit excise duties on a quarterly rather than monthly basis, starting from the quarter beginning on April 1, 2023.
Tariff support for developing countries
The budget proposes to renew the General Preferential Tariff (GPT) and Least Developed Country Tariff programs until the end of 2034. These programs were to expire on December 31, 2024. The government also intends to update these programs, which would include creating a GPT+ program, expanding benefits for certain import categories and simplifying administrative requirements for Canadian importers.
