Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Will the CRA agree to accept requests for competent authority relief under Article XXVI of the Canada-U.S. Tax Convention on the basis that the taxes imposed under the GILTI rules may be in violation of Article VII of the Convention?
Position: The Convention does not provide a mechanism for the Canadian Competent Authority to resolve potential double tax situations with the U.S. involving the GILTI rules.
Author: Carruthers, Lori
IFA 2018 International Tax Conference
Canada Revenue Agency Roundtable
Question 1 - New U.S. GILTI Tax
One of the measures introduced under United States (“U.S.”) tax reform is the “global low-taxed intangible income” or “GILTI” rules in the Internal Revenue Code section 951A. Under those rules a U.S. corporation may be subject to tax on a current basis with respect to active business income earned by a controlled Canadian subsidiary, even if that Canadian subsidiary does not have a permanent establishment in the U.S. Under Article VII of the Canada-U.S. Tax Convention (“Convention”), however, business profits of a corporation resident in Canada that does not have a permanent establishment in the U.S. shall be taxable only in Canada.
Will the CRA agree to accept requests for competent authority relief under Article XXVI of the Convention on the basis that the taxes imposed under the GILTI rules may be in violation of Article VII of the Convention?
Under Article XXVI (Mutual Agreement Procedure) of the Convention, Canadian resident taxpayers who consider that the actions taken by the U.S. result for them in taxation not in accordance with the provisions of the Convention may present their case to the Canadian Competent Authority along with the support for their views. If the objection appears to be justified, the Canadian Competent Authority will engage discussions with the U.S. Competent Authority.
The Canadian Competent Authority does not have any experience with the GILTI rules that were recently adopted by the U.S. However, regardless of whether the U.S. GILTI rules may be in violation of Article VII (Business Profits) of the Convention, it should be noted that under paragraph 2 of Article XXIX (Miscellaneous Rules), the Convention cannot affect the taxation by the U.S. of its own residents, except to the extent provided in paragraph 3 of Article XXIX. Article VII is not one of the exceptions provided in paragraph 3 of Article XXIX. This means that the Convention does not provide a mechanism for the Canadian Competent Authority to resolve potential double tax situations with the U.S. involving the GILTI rules.
We do, however, understand that the U.S. GILTI rules allow a foreign tax credit for Canadian tax paid on active business income earned by a controlled Canadian subsidiary such that no additional U.S. taxes would be payable by the U.S. parent in most instances. Double taxation caused by limitations in the U.S. domestic law applicable to such foreign tax credit would generally not be contrary to the provisions of Article XXIV (elimination of Double Tax) of the Convention.
Lori M. Carruthers
May 16, 2018
Response provided by:
Competent Authority Services Division
International, Large Business and Investigations Branch
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