A group of nations called the G20 met in Canada in April to discuss the problem of tax avoidance by multinational companies. Among the group’s priorities, they agreed to close all loopholes that shield corporate profits from tax. But they didn’t agree on how to do that. One country laid an entire charge, whereas another member states came up with another “pebble in the pool.” Which one of these methods or proposals worked best? Let’s go to the bottom line.
What are the Pandora Papers?
The Whale Declaration of April outlined six countries — Canada, France, Germany, Italy, Mexico and the U.K. — where there have been allegations that subsidiaries of multinational companies had not been paying their share of tax. In each of the cases, the country named as the offender allowed the companies to move profits between subsidiaries.
And while the U.K. was the first, Canada appears to be the second: it’s one of the 11 countries for which U.S. is fighting an international tax evasion case. U.S. alleges that French bank BNP Paribas hid $8.3 billion from American tax collectors between 2004 and 2012, by manipulating the transfer pricing of the bank’s trading in agricultural commodities such as soybeans, corn and wheat. The bank has acknowledged that one of its Swiss subsidiaries, BNP Paribas SA, was involved, and has agreed to pay a fine of $9 billion.
Where is Canada in all of this?
It’s not as a country involved in the BNP Paribas case. The one that really matters to the U.S. is Canada, but in court documents filed by Canada, the country doesn’t even name a specific company. Instead, the country cites the practice of transferring financial profits between subsidiaries as being “quite commonplace in the global energy and steel industries.” Canada wants BNP Paribas to acknowledge that the practice is “useless and a hazard to the soundness of the Group of 20’s international monetary system.”
Why has Canada gone to court?
Canada is facing a trade dispute and wants to impose tariffs, which will typically involve the reference point being the level of taxes that had been paid in past years. For example, if a company is paying its Canadian corporate tax rate of 20% and then makes a profit in a foreign country, Canada can assert that the U.S. tax rate is calculated under an “internationally agreed” price — a term that courts will always look to to determine the levels of taxes paid. It’s quite a slippery slope if you start disputing a tax rate, as it’s essentially violating existing legislation to require that companies pay the tax on the profits they made before they were transferred out of the country.
Will Canada successfully add new taxes?
Not unless the U.S. concedes that Canada has a point. The U.S. argues that foreign subsidiaries of a U.S. company make profits through “vanilla” transactions, which don’t require negotiating between counterparties, for example, fees, and has argued that it is not technically a transfer between separate legal entities.
A successful tax avoidance case could apply pressure to companies to come clean. But on the other hand, it could potentially bring costs down, which could be good for business.
Does this news matter in the U.S.?
If you’re one of the 522 companies with an American subsidiary that is suspected of violating the tax laws of the United States, you might want to change your bookkeeping.