Canadian mining companies with operations outside the country may face increased tax payments depending on how the Department of Finance implements a proposal in the 2007 federal budget.
“We’re seeing a risk, based on how the proposal is implemented, for Canadian-based companies with operations in countries that don’t have tax treaties with Canada,” explained John Gravelle, tax services partner and Canadian tax leader for the mining industry, PricewaterhouseCoopers. “Many of these countries are in Africa, Central America, and Asia - places with tremendous mineral potential.”
Subject to a phase-in period, the provision could require foreign subsidiaries of Canadian companies to pay current Canadian tax on all earnings in a country that lacks a treaty and does not enter into a Tax Information Exchange Agreement with Canada. The immediate tax would equal tax computed under Canadian rules, less a credit for foreign tax paid.
Under existing law, the current tax paid is the tax of the countries they do business in. Incremental Canadian tax is paid only when such earnings are paid to the Canadian shareholder by dividend.
“One concern with the Tax Information Exchange Agreements is that they allow the government to obtain information on wealthy Canadians with money in tax havens such as the Caymen Islands,” Gravelle suggested. “There is a feeling that, in truth, the government wants information of wealthy individuals with nest eggs offshore, but they are using the companies with foreign operations to obtain it.”
Complicating the issue is whether or not all countries will agree to Canada’s request, and what happens if they don’t. “There are trust issues with outside governments, so I doubt that all these countries will comply,” Gravelle noted. “However, if those agreements aren’t concluded immediately, then the companies will be subjected to new taxes.”
The proposed new approach will mean companies lose the benefit of a foreign tax holiday, since lower foreign tax immediately results in increased Canadian tax.