The Unified Approach: Another COVID-19 Casualty?

The COVID-19 pandemic has revealed the fault lines of the globalized economy and triggered a rise of protectionist trade policies.  The latest chapter in this trend away from a multilateralism is the U.S. withdrawal from OECD negotiations over the tax challenges of the digitalisation of the economy, which in turn has provoked European nations to retreat to unilateral solutions.

The Globalized Economy and COVID-19

In the period between the end of the Second World War and the on-set of the COVID-19 pandemic, the globalization of production created deep economic interdependencies, binding domestic economies to a global supply chain. Consequently, when the COVID-19 pandemic broke, the structure of global trade was such that a disruption in one link of the supply chain created effects all down the line.

In March 2020, the six nations hit hardest by COVID-19 were the U.S., China, Korea, Italy, Japan, and Germany.  At the time, these six nations accounted for 55 percent of world supply and demand, 60 percent of world manufacturing and 50 percent of world manufacturing exports.[1]  China, where the virus first emerged, was largest contributor to global trade, the “workshop of the world,” making up 41 percent of world manufacturing exports and 20 percent of global trade in manufacturing intermediate products.[2] Due to the globalization of production, when the pandemic decreased production in these six nations, and China in particular, the effects reverberated globally.

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A new global taxing right: Report on the “Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy”

In January 2020, the OECD/G20 Inclusive Framework on BEPS, a group of 137 countries including Canada, endorsed a statement, which affirmed their commitment to build a global solution to the tax challenges created by the digitalisation of the economy.  This work has been underway since 2015 and is slated to be finalized by the end of 2020.

The statement, itself a political expression of on-going commitment, was accompanied by additional documents which, provide an outline of the “architecture” of the currently agreed upon Unified Approach under Pillar One, a programme of work descriptions, details on the multinational enterprises (“MNEs”) that will be impacted by the initiatives under Pillar One, and a progress report on Pillar Two work (collectively the “January 2020 Statement”).  The biggest development presented in this set of documents is the architecture of the Pillar One solution, including a clarified explanation of a new taxing right for market jurisdictions.

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Implications of COVID-19 for Corporate Residency

Overview

The COVID-19 pandemic has created many changes for corporate management throughout Canada. In the past, directors often traveled outside of Canada for purposes of attending board meetings in foreign jurisdictions. Directors often made such travel arrangements in order to maintain a corporation’s residency outside of Canada for tax purposes. However, the ongoing COVID-19 pandemic has significantly restricted directors’ abilities to travel abroad and, in turn, attend meetings in foreign jurisdictions.

Directors have, in response, created alternative local or “virtual” arrangements (i.e. video or teleconferencing) for such meetings. However, these arrangements may have potentially significant income tax consequences for a corporate taxpayer. This bulletin will briefly address some of these consequences:

General Principles of Residency

The Income Tax Act (Canada)[1] (the “ITA”) imposes tax on corporations resident in Canada. The Courts generally determine a corporation’s residency by applying the common law test of “central management and control”. The test provides that a corporation is resident in the country where its central management and control is exercised. This is generally the country where the directors of the corporation exercise their responsibilities.[2] It should also be noted that a corporation may be resident in one or more different countries (e.g. the directors may be exercising their responsibilities in multiple different countries).[3]

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COVID-19: Administrative Accommodations by the Canada Revenue Agency (“CRA”) with respect to International Tax Matters

In light of the COVID-19 crisis and the travel restrictions implemented by Canada and many other jurisdictions as well as by businesses (the “Travel Restrictions”), the CRA has temporarily relaxed the way it administers certain rules and requirements contained in the Income Tax Act (Canada) (“ITA”) to account for the “forced” and involuntary presence of many non-residents in Canada for an extended period of time. As no one knows how long these Travel Restrictions will remain in effect, the guidelines described below, which apply from March 16, 2020 to June 29, 2020, may be extended by the CRA if necessary.

Deemed Residence: 183-Day Rule

For an individual, being subject to Canadian tax depends on his or her tax residence, which remains essentially a question of fact determined according to connecting factors established in common law. On the other hand, and subject to any applicable tax treaty, a non-resident who, in a calendar year, remains in Canada for more than 183 days is deemed to be a Canadian tax resident for the entire year and as such, becomes subject to Canadian tax on his worldwide source of income.

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COVID-19 : Assouplissements administratifs de la part de l’Agence du revenu du Canada (« ARC ») en matière de fiscalité internationale

Compte tenu de la crise de la COVID-19 et des interruptions de déplacement décrétées par le Canada et d’autres juridictions ainsi que par les entreprises (les « restrictions de voyage »), l’ARC a assoupli de façon temporaire sa façon d’administrer certains critères d’assujettissement contenus dans la Loi de l’impôt sur le revenu (Canada) (« LIR ») pour tenir compte de la présence « forcée » et involontaire de plusieurs non-résidents au Canada pendant une période prolongée. Personne ne sait combien de temps resteront en vigueur ces restrictions de voyage et les directives décrites ci-dessous, qui s’appliquent du 16 mars au 29 juin 2020, pourraient être prolongées par l’ARC au besoin.

Résidence réputée : règle des 183 jours

L’assujettissement d’un individu à l’impôt canadien est fonction de sa résidence fiscale, situation qui demeure essentiellement une question de fait tranchée selon des critères de rattachement établis par la common law. Par contre, et sous réserve de toute convention fiscale applicable, un non-résident qui, dans une année civile, séjourne au Canada plus de 183 jours est réputé être un résident fiscal canadien pour l’année entière et il devient donc assujetti à l’impôt canadien sur son revenu de source mondiale.

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