Deloitte - Canada Regional Tax Controversy Interview (ii)

Interview with Diana C Estrada, Partner, Tax and Legal, Deloitte Canada

1. What is the most significant change to your region/jurisdiction’s tax legislation or regulations in the past 12 months?

The Organisation for Economic Co-operation and Development’s (OECD) Pillar 2 has created significant changes in cross-border tax. Both planning and compliance will be impacted for jurisdictions such as Canada, where multinationals will have to comply with the global minimum tax of 15%.

2. What has been the most significant impact of that change?

The introduction of a global minimum tax means that clients are now focussed on identifying geographies where the effective tax rate is below 15% and considering what this means for future tax strategies and operations.

3. How do you anticipate that change impacting your work and the market moving forwards?

The way we approach advice will certainly be impacted, along with the jurisdictions that will be considered when looking at different business locations.

The market will also be focused on compliance requirements and ways to comply. Our clients want to know whether they have access to the relevant data that will be needed to meet these compliance requirements in Canada and other jurisdictions. We expect it will result in a significant compliance exercise, particularly for very large companies. As a result, companies will be considering their options, including technology solutions, to reduce the compliance burden on their teams.

4. How has this changed the way you offer tax advice?

I am having considerably more conversations around global tax compliance and enterprise resource planning (ERP) data accessibility than ever before. Clients want to confirm that when Pillar 2 is effective, they are ready to be compliant and have access to the data necessary to estimate their exposure, if any.

5. What potential other legislative/regulatory changes are on the horizon that you think will have a big impact on your region/jurisdiction?

The implementation and expansion of anti-hybrid provisions in both Canada and the United States will have substantial impact.

6. What are the potential outcomes that might occur if those changes are implemented?

The implementation of anti-hybrid provisions requires an understanding of how financial instruments will be interpreted for tax purposes. Clients will require assistance to understand the impact of these changes.

7. Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?

Tax changes mean that businesses need help, which Deloitte is ideally placed to provide.

8. Are there any regulatory/legislative changes you believe should be implemented in your region/jurisdiction?

I’m keenly following the evolutions in environmental, social, and governance (ESG) and sustainability, along with the innovative changes that are underway—especially discussions around the role that tax plays in this conversation.

9. How do you believe those changes would help improve the tax landscape in your market?

Clients are looking to disclose and measure their sustainability efforts. Thus, additional taxes would have a significant impact on many companies, especially in Western Canada. In contrast, enhanced tax incentives would help encourage investment in sustainability efforts.

Currently, Canada is exploring an investment tax credit with the goal of reducing emissions annually. There are a number of general and technical tax-related considerations that would evolve the tax landscape in Canada. I am closely following the government’s decision as it intends to make these credits available in 2022. Similarly, in the United States, there is a tax credit for carbon sequestration which provides an incentive for capturing carbon and storing it underground in geologic or saline formations through oil recovery and in products through CO2 utilization.

10. How are issues surrounding the taxation of the digital economy affecting your work?

A digital services tax (DST) is certainly on top of mind for clients. When considering global expansion to other jurisdictions, we look at whether a DST is a concern for that particular jurisdiction. However, these domestic DSTs are scheduled to be removed with the introduction of the OECD’s Pillar 1 rules. In this regard, countries agreed as part of the global deal to remove their domestic DST if Pillar 1 is adopted, which will change the allocation of income rules and give more taxing rights to market jurisdictions (i.e., where customers are). The office of the US trade representative has concluded that DSTs unfairly affect US businesses and has raised (and currently suspended) trade tariffs accordingly. However, a majority of my clients are in the natural resource space or consumer products industry where the DST is not as applicable.

11. How would you describe the tax authorities’ approach in your region/jurisdiction?

From a US perspective, tax authorities often look at different ways in which certain transactions might be recast. It is therefore important that businesses have appropriate documentation to support the positions taken and the substance of the transactions concerned. In recent years, the IRS has received an increase in budget, allowing them to expand their staff and the number of audits that may be accomplished each year. This is on top of mind for Canadian clients with cross-border operations, as the same is true for the Canada Revenue Agency.

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