OECD Seeks Additional Proposals on Treaty Benefits for Non-CIV Funds

On March 24, 2016, the Organization for Economic Co-operation and Development (OECD) issued a consultation document soliciting public comments regarding treaty entitlement of non-collective investment vehicle (non-CIV) funds. While collective investment vehicle funds are defined under the 2010 OECD Report and are entitled to treaty benefits subject to specific rules, commenters have sought treaty benefits for non-CIVs, which have yet to be defined.

The consultation document states that the OECD will continue to examine policy considerations regarding treaty entitlement of non-CIV funds. Further, the OECD plans to address two key concerns of OECD members about granting treaty benefits with respect to non-CIV funds. In particular, these concerns are that non-CIV funds should not be used to obtain treaty benefits for investors not otherwise entitled to such benefits and that investors should not be able to defer recognition of income on treaty benefits that have been granted.

The consultation document also asks commenters to clarify how non-CIV funds work, e.g., what types of vehicles would be defined as non-CIV funds; whether these funds are able to determine the identities and tax-residences of the beneficial owners; what is the intermediary-level tax; and at what point would taxation occur. In particular, the consultation document focuses on proposals concerning the impact on non-CIV funds of new limitation on benefits (LOB) rules, the principal purpose test, anti-conduit rules, and special tax regimes. Regarding the LOB rules, the document raised questions to commenters’ requests that: (a) treaty benefits be granted to regulated and/or widely-held non-CIV funds; (b) non-CIV funds be allowed to elect treatment as fiscally transparent entities for treaty purposes; (c) certain non-CIV funds be granted treaty benefits where a large proportion of the investors would be entitled to the same or better benefits; (d) the LOB rules not deny benefits to a non-CIV resident of a State with which the non-CIV has a sufficiently substantial connection; and (e) a “Global Streamed Fund” regime be adopted.

Fundamental objectives of the OECD include combating international tax avoidance and evasion by preventing multinationals from artificially shifting profits to low or no-tax jurisdictions and developing and encouraging the promulgation of clear guidance that identifies which country’s tax should apply under particular arrangements. The OECD’s analysis of how non-CIV funds should be taxed is part and parcel of this core mission.

Canada’s New Blanket Withholding Waiver for Non-Resident Employees

A legislative amendment in Canada’s 2015 federal budget is providing some U.S. employers and employees much needed relief.  The amendment provides a blanket waiver for non-resident employers who otherwise would have to withhold from the wages of non-resident employees, including those ultimately entitled to full refunds.  The new waiver will eliminate a process by which many non-resident employees faced withholding and then had to file a return to claim a full refund.

Before 2016, a non-resident employer in Canada was required to withhold and remit taxes from compensation paid to an employee for work performed in Canada, even if the employee is a non-resident person exempt from Canadian income tax under a tax treaty. To get a refund, the non-resident employee was then required to file a Canadian income tax return and claim the treaty exemption.  Alternatively, a non-resident employee could have applied for a waiver from wage withholding—and point to the applicable treaty exemption—30 days before either the employment services began in Canada or when the initial payment was made for the services. But this per-employee waiver is administratively burdensome.

After 2015, however, a new blanket waiver valid for up to two years is available to qualifying non-resident employers paying qualifying non-resident employees.  To be certified as a qualified non-resident employer, an employer must file a Form RC473, Application for Non-Resident Employer Certification with the Canada Revenue Agency, 30 days before the first payment.  The employer must show that, at the time of the payment, it is resident in a country that Canada has a tax treaty with and it is certified by the Minister of National Revenue.  Additionally, an employer must agree that the employer will:

  1. Evaluate and document how its employee meets the definition of a qualifying non-resident employee at the time of any employment payment by (a) monitoring the employee’s qualification status on an ongoing basis; (b) obtaining documentation proving the employee’s country of residence; and (c) ensuring that the tax treaty between the employee’s resident country and Canada is applicable;
  2. Track and document the number of days the qualifying non-resident employee is working in Canada or is present in Canada, and the employment income that corresponds to these days;
  3. Keep a business number (or use Form RC1, Request for a Business Number, to get a business number if the employer does not yet have one) and register a program account number for payroll purposes if the employer expects to make remittances;
  4. Prepare and file a T4 slip and a T4 Summary for the non-resident employee who has provided employment services in Canada that are not excluded from reporting under proposed subsection 200(1.1) of the Income Tax Regulations;
  5. Complete and file Canadian income tax returns for calendar years covered by the certification period; and
  6. Render its books and records available for CRA inspection.

A qualifying non-resident employee is an employee that (a) is a resident in a country that Canada has a tax treaty with at the time of the payment; (b) owes no tax in Canada on the payment because of the tax treaty; and (c) works in Canada for less than 45 days in the calendar year that includes the time of the payment, or is present in Canada less than 90 days in any 12-month period that includes the time of the payment.

Although the new blanket waiver may lessen a non-resident employer’s administrative burdens, the employer must carefully comply with the conditions of certification.  The CRA may revoke a certification if the non-resident employer violates any of the conditions, rendering the employer liable for the whole amount that should have been withheld and remitted and subject to related penalties and interest.