The 2023 federal budget did not contain any significant new international tax measures, as there are still substantial measures that were announced in previous budgets and economic updates, which have yet to be introduced and implemented. Below we summarize the measures that will be introduced and will impact organizations that operate internationally:
Pillar One and Pillar Two
Consistent with previous budgets, the government reaffirmed its commitment as part of the Organisation for Economic Co-operation and Development (OECD) initiative on Base Erosion and Profit Shifting (BEPS). Canada is one of the 138 member countries to have joined a two-pillar plan on international tax reform.
Pillar One will ensure that large multinational corporations will reallocate taxing rights of profits to jurisdictions where their users and customer base are located. Budget 2023 confirmed that the government is still actively working with its international partners to develop the multilateral convention to bring the new rules into effect by mid-2023, with a view they are entering into force in 2024. To ensure that Canadians' interests are protected, the government released draft legislative proposals for a Digital Services Tax (DST) in December 2021.
We anticipate updated DST legislation to be introduced later in the year. The DST could be imposed as of January 1, 2024, but only if the multilateral convention implementing the Pillar One framework has not come into force. In that event, the DST would be payable as of 2024 in respect of revenues earned as of January 1, 2022.
Pillar Two will ensure that multinational enterprises with annual revenues in excess of €750 million are subject to a minimum effective tax rate of 15% on their profits globally. The 2023 budget reaffirms Canada's intention, announced in Budget 2022, to introduce legislation implementing the Pillar Two global minimum tax. The primary charging rule of Pillar Two and a domestic minimum top-up tax would be effective for fiscal years of multinational corporations that begin on or after December 31, 2023.
The secondary charging rule, the undertaxed profits rules, would be effective for fiscal years beginning on or after December 31, 2024. The government will continue to monitor international developments as it moves forward with implementing Pillar Two.
On November 3, 2022, the government released its latest version of draft legislation relating to Excessive Interest and Financing Expenses Limitation (EIFEL) which will affect multinational corporations, cross-border investments and other Canadian public and private enterprises. As currently proposed, the EIFEL rules will limit the deductibility of net interest expense to a fixed ratio, of 30% of taxable income before interest, taxes, depreciation and amortization (referred to as tax EBITDA). The government is expected to proceed to introduce this draft legislation as a bill later this year.
These rules are currently set to apply for taxation years beginning on or after October 3, 2022. For more details on how the EIFEL rules will impact your organization, read our Tax Alert “The Next Round of Interest Deductibility and Its Impact on Stakeholders.”
Hybrid arrangements can be used to exploit tax differences between Canadian and foreign tax laws. Budget 2021 proposed to eliminate the tax benefits from hybrid mismatch arrangements. Draft legislation was released in April 2022 but has yet to be tabled in a bill.
In Budget 2021, the government announced its intention to consult on Canadian transfer pricing rules given recent court decisions. However, the consultation paper is yet to be released to date.