National Post (National Edition)
The virus may bring offshore money home
The pandemic has unleashed a tsunami of health, social and economic issues. From a tax perspective, there are many new issues and unanswered questions, mostly related to evolving government support programs. But let’s all take a breather and consider a tax issue of more limited application — the impact of COVID-19 on corporate tax havens.
The country where a company is resident for tax purposes depends on all the facts and circumstances and is not always clear. However, the position of the Canada Revenue Agency is that a corporation is usually resident in the country where its board of directors meets. The COVID-19 travel restrictions can have a significant impact on where those meetings occur, and as a result whether Canadian tax is payable or not. Here’s an example.
Several years ago, a Canadian research company — call it Canco — believed it had discovered a blockbuster drug. It applied for a patent and started clinical trials. If the trials proved successful, Canco intended to license the drug to a major pharmaceutical company. Canco’s tax lawyer suggested a different plan.
Canco formed a whollyowned subsidiary in an offshore tax haven (call this company Havenco) and transferred the patent rights to it. A few years later, the drug was approved and Havenco licensed the right to manufacture and market the drug to an unrelated third party. Havenco now receives royalties of about $100 million a year. Havenco owes no tax to the tax haven and, with careful planning, there is also zero tax in Canada — either when Havenco earns the royalties or when Canco receives dividends from Havenco.
The tax advisers were careful when Havenco was formed. Havenco has three directors — two senior officers employed by Canco, and a lawyer who resides in the tax haven and for a small annual fee acts as a director. A couple of times a year, the Canadian directors fly to the tax haven to review and discuss Havenco’s business operations and approve whatever corporate resolutions are required. But now COVID-19 means the Canadian directors cannot travel. So what to do?
The three directors could meet by FaceTime or Zoom. But the majority of the directors would be sitting in Canada as they made their business decisions for Havenco. As a result, Havenco would become a tax resident of Canada: one of the tax consequences of that would be that Havenco would owe Canadian tax of $25 to $30 million each year. “Good!” you might say.
But the tax advisers have come up with another plan. The Canadian directors resign and Havenco appoints two more local professionals as replacements. The three directors — now all residents of the tax haven — must ensure that they make decisions independently, even if they are influenced or even instructed by the Canadian parent company. If it all works — and the jurisprudence suggests it should — there will continue to be zero Canadian tax.
Last week, the U.K. tax authority (HMRC) issued guidance on COVID-19 and corporate tax residency. The HMRC stated that the pandemic has resulted in significant disruption to international travel and business operations, including the location of directors, employees and other individuals, and that it is “very sympathetic to the disruption that is being endured.” HMRC did not grant a formal administrative concession but stated that it does not consider that a foreign company will necessarily become resident in the U.K. “because a few board meetings are held here” or because some decisions are taken in the U.K. “over a short period of time.”
Should the Canada Revenue Agency issue administrative guidelines suggesting it might also be lenient in reviewing corporate residency issues until the pandemic subsides? Or should it take advantage of the pandemic to challenge Canadian multinational corporations with offshore tax havens that are earning billions of dollars of revenue each year that would otherwise have been earned in Canada or other high-tax jurisdictions?
The debate will be heated and entertaining. Where people stand may depend on where their money sits.
Allan Lanthier is a retired senior partner of an international accounting firm and has been an advisor to both the Department of Finance and the
Canada Revenue Agency.
THE DEBATE WILL BE HEATED AND ENTERTAINING.