Tax Effective Use for Canadian Online retailers via Canada-Bermuda TIEA
A Tax Information Exchange Agreement (“TIEA”) between Canada and Bermuda was signed on June 14, 2010 and ratified on July 1, 2011.
This agreement is very attractive for Canadian online retailers who are looking to expand internationally. According to law firm, Bennett Jones, Canadian retailers who sell their goods and services online can now utilize the Canada-Bermuda TIEA to expand their international sales into foreign markets with highly beneficial tax advantages.
What is a TIEA?
TIEAs set out a framework for exchanging information between countries to help administer and enforce tax laws. These agreements are typically based on the Organization for Economic Cooperation and Development (“OECD”) internationally agreed standard and are seen as an important tool to prevent tax evasion in circumstances where there is no comprehensive tax treaty in place between the countries concerned. While this is their primary purpose, a number, such as the Bermuda-Canada TIEA, provide additional benefits for Canadian companies, according to KPMG in Bermuda.
Under Canada’s tax regulations, a “designated treaty country” includes a jurisdiction with which Canada has a TIEA in effect. This enables Canadian foreign affiliates resident and carrying on active business in a TIEA jurisdiction to be eligible for exempt surplus treatment on their earnings, enabling them to repatriate profits to Canada without incurring Canadian tax. Previously, active business income earned by foreign affiliates in non-treaty countries was subject to Canadian tax when repatriated to Canada as “taxable surplus”. Additionally, other forms of income earned in the TIEA jurisdiction, such as interest received from another foreign affiliate resident and carrying on an active business in a third jurisdiction (also being a TIEA or treaty jurisdiction), may be repatriated on a tax free basis to the Canadian parent, so long as the amount is deductible in computing active business income of the first affiliate.
Such benefits have previously been conferred only to affiliates carrying on business in countries with a double-tax treaty with Canada such as Barbados.
By extending such tax benefits to countries that enter into TIEAs with Canada, the Canadian federal government is offering an incentive to attract more jurisdictions to join its TIEA network. At the same time it discourages investment in countries that do not come to the table. If Canada does not enter a TIEA with a country within five years following the initiation of negotiations or a written invitation to enter into negotiations, active business income earned by a foreign affiliate in that country is taxed in Canada on an accrual basis (i.e., the income is taxed as it is earned as “foreign accrual property income”).
Source: Jason Carne & Mark Alitt of KPMG
Bermuda has an enviable reputation globally, both in terms of regulatory environment and infrastructure. A leading financial center, the island is renowned for its insurance, re-insurance and banking sectors as well as ancillary services such as legal, accounting and IT.
The country has a world class regulatory regime implemented by the Bermuda Monetary Authority (BMA) and holds a very high rating within the OECD. (The OECD’s most recent assessment rated Bermuda favorably on international standards of tax transparency — the same level as the U.S., the U.K. and Germany.)
The Canada-Bermuda TIEA
Online Canadian retailers can secure exceptional tax advantages of the Canada-Bermuda TIEA. Please see the following update from Duncan C. Card, Claire M.C. Kennedy and Wesley R. Novotny of Bennett Jones, for more information.