Pillar Two also contemplates a domestic minimum top- up tax, which permits a jurisdiction to impose a top-up tax on low-taxed income of any domestic entities. The IIR and UTPR would not apply in respect of income for such domestic entities, to the extent that the domestic minimum top-up applies. The Canadian government has announced its plan to release for public comment in 2023 draft legislation to implement the IIR and a domestic minimum top-up tax for Canadian entities, with draft UTPR proposals to follow. DIGITAL SERVICES TAX Due to an absence of international agreement on Pillar One, the Canadian government has proposed a Digital Services Tax (DST), which would impose tax at a rate of 3% on revenue derived from the sale of data pertaining to Canadian users, as well as the provision of digital services that rely on data and content contributions of Canadian users. DST would apply to domestic or foreign businesses with consolidated annual global revenues of €750 million or more and revenues associated with Canadian users exceeding €20 million. The government plans to enact DST legislation no earlier than January 1, 2024, only if the multilateral convention implementing Pillar One has not come into force. If enacted, DST would retroactively apply to revenue earned as of January 1, 2022. Taxpayers that may be subject to DST should consider collecting and retaining data that may be relevant if DST becomes payable.
Pillar One (Reallocation of Taxing Rights) Pillar One proposes to reallocate a portion of taxing rights over the profits of multinational enterprises (MNEs) with the aim of having MNEs generally pay greater tax in countries where their users and customers are located. The revised rules in Pillar One purport to be more suitable in a digitalized economy. Once adopted, the Pillar One proposals would apply to MNEs with annual revenues exceeding €20 billion and profit margins exceeding 10%. Pillar Two (Global Minimum Tax) Pillar Two intends to impose a global minimum effective tax rate of 15% applicable to MNEs with annual global revenues of €750 million or more. The object of Pillar Two is to reduce the incentive for MNEs to shift profits into low-tax jurisdictions by creating a floor to international tax competition. The primary rule proposed by Pillar Two is the Income Inclusion Rule (IIR), under which the jurisdiction of the ultimate parent entity of an MNE is intended to have the right to impose a top-up tax on the ultimate parent entity with respect to income from the MNE’s operations in jurisdictions where it has been taxed at an effective rate below 15%. Where the jurisdiction of the ultimate parent has not implemented the IIR, the right to impose the top-up tax shifts to the jurisdiction with the highest-tier intermediary parent within the MNE. Pillar Two contains a secondary rule known as the Undertaxed Profits Rule (UTPR). Where a parent jurisdiction of an MNE has not implemented the IIR by imposing a top-up tax on the MNE, the UTPR is intended to allow other jurisdictions in which the MNE operates, which have implemented the UTPR, to impose the top- up tax on the group entities located in their jurisdiction, allocated among those jurisdictions on a formulary basis.
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Doing Business in Canada
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