My name is Brian Ernewein. I am the General Director of the Tax Policy Branch at the Department of Finance. I am joined by Stephanie Smith, who is the Chief Tax Treaty Negotiator with the Department of Finance, and Trevor McGowan, who is the Chair of our Legislative Drafting Unit.
I have an opening statement, but I haven't proposed to read it. I am happy to do so, if you would like me to read it. If not, I don't propose to. I understand that the clerk has received it and perhaps circulated it to members.
The only comment I would make is that I understand we are here, in some sense, to study the subject matter of Bill . It was considered by the Senate committee last Friday. I don't think it has actually been reported back to the Senate or voted on third reading, but we are happy to take any questions. The subject matter is, of course, a new tax treaty with Israel, an arrangement with Taiwan that would have the same intended effect as a tax convention or tax treaty, and one clarifying change in relation to the tax agreement we have with Hong Kong.
Certainly. That would be fine.
Again, we are here to talk about Bill , which includes two new or revised income tax agreements with other jurisdictions.
Canada actually has one of the most extensive networks of income tax treaties in the world, with 92 treaties currently in force. Of course, there's an ongoing need to update and modernize our network of tax treaties with foreign jurisdictions. That's essentially what Bill proposes to do with respect to two jurisdictions.
The first part of the bill is a convention between the Government of Canada and the State of Israel for the avoidance of double taxation and the prevention of fiscal evasion with respect to income taxes. The second portion is an arrangement, so-called, between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada for the avoidance of double taxation and the prevention of fiscal evasion. The bill would also amend the Canada-Hong Kong Tax Agreement Act, 2013, in order to add to it, for greater certainty, an interpretation provision.
There is currently no double taxation arrangement between Canada and Taiwan, although it is a significant trading partner for Canada, ranking as our fifth-largest trading partner in the Asia-Pacific region and twelfth worldwide in 2015. In keeping with Canada's “one China” policy, the double tax arrangement with Taiwan has been concluded as an arrangement, as I say, between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada, as opposed to an agreement between sovereign countries. Once implemented, and with the legislation that accompanies the convention or arrangement itself, this bill is intended to constitute a functional equivalent to a tax treaty.
Bill would also implement a revised double tax convention with the State of Israel to replace the existing tax treaty, which dates back to 1975. This convention has been updated to make it consistent with Canada's current treaty tax policy.
As I mentioned earlier, the double tax convention and arrangement will facilitate cross-border trade, investment, and other activities between Canada and each of its signatory jurisdictions. Our tax treaties are all designed with two general objectives in mind. The first objective is to eliminate tax barriers between two jurisdictions in order to promote bilateral trade and investment. Obviously, removing barriers to trade and investment are paramount in today's global economy. Investors, traders, and others with international dealings want clear information on the tax implications associated with their activities both in Canada and abroad. Equally important, Canadians with business interests or investments abroad want to be sure that they receive fair and consistent tax treatment. It follows that one of the objectives of Bill is to remove uncertainty about the tax implications associated with doing business, working, or investing abroad.
Bill would also reduce double taxation and encourage investment by reducing withholding taxes. It would provide for a maximum withholding tax rate of 15% in the State of Israel and the jurisdiction of Taiwan on portfolio dividends paid to non-residents—that is, paid between Canada and Taiwan, or between Canada and Israel. For dividends paid by subsidiaries to their parent companies, the maximum withholding tax rate under these agreements is reduced to 5% in the State of Israel and 10% in the case of the jurisdiction of Taiwan. Finally, on withholding taxes, this bill would also cap the maximum withholding tax rate on interest and royalties at 10% and on periodic pension payments at 15%.
The second objective, generally, of treaties is to prevent tax avoidance and evasion. A key element of Canada's tax treaties is their provisions authorizing the exchange of information relevant to administering domestic tax laws, helping to combat tax evasion. Bill would allow Canadian tax authorities to do so.
The final point is one on timing. Both of these, the agreement and the arrangement, would apply for the year following the year in which they are brought into force. If the Senate, the committee, and the House of Commons should approve this bill this year, and if it's possible to get the required notices in place between ourselves and Taiwan and Israel respectively, the treaty can have effect beginning at the start of 2017. That would make it important, if it were possible, to have it enacted this year. Failing that, if it should be enacted only sometime in 2017, it would only take effect for the following year.
I'll stop there. Thank you.
Thank your for the question. I'll offer a couple of observations, and then I'll turn to my colleague to see if she wants to add any more.
There are a number of different considerations, but most of them are economic-based—that is, the level of investment between Canada and another country is probably the primary driver of whether to have a treaty or not. We seek to prioritize the countries with which we have the greatest investment, or they in us, as treaty partners or for treaty updates.
The age or vintage of our treaty is also a factor, so in the case of Israel, it's a 41-year-old treaty. As a consequence, it's not surprising it's a little bit out of date with respect to current Canadian treaty policy and presumably in relation to Israel as well. That is a factor in identifying our priorities.
The other consideration, of course, is a shared interest. We may be very interested in having a negotiation with another country, but it might not be interested in having one with us, or vice versa. There needs to be that mutual desire for treaty negotiations to get those launched.
In general with the negotiation process, as Brian has described, we do develop our own priorities in terms of which treaties we would like to update and whether there are new treaties, as with Taiwan. Typically, the engagement can start in two different ways. It can be at a meeting at the officials level on international issues, where we speak informally with colleagues in the other jurisdictions to gauge their level of interest and also their availability of resources in terms of taking forward negotiations. Sometimes those negotiations commence at a more senior or political level, where there have been discussions or approaches at, for example, bilateral meetings on the sidelines of a G20 or a G7 meeting. The direction would come down to officials that this was seen as a priority and that an approach was made.
Once it's determined that, yes, we will go forward with negotiations, the first stage is to exchange model treaties, or the treaty that we would ideally be looking for. The other jurisdiction does the same with us. We typically would then have some back and forth, at which time there would be a date set for a face-to-face meeting to commence those negotiations. Typically, at the start of one of those face-to-face meetings, we would have an exchange and a general discussion on our respective tax systems so that we ensure that the research we have internally done is correct about the other jurisdiction and vice versa.
Typically, we would proceed through the text of the agreement on an article-by-article basis, leaving open provisions for which agreement could not be obtained on the first go-round. While rare, it is possible to conclude in only one round. It is more typical that there would be a second round, which would take place after some bilateral contact by email, further refining the outstanding issues. There would then be a second face-to-face, at which time negotiations at the negotiators level are concluded. We would domestically move through processes, with a “legal scrub” by Foreign Affairs. That's done on both sides to ensure that the treaties themselves respect legal standards in Canada and the other jurisdiction.
Then we would go through the process of obtaining cabinet approval for signature. There would be a signature. Then we would have, as we have before us today, an implementing bill with respect to the particular treaty, which would allow us to implement it into domestic law and to resolve any conflicts of law that might otherwise occur.
Dear colleagues, ladies and gentlemen, welcome to this House of Commons parliamentary committee.
To begin, let me say that our political party agrees with the general principle of creating and updating agreements with our trading partners. Clearly, we are not talking about a blank cheque. We have to do our homework, verify things, and that is what we will do today.
Let us begin with Taiwan. After that, we can talk about Israel.
I would like to know if Japan and China, two important partners and economic players in Asia, are affected by the agreement that you are proposing today in Bill .
Have those impacts been measured and, if so, what is your assessment of them?
When I read the proposed conventions between Canada and these countries, I did not see a problem initially, because these countries have individual and corporate tax rates similar to those in Canada. When I saw, however, that a tax convention is proposed to avoid double taxation, I immediately thought of the tax convention between Canada and Barbados. There is something that I repeat often and that always seems to surprise people. In 2014, Barbados ranked as the second most important country for direct investments by Canada, after the United States. People wonder why Barbados ranks second.
The most common reply is that Canada has an accord with Barbados to avoid double taxation. The problem is that the corporate tax rate in Barbados ranges from half a percent to 2.5%. I do not necessarily see a problem as regards Israel and Taiwan, because their tax rates are similar to those in Canada.
The title of the bill includes the words “avoidance of double taxation”. Is there not a danger that such conventions or accords concluded with countries that have very low tax rates could in fact lead to tax avoidance, which is what you are trying to combat?
Thank you for the question.
We do have a tax treaty with Barbados, as do many other countries. In fact, Barbados is one of the countries with which we have a long-standing relationship inasmuch as it was covered by the first treaty we had with the U.K. until Barbados acquired their own sovereignty. Then we entered into a treaty with Barbados directly.
I think the point you're making is that Barbados has a low tax rate. We don't tax the business income, if it's business income in question, that's earned in Barbados as it's earned or indeed even as it's repatriated. We do of course tax passive investment income earned in Barbados or elsewhere if it's earned by a Canadian, a Canadian individual or a Canadian company, but not business income. In that respect, we're like almost all of the rest of the world with almost the singular exception of the United States, which is going through its own debate as to whether this remains appropriate.
Every other country alongside Canada doesn't tax foreign business income as it's earned or when it's repatriated. I think that decision has been informed, in Canada's case and in other countries' cases, for reasons of competitiveness. If we sought to tax foreign business income of subsidiaries, foreign subsidiaries of Canadian firms, one might reasonably expect there would be a lot less foreign business income earned by Canadian firms.
I think that's sort of the basic premise. It's not the treaty itself that's the issue that you raise. I think it's the domestic decision of Parliament and our domestic law to provide this exemption for foreign business income. As I say, people can have different views about that, but I do think it's consistent with what almost every other country does in the same circumstance.
You've read my mind, Chair.
The situation with a convention or an agreement is very straightforward. It's an agreement between sovereign states whereby both countries, as countries, are committed internationally to the agreement. Our infrastructure, if you will, and our tax laws are all built around that. When we enter into a new tax treaty or tax convention, it plugs rather neatly, with this implementation bill, into our tax laws.
The one China policy means—I'm trying not to make a foot-fault here—that Canada recognizes the People's Republic of China. As I understand it, Canada takes note of China's position with respect to Taiwan but does not do more than that. I think functionally, as I understand it, that means we don't treat or deal directly on a state-to-state basis with Taiwan. What was done in this case to try to implement a tax treaty-like relationship with Taiwan was to have an agreement or arrangement between the trade offices that each jurisdiction could implement—in Canada's case, that Canada could implement—domestically. So while it might not hold the status of an international treaty, by virtue of the changes or the legislation we have here we can give it the same effect in Canada while respecting our position with respect to both China and Taiwan.
Thank you for that question.
In working on the arrangement with Taiwan, because it was set up as an arrangement and it's not between two sovereign jurisdictions, in order for the Income Tax Act to apply appropriately, we needed to have certain provisions in the implementing act to ensure that it is functionally equivalent to a tax treaty so that the Income Tax Act rules work. It was in reflecting on this that the question of Hong Kong arose.
Now, Hong Kong has been in place for a couple of years. The Canada Revenue Agency has issued an interpretation to make it clear to all Canadians that, yes, residents of Hong Kong and investments in Hong Kong do get the benefits that are accorded to a tax treaty under the Income Tax Act. It has been working just fine. However, we were concerned that perhaps in light of making very particular amendments to address the different situation that exists with Taiwan—because it is a different relationship, with China, relative to the relationship with Hong Kong—we decided that for greater certainty it was appropriate at this time to include similar clarifying amendments with respect to Hong Kong, to avoid any adverse inference being raised from having done the specific...with respect to Taiwan and not Hong Kong. However, nothing in this should be read into as having any change or any difference in respect of the interpretation provision and how it has worked since it has entered into effect in Canada.
Let me start, but I may well want to defer to my colleague.
The general answer is that Canada is a member of the OECD and seeks to follow the OECD model. That's essentially the template or text of the OECD model tax convention. It's not that we follow in every respect the tax rates that apply under the OECD model. For example, the OECD might propose a general exemption from withholding tax on interest and royalties, whereas Canada reserves the right to impose a lower rate of tax but a positive rate of tax on such income.
Also, in the negotiations, the other country's position will be taken into account. They might want changes that diverge as well. I can also think of a couple of specific things that Canada seeks as part of its base negotiations. For example, since 1972 we've had a departure tax, a tax applying to people who emigrate from Canada, and it was strengthened quite a lot in 1996. To try to relieve double taxation, Canada has, since 1996, sought to have in all its treaties a provision to essentially step up the tax cost for the person moving to another country so they won't be exposed to double tax in that other country. That's an example of a divergence.
There are a number of those. We basically follow the model. I don't know that I could go through them all with their differences.
I was just looking at some of the information provided by the Library of Parliament. Our exports to Israel are diamonds, computer parts, accessories, and newsprint. Exports to Taiwan are coal, lumber, and copper ore. Exports to Hong Kong are gold, ginseng roots, and nickel. Our imports from Israel are medications, diamonds, articles of cement, concrete, artificial stone; imports from Taiwan are electronic integrated circuits, screws, bolts, nuts, hardware, diodes, transistors, similar semiconductor devices; and from Hong Kong the imports are iron and non-alloy steel bars, rods, jewellery, printed books, brochures, directories, and booklets.
This is all very interesting, but you know, we send a lot of our products there. How much will this trade treaty then improve the level of trade? Will Canada have a greater ability to send more of our finished product to countries like Taiwan or Hong Kong or Israel?
Thank you very much, Mr. Chairman and honourable members, for inviting Export Development Canada to come and speak to you today. We appreciate your interest in EDC's work as it relates to Canadian exporters and our perspective as it relates to this issue today.
My name is Luisa Rebolledo, and I am the chief representative for Asia at Export Development Canada. EDC is a crown corporation whose mandate is to support and develop trade. This is done by helping Canadian exporters respond to international business opportunities. We provide insurance and financial services, bonding products, and small business solutions for Canadian exporters and investors, as well as their international counterparts.
EDC is financially sustainable and does not receive any appropriation from the government. That's particularly interesting to us, as we paid a $500-million dividend back to the Canadian government. Many Canadian exporters do benefit from EDC. Almost 7,400 Canadian exporters, of which 81% were small and medium-sized businesses, used EDC's services that facilitated $104 billion in trade. As it relates specifically to Taiwan, Taiwan is Canada's eleventh-largest trading partner. If you've been to Taiwan, you understand that Taiwan has a very dynamic economy and has a growing middle class, making it particularly appealing to Canadian companies.
Today I come before you to address the benefits that the proposed arrangement on avoidance of double taxation may have for Canadian exporters and how it will make these exporters more competitive when doing business with Taiwan. I should note that I am limiting my comments specifically to EDC's business and to EDC's mandate, and therefore I will allow my partners here to provide their expertise on other parts of the arrangement.
Current tax laws in Taiwan require borrowers to withhold 20% of interest payable on any loan. Practically, that means that Taiwanese borrowers must withhold 20% of interest and give it to the government. As is customary with most loan agreements, when there is a withholding required, the borrower has to gross up their payments such that the bank receives the full interest they are entitled to. From the borrower's perspective, this increases their costs on the interest by 20%. This very much dampens the competitiveness of a Canadian exporter's bid.
The proposed changes in article 11, paragraph 3(a), of the agreement specifically relate to EDC and EDC's activities as they relate to Taiwan. Essentially, when a loan or a credit is guaranteed or insured by EDC, the taxes payable on the interest are subject to Canadian tax laws. Given that EDC is tax-exempt, no withholding tax would be required on those loans.
In addition to making EDC loans tax-exempt, another key impact of the arrangement will be that many cross-border payments, such as dividends and royalties between Canada and Taiwan residents, will attract lower Canadian tax. In effect, this arrangement should reduce the tax costs of repatriating income or profits from Taiwan to Canada. EDC believes this arrangement will help create a friendlier environment for bilateral investment, especially considering the potential for further co-operation in technology, health care, clean tech, sustainable development, and the services sectors that Canadian companies are particularly strong at.
I would welcome any questions after my panel continues.
Thank you very much, Mr. Chairman and honourable members.
It is my great pleasure to be here representing the University of Alberta, the China Institute, where I'm the Director and Professor of Political Science.
In an earlier life I served as Executive Director of the Canadian Trade Office in Taipei and later as Director General for East Asia, but my comments today are as a private citizen.
I can take questions in both official languages.
Since establishment of relations on October 13, 1970, between Canada and PRC, it's not possible for Canada to sign formal international agreements with Taiwan. However, under that formula of those negotiations, which concluded in 1970, there was space retained for commercial and people-to-people contacts. Given that Taiwan has developed subsequently into a very dynamic economy, one of our premier economic partners in Asia, it befits us to do what we can to facilitate that relationship. Others I've heard today, including a former colleague from EDC, have spoken in detail of those arrangements and of some of the facilities that may offer.
One can be reminded it was only in 2014 that our total trade with Taiwan was surpassed by India. The population of India is 50 times the size of Taiwan. So this is a substantive trading partner. It is of relevance to this agreement as well that the number of citizens living in each jurisdiction is also significant. Some 50,000 Canadian citizens live in Taiwan. The Government of Canada estimates that some 200,000 Taiwanese are living in Canada. That's something quite unique developing on that far side of the Pacific, with over 350,000 in Hong Kong, perhaps; and I think at least 100,000 in China, perhaps. We're now getting a situation where those human contacts are very large, notwithstanding the distance.
Of course, on the case of double taxation, Taiwan has already included some 30—I'm not going to read them—arrangements on double taxation with states including Japan, Singapore, Australia, Belgium, France, Netherlands, the U.K., and others. There also have been, and this began in 1979, over 20 arrangements of various sorts between Canada and Taiwan. Most of these are economic and commercial to bring order, I believe, to this substantive trade.
I recall working in government previously when there was a great gap in the fisheries arrangement in the Pacific. All the internationally recognized states subscribed to the international covenants on fishing, and one in particular, drift-net fishing. Because Taiwan is not a state, they could not join the relevant organization, and there's a great gaping hole there, which we along with others managed to fill through informal relationships. Taiwan is too big and too important to simply leave aside. It leaves a great gap, either with our arrangements in that place or in the international arrangements between states and in the international community.
Beijing, in my opinion, sometimes more and sometimes less has shown considerable tolerance and maturity with regard to foreign contacts with Taiwan where these arrangements do not imply the establishment of state-to-state relations with Taiwan. Therein is that question you posed to one of the previous witnesses, why the term “arrangement” and not “agreement”, which generally carries with it an implication of recognition between states.
This “space” is not unlimited, but it has allowed Canada to promote a substantive interest with Taiwan while observing limits on the form of such contacts. In my view, that's the trick: how to get the substance in dealing with Taiwan without violating the form to the point where it creates an impediment in our relations with the PRC.
The tenor of the relationship between Beijing and Taipei is a factor as well. The better those two are getting along, the more space there's been traditionally, the less the Chinese tend to be hyper-sensitive. When those two are not getting along—I fear we're sliding into another one of those phases—the tolerance tends to decline again.
Given the magnitude of Canadian interest in that relationship with an emerging superpower that is the PRC, and the parallel importance of maintaining contacts with the lively democracy that has emerged in Taiwan, both caution and perseverance are warranted.
Thank you, Mr. Chairman.
Ladies and gentlemen, Canadians, my name is Brigitte Alepin. I am a Tax Expert, tax policy specialist, author, and scriptwriter.
Since I was invited on short notice, I will focus on my analysis of the agreement with Hong Kong. I also looked briefly at the agreement with Taiwan. Here are what I consider the most important findings of my analysis.
Since the corporate tax rate in Hong Kong is 16.5%, there must be an agreement to avoid double taxation of the corporate revenues of Canadian businesses in Hong Kong. However, since Hong Kong is a special case, where interest income, dividends, and capital gains are not taxed, and there is no tax deduction at source, we might expect that this convention between the two countries would reflect this, which does not appear to be the case at all right now.
Moreover, the proposed amendment in Bill must be considered in the context of the existing convention with Hong Kong. The bill provides as follows:
[...] references to a “country” or a “state” are, with such modifications as the circumstances require, to be read as including the Hong Kong Special Administrative Region of the People’s Republic of China.
Does that mean that, without Bill S-4, the current agreement between Canada and Hong Kong is not operative? In fact, the terminology used in the bill is not consistent with that used in the Income Tax Act, the Income Tax Conventions Interpretation Act, and the Income Tax Regulations.
Moreover, in Canada, all tax conventions are covered by the prevailing domestic legislation, pursuant to the Income Tax Conventions Implementation Act, 1999. Is this terminology legally appropriate in view of the latter act?
It would be helpful to have a clear answer to this question because, if the amendment proposed in Bill S-4 makes the tax convention between Canada and Hong Kong operative whereas it is not really at present, that means that the amendment proposed in Bill S-4 would be more important than a mere administrative adjustment. In that case, the issues involved would be more complex.
I know that the trade relationship with China is very important to Canada. Bill S-4 simultaneously approves tax conventions between Canada, Hong Kong and Taiwan. In the present circumstances, I think we should be concerned about how China would interpret this action by Canada in the era of the Trudeau government.
As to the added provisions specifically included in Bill S-4 regarding the convention with Hong Kong, I also wonder about the impact of the tax convention with Hong Kong that Prime Minister Stephen Harper himself signed on November 11, 2013. The world has changed since then in terms of taxation and politically. While the tax convention with Hong Kong is open and certain changes are being made to it, Canada should perhaps consider using the opportunity to make sure the agreement complies with the international commitments Canada has made since November 11, 2013.
Consider for example the automatic sharing of information. The current agreement and its protocol provide for the sharing of information at the request of tax administrations only, which runs counter to the commitment Canada made in 2015 to measures for the automatic sharing of tax information and the statements by the Minister of Finance, Mr. Bill Morneau, with regard to information sharing.
That concludes my presentation. I will be pleased to answer all of your questions.
Mr. Chair, honourable members, thank you for this invitation to appear before you today. I am pleased to be here today to speak to you about Bill S-4, An Act to implement a Convention and an Arrangement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and to amend an Act in respect of a similar Agreement.
My name is Sarah Taylor. As mentioned, I'm the Director General for North Asia and Oceania bureau at what is now called, because we love to change our name, Global Affairs Canada. Given these areas of responsibility, my remarks today will focus principally on the avoidance of double taxation arrangement between the Taipei Economic and Cultural Office in Canada and the Canadian Trade Office in Taipei.
Why is a double taxation arrangement necessary with Taiwan?
Double taxation conventions or arrangements are specifically used to eliminate tax barriers to trade and investment. Canada has an extended network of double taxation conventions, with 92 in force.
Overall, the entry into force of this arrangement will assist to further solidify Canada's strong economic links with Taiwan by removing tax barriers to cross-border trade and investment.
As the Prime Minister said recently at APEC in Peru in November, "Trade and investment with Asia Pacific economies are critical to our country's economic future and to growing our middle class."
Taiwan is Canada's twelfth-largest trading partner and fifth-largest trading partner in Asia. In 2015 our exports to Taiwan exceeded $1.46 billion, and our imports exceeded $5.46 billion. In 2015 bilateral trade grew year on year by over 14%, from $6 billion to $6.91 billion. However, Taiwan is one of the few of Canada's large trading partners not covered by a double taxation convention.
Investment relations between Canada and Taiwan remain underdeveloped, as a result, in the context of Canada's overall inward and outward FDI, or foreign direct investment. According to figures from Statistics Canada, the stock of Taiwanese FDI in Canada stood at $108 million at year-end 2015. By the same token, the stock of Canadian direct investment in Taiwan at the end of 2015 was $115 million. This is partly due to the lack of an avoidance of double taxation arrangement, as many Taiwanese and Canadian companies are forced to make investments through an indirect route by going through a third country that already has an existing ADTA. This is a significant barrier to investment, in our view.
Taiwan clearly offers great potential for Canadian investors: it is a vital link to Asian and global supply chains, especially in the information, communications and technology sector, and is used by many businesses as a test site for products aimed at wider Chinese markets.
We've heard from Canadian and Taiwanese businesses, and they welcome this arrangement, as it will significantly reduce their tax burden and make investing in each other's jurisdictions more compelling. Further, it will support the competitiveness of Canadian companies vis-à-vis companies from other countries that already have a double taxation agreement with Taiwan.
Just very briefly—Mr. Houlden also mentioned it—why has this been concluded as an “arrangement”? In keeping with our one China policy, the arrangement with Taiwan is an arrangement, rather than an agreement, between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada. Canada has arrangements in a wide range of areas with Taiwan—air transportation, agricultural market access, visa exemptions, etc. The arrangement is also consistent with what other countries that have a one China policy have done in their respective double taxation conventions or arrangements with Taiwan. Taiwan has accepted Canada's position to present this instrument as an arrangement.
To conclude, Global Affairs Canada fully supports Bill . It will facilitate trade between and investment between Canada and Taiwan and lead to job-creating investment for our Canadian businesses.
I would be pleased to take your questions afterwards.
Thank you Mr. Chair and members of the committee. I am very pleased to be here with you today, albeit in a different capacity.
I served as the MP for West Vancouver—Sunshine Coast—Sea to Sky Country for eight years, between 2008 and 2015, before being liberated by the electors last October.
Voices: Oh, oh!
Mr. John Weston: I am now practising international law with a firm named McMillan, which has offices in Hong Kong, Vancouver, Ottawa, and other places, but I am confident that the reason the committee invited me is that I resided in Taiwan for 10 years and did business throughout the Pacific Rim. I also had the honour of being one of the first two Canadians who served at the Canadian Trade Office in Taipei, so there is some history there. We've heard, throughout the day, about the arrangements that led to that rather interesting office.
Ironically, when I received your invitation, I was putting the finishing touches on a book, Seeking Excellence in Leadership, criticizing the effectiveness and relevance of committees, and here you are, studying something that could not be more relevant to people who want to do business and invest in Taiwan, Hong Kong, and Israel. For obvious reasons, I will be focusing on the Taiwan part of the agreement.
I lived in Taiwan between 1986 and 1997, a very eventful decade. When I arrived, martial law was in force, and when I left, they had an independent judiciary, free elections, free newspapers, freely trading currency, and people who could freely travel to mainland China. Just note the number of times I used “free” in that sentence. It is truly one of the world's most robust democracies.
Voting participation rates in the last five Taiwan presidential elections have averaged over 76%, and they have very high-calibre, well-educated leaders to serve: for instance, in the persons of Ma Ying-jeou, the past president, and Tsai Ing-wen, the current president. She has achieved international fame as the first female president of Taiwan—and, after last weekend, someone who knows how to place an important phone call.
Voices: Oh, oh!
Mr. John Weston: From 2013 through 2015, I headed the Canada-Taiwan Parliamentary Friendship Group, known for its hard work, cross-party camaraderie, and productivity. In that group, we learned the virtues of the type of agreement you are considering today. Such agreements are typical signs of progress between jurisdictions that encourage friendship, free trade, investment, and increased exchange between people.
Let me quickly cover ten benefits I see in this agreement. Deft drafting and careful diplomacy have eliminated the one impediment that delayed this agreement for the 20 years of negotiations it has taken.
One, it encourages trade with a decidedly democratic jurisdiction. Two, it allocates taxing rights between the two jurisdictions so that taxpayers are not subject to double taxation. Three, it reduces the risk of excessive taxation that may arise because of high withholding taxes on payments of dividends, interest, remittances, and royalties paid by a resident of one jurisdiction to a resident of the other. Four, it ensures that taxpayers will not be subject to discriminatory taxation in the foreign jurisdiction. Five, it provides greater certainty to taxpayers regarding their potential tax liability in the foreign jurisdiction. Six, it encourages adherence to the rule of law for people by promoting tax compliance. Seven, it increases tax revenues. Eight, it discourages good Canadians—those of Taiwan background—from renouncing their citizenship. In my experience, Canadians who hold dual U.S. citizenship are renouncing their U.S. citizenship in increasing numbers due to arbitrary and capricious practices by the IRS and the U.S. Treasury Department. Nine, the ADTA paves the way to other promising economic arrangements, including a foreign investment protection agreement and a free trade agreement. And ten, it takes advantage of great timing. There is peace across the Taiwan Strait, so it's easier for Canada to engage with both Beijing and Taipei while adhering resolutely to our one China policy.
In terms of the impact on Canada-Taiwan investment, we've heard about the underperforming rates of investment that are just out of step with the patterns of cross-border trade and the number of people in both places. On two-way investment, the CTOT reports that Taiwan is currently Canada's twelfth-largest trading partner, but we are looking at Taiwan as being only the 40th-largest investor in Canada, so there is much more that can be done in that file.
The CTOT also reports that a number of bilateral investment deals are pending that would benefit from the provisions within the ADTA. They can't be disclosed for reasons of confidentiality, but there is real margin to be had by getting this agreement passed.
The one negative downside has been alluded to by various persons who have testified. This agreement was signed in January of this year and passed by the Taiwan legislature in February. It took two decades to get here, and that is due solely to the concern of offending the one China policy. But the deft drafting includes words such as “territory” and “jurisdiction”, deliberately in there to avoid offending a state-to-state kind of...or proposing that there's a state-to-state kind of relationship here.
The signatories are the two trade offices, not governments directly—another sign of the genius behind this accord. It has been carefully designed to navigate the tightrope that all but Donald Trump require when promoting relations with Taiwan.
In conclusion, this accord is expected to help facilitate increased two-way investment by significantly lowering withholding tax rates. As I related, there are at least ten concrete benefits and no serious downside risks. If the committee and the House can get this through by Christmas, there will be a whole extra year of more value-added investment between the two sides.
I highly recommend that the committee support Bill .
Thank you for the question.
Traditionally there has been considerable interest in trade and investment in areas like IT, engineering and consulting services, environment-related services, and natural resources. In terms of investment in the two places, it creates an opportunity to capitalize on the really good personal relationships that have developed over the years among people of Taiwanese and Canadian backgrounds.
Really, the sky is the limit in that this is one of the most obvious barriers that would prevent all those many Taiwanese people—we heard between 150,000 and 120,000 people in Canada have a Taiwanese background. They're buying houses, they're sending their children to school, but they're not investing in our country in the ways we would like. There are many opportunities. In the past couple of years, there have been joint ventures involving high tech. They've typically been conducted through intermediary countries. Again, that was required because of the lack of an ADTA.
Thank you, Mr. Vice-Chair.
To all the witnesses, I appreciate your testimony. Thank you for taking the time to be with us here, and for our public servants, thank you for the work you do for Canadians every day.
I'd like to actually start with you, Ms. Rebolledo. We heard earlier from EDC about the importance that your agency has, particularly when we look at the Americans. They basically have restrained themselves by not being able to offer loans at a low level. We heard about some relocation of General Electric facilities to Canada, which is a big score for Canada, so thank you for that.
With regard to the withholding tax, again, you've illustrated a point where just for the loan, that 20% added to that extra investment basically made it less attractive for many people. Would you also say that the extra paperwork that goes along with that, including the fact that the person making the sale has a requirement to withhold and to deal with the government on that, makes it less likely for someone to do business that could expand our economy?
Thank you to the witnesses for being with us here today.
I would like to begin with Ms. Alepin.
Thank you for agreeing to appear on short notice.
Thank you also for the new information you provided today, which could mean the re-opening of the debate on the tax convention between Hong Kong and Canada, in a context in which one might believe that, if the proposed amendment is not made, the agreement itself is inoperative as we speak.
In this regard, I asked departmental officials earlier if they saw any danger in having such tax conventions with jurisdictions with low tax rates, such as Hong Kong. I would like to know if you think this poses a risk. The purpose of the bill, as the title indicates, is to avoid tax evasion. Do you think that, instead of fighting tax evasion, it could in fact increase it? Do you think that some people, in order to pay less tax in Canada, might use these tax conventions as a way of avoiding double taxation? Barbados is an obvious example in this regard.
Do you see a danger in these agreements that would allow taxpayers to avoid paying a certain amount of tax in Canada?
Thank you for your question.
Earlier I heard finance department officials answer your question. You had asked whether the current convention between Canada and Hong Kong was fully functional and legal. I know that the Canada Revenue Agency has given its interpretation of this. It said that the convention could apply to transactions between Canada and Hong Kong.
We should question, however, whether the convention in force really complies with international law. International law uses words such as “state” and “country” whereas these words are not mentioned in the current model of the convention.
So we should ask this question since we want to be clear on what we are talking about right now. Is it a minimal technical amendment or something that allows for the full operation of the convention with Hong Kong?
If that is the case, having seen how China can react to certain recent decisions in the United States, we have to consider how China will react to this. Would Canada be simultaneously approving two tax agreements, that is, an arrangement and an agreement with Hong Kong and Taiwan?
I know we are being careful not to offend China by being mindful of the wording of the agreement with Taiwan. We are being careful not to suggest that Taiwan is a country. I understand all that, except that Hong Kong and Taiwan are fiscally competitive with China, so much so that in trading with China it is standard practice to go through Hong Kong.
So I think we have to understand the conventions so we can agree and legislate on the tax treatment between Canada, Taiwan and Hong Kong, which are fiscally competitive with China. It is as though a Canadian province or a U.S. state decided to separate and became a major fiscal competitor.
Today we are talking about agreements that other countries would conclude given that those governments had just separated. So we have to be mindful of these issues. As I said in my remarks, I know relations with China are very important to Canada. From what my colleagues said, I understood that people are quite comfortable with China's reaction, but your question was worth asking. It is important.
I will answer your question and, if I may, I will also pick up on some of what Ms. Alepin said about China's possible reaction.
Our current relationship with Taiwan is somewhat complicated. The agreement was in fact signed by the two offices. The staff of the Canadian office in Taipei are from the government of Canada. They are Canadian public servants, primarily from our department, but also from other departments. Similarly, the staff of the Taipei office in Ottawa are from Taiwan's foreign affairs department. So they are officials from the two governments.
As to the personnel, there is not much difference. There is, however, a legal difference owing to the fact that it is an arrangement and that it is signed by the offices. These offices are organizations that have already been mutually accepted. In our case, we accept the presence of the Taiwanese office in Ottawa. This office has a certain legal status in Canada as an organization working in Canada. On the other hand, we do not accept the Taiwanese foreign affairs department in the same way. This is why the document was signed by the two offices. From a strictly legal point of view, there is a difference.
As to China's reaction, I have two comments.
First, I would say Taiwan is a bit different from Hong Kong. The situation is always a bit trickier with Taiwan. From China's point of view and ours, Hong Kong is indeed part of the People's Republic of China. The only difference is that it is a separate customs territory.
Moreover, China accepts that Hong Kong and Taiwan are members of APEC, a multilateral organization whose members are economic members rather than countries. So China has already accepted the principle that Hong Kong and Taiwan can operate in a multilateral, international context as economies rather than countries.
In both cases, we already have that type of agreement with China. The change with Hong Kong is really a technical change. As to Taiwan, we are proceeding with something that we already have in place with China. In our opinion, China's reaction should not be a problem. If we had done the opposite, if we had made an arrangement with Taiwan first, that might have caused a problem.
Thank you very much, Mr. Chair.
Thank you very much for coming. I'm not going to ask a lot of questions, because I think we already dealt with quite a number of them.
I was really quite surprised, obviously, by Mr. John Weston's experience in Taiwan.
It's very interesting that you lived there, and you had the experience where you got to see it move from a dictatorship into a functioning democracy.
I was also really surprised by Prof. Gordon Houlden's remarks around how it's become our twelfth-largest trading partner, and the fifth-largest in Asia for Canada.
I just feel that at the end of the day, a strong Taiwan, a prosperous Taiwan, probably leads in the long term to a strong China. They don't have to be mutually exclusive things, but they can interact. It makes China, I believe, a stronger place in order to do business. I'm not an expert on either China or Taiwan, but if I were looking for a place where I could do business, for a smaller location that would give some greater understanding of how Chinese people think, their values, and how to do business, that might be a good location to start, and then perhaps to the mainland later on.
To Mr. Houlden and Ms. Rebolledo, by increasing trade and opportunity with Taiwan, what would be the impacts in the long term for Canada regarding trade and exports?
It's a tricky question. PRC has been the dominant, most buoyant partner for the last 30 years. By my estimate, investment into Canada from China is 600 times greater than that from Taiwan. It's whole multiple orders of magnitude greater, and that's not going to change overnight.
Taiwan has a static population. Its economic growth rates are modest, and that's actually one of the causes, in my view, of the change of government recently: dissatisfaction, particularly among young people, over economic prospects. That said, this can help, and these sorts of arrangements are much appreciated by the Taiwanese government and the Taiwanese people.
You're quite right that Taiwan is.... When in government, when I ran our office in Taiwan, we had urged Canadian companies to operate in Taiwan. Beijing is formidable in that you have dozens and dozens of large cities, and provinces that are a multiple size of countries. Taiwan is a place with considerable respect for the rule of law. Most recently, in the last 20 or 30 years, perhaps 20 years, let's say, there is respect for intellectual property rules that wasn't the case in the early days. It is the case now. It's a safe place to do business by comparison with the PRC, which has a remarkably dynamic economy but just tougher to penetrate, much more difficult. Taiwan is a nice safer way station for Canadian companies to cut their teeth.
Hong Kong, to some extent, is as well. There are maybe a couple of hundred thousand Taiwanese in Canada, and two million or more on the mainland. Most of that capital that flows out of Taiwan doesn't come to Canada or North America, it goes to China where Taiwanese companies build massive factories, particularly in the electronics consumer products industries. Partnership with a Taiwanese company can have multiplier effects if you work on a broader Asia platform, so it is attractive.
What has to be done, though, is sequencing. There was a question about a free trade agreement, for example, with Taiwan, and that's wonderful, but generally I would think that would be a risky exercise if you hadn't already concluded one with China. China does watch very carefully. Right now, thanks to President Ma Ying-jeou, we're at the end, perhaps, of a honeymoon period between Taipei and Beijing. Already just based on the commentaries generated by President-elect Trump, we're seeing a stiffening of Chinese attitudes towards Taiwan. I don't know if that will continue or not, but I'd say there's a prospect that this will be the case.
So yes, do business with Taiwan, but keep an eye on Beijing, because they have a relevance to what you can get away with and what you can do in Taiwan.
Ladies and gentlemen, welcome to this House of Commons parliamentary committee.
My first remarks are for Ms. Alepin.
You were here earlier when we heard from the first group of witnesses. We asked them, among other things, whether Bill , which includes a new agreement with Taiwan, Hong Kong, and so forth, could impact our relationship with China and Japan, our two most important partners and the two economic powerhouses of Asia. Those witnesses did not appear to have any concerns in this regard whatsoever, but I believe you said it could have an impact on China.
I know that some colleagues have already asked about this. In your opinion, are there any yellow lights or flags that should be raised regarding certain aspects of this bill that could unfortunately have a negative impact on our relationship and trade with China in particular?
Thank you for your question.
Time will tell how China will react. The tax regime in Taiwan and Hong Kong seems to be more favourable than the one in China. In Hong Kong, for instance, dividends, interest income and capital gains are not taxed. No tax is deducted at source. This is a more advantageous regime than China's.
We are now concluding agreements with these jurisdictions which are fiscally competitive with China. In the past, people were not offended, for instance, when a country started being a fierce fiscal competitor to another country in the area. Is this viewed favourably in today's world, in 2016? Could there be reactions if we conclude agreements with territories or jurisdictions that compete with China fiscally? Time will tell. For now, I don't think we can discuss this or these important agreements without asking this question.
Similarly, in the agreements currently under consideration, with Taiwan and Hong Kong, for instance, regarding information sharing, the protocols clearly say, as does the agreement with Taiwan, that information sharing should not be considered—not the exact wording—as automatic.
As we just said, this is 2016 and I have questions about this. I wonder why that is specifically included in the protocol, although we know very well that, recently, the two Canadian governments appear to have made a commitment to the automatic sharing of information.
As to the sharing of information, does that mean that Canada has slightly less restrictive agreements with Hong Kong and Taiwan than it does with China? What will the future hold as to the sharing of information? That is hard to say right now, but these are very important questions.
Thank you for the question.
Over the past 20 years, as we negotiated this accord, this was the greatest obstacle. Moreover, this accord is not a treaty or an agreement. If there were reasonable problems, we might in fact pause to reconsider. There is no reasonable obstacle, however. Reading the accord carefully, we see that the words “jurisdiction” and “territory” were deliberately used to prevent problems with China.
Second, the way the accord is set up between the two trade offices is clearly meant to send a signal that this is not an affront to China.
Third, there is a famous leader—your leader—who said not so long ago that love is better than anger, if I remember correctly. It's better to encourage people to voluntarily pay their taxes than to pay them angrily or against their sense of justice. By removing double taxation, we are encouraging people in both places to adhere to the rule of law. We're encouraging them to do business with one another. We're encouraging people who are already good friends to increase the level of the friendship.
To me, many bills that come before this place are very difficult and hard to decide upon, but this one seems very, very clear. Without reserve, I would say that this makes sense for the people you represent: all Canadians.
I will. I confess that I was Sarah's first boss many years ago when she first joined the Department of Foreign Affairs. I worked on Taiwan for a long time, as many of the people here at the table have done. I'm in my 30th year of Canada-China relations, and I think I have a fairly good feel for what's doable and what's a bridge too far.
This one strikes me as doable. As Ms. Taylor said, there are many issues that Taiwan complains about. On some issues, when they come up, you just know: you're waiting for the knock on the door from the Chinese ambassador. You can almost hear his footsteps coming down the hall. But this, to me, is not one of those.
They watch the formalities like a hawk. I've looked over the agreement, and the formalities are being met in a way that is satisfactory to them, I believe. One trick in negotiating with the PRC, in my experience, is that if you honour the formalities, you can get away with a lot of substance. I've had substantive, sometimes very confidential, arrangements made with China where we were honouring the form and getting a lot of substance. I walked away from the table happy and I think they did as well, because they got the form honoured, and they cared less about the substance.
I think this is an example where the amount of investment that's going to flow in either direction is just a rounding error on our own investment arrangement with China, so this to me is in that okay category. But to try to do an FTA with Taiwan—this is my personal opinion—without having advanced one with China would be probably a bridge too far. Sliding it into a TPP would have worked, but to do it all by itself as a stand-alone, without one with the PRC, would be tough. That's a personal opinion.
I just have a general thing, because I think Mr. Weston summed it up pretty well. It just seems like this is one of those situations that makes a lot of sense. I don't think we're necessarily spending a lot of time talking about the bill but more about our relationships with these countries, and that's, frankly, a good thing.
In a general sense, in listening to the discussion, it's ironic that we're talking about a bill that is about Israel and Taiwan, and I think we spent 90% of our time talking about Taiwan. As someone who comes from the west, it's probably more relevant from our standpoint. But in looking through the notes that we've been provided, obviously there are some tremendous opportunities with Taiwan. If I read this correctly, our trade balance with Taiwan is not very good. We bring in a lot more than we ship out. What I do find a little surprising is that when it talks about exports, it talks about coal, lumber, and copper. I thought Alberta and western Canada exported a lot of pork to Taiwan, or meat products at least.
To any of the panellists, with this particular legislation do you see some of that trade imbalance starting to level out? What are some of the opportunities that maybe we could be pursuing a little more diligently to bring that trade balance a bit more into a balance?
Maybe I'll start with you, Mr. Houlden. Since both Rachael and I are from Alberta, we'll play favourites and let you go first.
Thank you very much. I've lived in Ottawa, but it's nice to be back in my home province as well. I retreated home after government service.
I struggled, as did others, in the office in Taipei with trying to level that balance somewhat. It's typical of many of our trading relationships with Asia—China is an example—where we are at a huge disadvantage in terms of the exchange. You can't expect a balance of trade with all of our partners, as it doesn't work that way, but we should be doing better ultimately. It took us a long time to get beef back into that market, so I'm hopeful that with quality products—of course, as you know, Alberta exports some 80% of the beef from this country—that will occur.
In Taiwan there are some non-tariff barriers to trade. They make it difficult for us sometimes in terms of labelling and regulations, and the job of the mission there is to make sure we're being treated fairly.
The United States has a powerful presence because they are the security guarantor for Taiwan, so all things being equal, that U.S. influence comes to bear. I was there at a time when they got a pass on beef and we did not, for reasons that really had all to do with politics and just clout, but Canadians can be persistent, and we need to be. Don't expect that root balance to be overturned overnight. I think it's a question of time and persistence.
Quite frankly, Canadian business people could sometimes be more aggressive. I've seen the phenomenon in my career of where folks get used to trading in Minnesota, and maybe Georgia is a little bit exotic, but we'll give it a try. The advantage of Australia, in my view, is they are in that part of the world. They had no choice but to adapt to very difficult circumstances. We have the luxury and the burden of having such a great market next door, so that leap to knowing another culture, knowing another language.... Mr. Weston was an example of that. That's a tough job for many Canadian business people. We have no choice, or we're going to be forever super-dependent upon that great market to the south.