March 7, 2017
Other videos available in the Going International series:
About this seminar
For any business, staying local but going global presents a number of challenges and opportunities. In this series, Gowling WLG lawyers from around the world discuss, regulatory, tax, employment and IP issues that Canadian companies need to consider before entering these key international markets.
This seminar counts for up to 0.5 hour of Substantive Credit under the CPD rules of the Law Society of Upper Canada, up to 0.5 hour of CPD credit under the rules of the Law Society of British Columbia and up to 0.5 hour of CLE credit under the rules of the Barreau du Québec.
Let me introduce to you two of our partners in Ottawa. Karen Hennessey and Carole Chouinard. Karen is the head of our corporate commercial group across Canada. Her practice covers quite a broad spectrum of corporate and commercial matters including mergers and acquisitions and commercial transactions, leasing, franchising and putting together complex commercial agreements. Carole, on the other hand, is our top advisor in the tax area which, when it comes to foreign investment, it’s a lot more exciting than it might be in terms of local interest. But Carole’s experience over the years has been in tax structuring and planning, both for domestic companies and companies that are going international. Let me turn the podium over to Karen and Carole.
Thanks everyone. I have the pleasure of welcoming you all back to Canada. We’ve heard from our colleagues and partners around the world about the opportunities for your business, globally, which gives you a good sense of why you might want to take your company international, to take advantage of those opportunities. We’re going to bring it back to a Canadian perspective and answer some of the other questions that you may be thinking such as timing, when is the right time to take your company global, how do I get there, meaning what is the right business vehicle that you should take, which country do you go to and, finally, some of the Canadian legal issues that you need to consider even when you’re doing an outbound investment.
The first question goes to timing. When? There is no magic to when you do it. I would say though that before you go global you want to make sure your domestic business is solid and you have a good foundation. And that you have the necessary resources. Going global is an ambitious task for a business. It’s going to take a lot of your financial and human resources away from your domestic business. If you already have your personnel, you’re already overwhelmed by the Canadian business, it’s probably not a good time to ask them to take on international initiative. Make sure you have the right people and the right focus so you can pursue the international issues but aren’t going to erode your Canadian business. That doesn’t mean that you need to saturate the Canadian market entirely. Throughout your business cycle it may be great to go early, you just need to make sure that you have a good foundation here. You also need to properly plan. You’ve heard from most of our colleagues about diligence required and that before you venture you need to make sure you properly planned your due diligence in the country that you’re targeting.
How do I get there? What’s the right business structure you’re going to use in that country? We’ve heard from our colleagues that in most countries around the world, or the ones that we’ve talked about, there’s various business structures you can use including importing or distributing directly into the country from Canada, opening an office or acquiring a business in that foreign entity. From a Canadian perspective one of the things, the biggest factor of which vehicle is going to be tax related, for which I will turn over to Carole who will give you the tax perspective from Canada.
Thank you Karen. Just before I get into my comments I thought I would give you a few statistics. The charts and the graphs are fairly self-explanatory but I think they serve a purpose of putting our comments into context. This first chart, graph, shows the stock of direct investment made by Canadian companies going abroad. Basically what you can see is that over a 20 year period there has been a growing trend. If we look at 2012 we are looking at approximately an investment of 700-800 billion dollars. Moving on to the next chart which shows the Canadian direct investment abroad by selected industries. In the finance and insurance sector you can tell that as a percentage of total stock we’re looking at an investment of about 39.9%. Mining, oil and gas continues to be a sector of investment for Canadian companies abroad and from there it’s reducing investments. This next chart shows the capital invested by type of business organizations. The statistics go back to 2010. I don’t have anything more recent but, not surprisingly, most Canadian businesses, when they’re investing abroad, are doing so by way of a subsidiary. Not that many are going by way of branches or head office. And finally, the last statistics slide gives you a sense of the profit that’s generated by foreign direct investment. Canadian direct investment abroad has increased over the last 20 years. There was a drop in 2002 and there’s also a drop, not surprisingly, in 2009 due to the economic situation.
Moving on to the some of the fundamental questions that you should be addressing if as a Canadian business you’re looking to go abroad. Many of these questions have already been touched upon by our colleagues in the other countries, from a corporate perspective and from a regulatory perspective. I’m coming at these questions from a tax perspective because the tax planning around a business going abroad is also important. Except maybe in Dubai, Tim. I guess there’s not a lot of planning for me to do if a Canadian business is going into Dubai, except from the Canadian perspective which makes it much simpler, I guess. Some of the important questions, obviously you want to obtain very specific detailed tax advice and other advice, if you’re a Canadian company going outbound. Amongst the fundamental questions is obviously, and this is important from a corporate regulatory and tax perspective is, what is the best vehicle, from a tax perspective, what is the most tax efficient vehicle for the business going abroad? Is that a representative office? Is it a branch? Is it a subsidiary or a joint venture? Also, how can a Canadian company tax efficiently expand into a foreign market or utilize a foreign enterprise? Should it set up its own business in that country? Should it partner with an existing business? Should it acquire shares of an existing business or assets of an existing business? Again, there are regulatory aspects to that question but there are also tax aspects to that question, both from a Canadian tax perspective and also from a foreign tax perspective, so from the perspective of the tax regime in that particular jurisdiction. Another question, what options does a Canadian company have to finance the business operations or acquisition? Obviously it needs to be a finance. You need to inject funds, probably. Is it best to do it by way of equity? Is it best to do it by way of loan? What’s most tax efficient? Is there a preferred tax way of financing that business abroad? Another question, how can you repatriate the money to Canada? What we mean by that is you have that business abroad, it has profits, obviously you want some of the profits, maybe all of it maybe some of it, to come back to Canada. How do you do that in a tax efficient way? That involves considering the tax implications in Canada and in that country. And finally, what is the exit strategy? You’ve been in that country for a number of years, the Canadian business has had operations in that country, and for whatever reasons they’ve decided that they want to move to another country or, alternatively, they want to close down the operations, what’s the best way of doing that?
Some of the Canadian tax considerations, these are select Canadian tax considerations, we could be speaking about the tax considerations for a whole day, especially if you wanted to talk about the foreign affiliate regime, which I don’t intend to do today. These are really two select tax considerations of many. One of them is transfer pricing, obviously. Transfer pricing rules require that pricing for goods or services, as between a Canadian parent company and a subsidiary or other entity in another jurisdiction, have to be at arm’s length fair market value pricing. The reason for that is if we didn’t have these rules you could manipulate where you would pay the tax and you would obviously pay the tax in the lowest tax jurisdictions. Which today is Dubai. In the absence of transfer pricing rules you would ensure that most of your profit of your whole enterprise is taxed in the jurisdiction where you’ve got the lowest tax rate. This is where the transfer pricing rules come into play and indicate that if you try to do that these rules will apply so that you can’t manipulate your overall taxes paid. Canada has transfer pricing rules. Other countries also have them. When you’re pricing the exchange of goods and services you have to take into consideration both the Canadian transfer pricing rules and also the foreign transfer pricing rules and, just before I move on, we do have in Gowlings a dedicated transfer pricing group. That’s all they do is transfer pricing, reviewing of transactions to make sure, as between the multi-national context as between Canadian companies and companies outside of Canada, all they do is review them from the perspective of transfer pricing rules and whether they comply.
Another select Canadian tax consideration has to do with foreign currency transactions. Transactions that are recorded by a Canadian company in a foreign currency, and many Canadian companies if they have operations outside of Canada will report in their own financial reporting, internal reporting, they will report transactions in the foreign currency. Unfortunately for tax purposes, for Canadian tax purposes, those transactions need to be reported in Canadian dollars. Depending on whether or not there is a timing issue between the time that this is reported for Canadian tax purposes and the time that the payment is actually received from the foreign corporation, from your subsidiary, there may be a fluctuation in the currency which would give rise to either an exchange gain or an exchange loss for tax purposes.
Just one example before I give the podium to Karen again, one example of the Canadian income tax, the Canadian tax implications of a direct investment. The example I’m working from here is a Canadian company that finances a subsidiary, pick whatever country, via equity. Basically buying shares and interest bearing loans, so also supporting its subsidiary by way of loans. The Canadian company grants the subsidiary licencing rights to use the intellectual property to carry on the manufacturing activities in the foreign jurisdiction, and the subsidiary pays to the Canadian parent interest, royalties and dividends. From the Canadian tax perspective there would be no immediate Canadian income tax to the parent if the subsidiary earns income from active business. Now generally that’ll be the case. If that is not the case, if the income or part of the income that’s earned by the subsidiary is not from active business, there are certain rules that may tax the income to the Canadian parent, although it’s earned outside of Canada by a separate entity. Generally not an issue if it’s an active operation, however, if it’s not then there could be some adverse tax implications in Canada. Dividends that are paid by the subsidiary are taxable to the Canadian parent unless those dividends are paid out of exempt surplus. What’s that? That’s basically your active business income. If the dividends paid by the subsidiary to the parent are paid out of that active business income there will be no tax payable by the Canadian parent. And finally, the interest and royalties that are paid by the subsidiary to the Canadian parent company, those will be taxable to the Canadian company, however, they will be taxable both in Canada and in the foreign jurisdiction because there is usually a non-resident withholding tax. What happens to avoid double tax, because it’s been taxed in the foreign jurisdiction and also Canada, is that Canada will, through its tax regime, provide a foreign tax credit to compensate for the withholding tax that was paid to the foreign jurisdiction.
That’s it. I will give the podium now to Karen.
All right. The big question is where do I go? We’ve heard some very compelling pitches from my colleagues around the world about why their country should be the one you go to first. You’ll also know from them, and from just reading the news, that the international and global economy and political climates are constantly changing and, therefore, the pros and cons of particular jurisdiction is going to change and those changes are really happening day to day as we’re hearing. The right country for your business for expansion is going to depend a lot on the type of business that you have. We had a question earlier about goods versus services. That may be a particular consideration about where you’re going to expand. There’s also some legal considerations for you and unfortunately I don’t have any answers for you’re here but I’m going to give you a number of questions and you’re going to have to ask yourself in order to make that decision.
One is, what are the regulatory approvals required in the foreign country? We’ve heard from our colleagues about CETA. We know about NAFTA. What are the foreign trade arrangements in those that will make your ease of investment into that country better or worse. If your business is very personnel heavy, you’re a service business or a sales business where you rely on employees, what are the labour and employment laws in the country that you’re thinking of? We already heard how China and France, even though they tried to pretend it wasn’t so, are very employee friendly. If you’re an employee heavy business those are jurisdictions you’re going to really want to investigate. An obvious question is where are your customers? That would be an obvious question to ask and you’re going to go where your customers are. What are the tax rules in the other country? We just heard from Carole about the possibility of dual taxation. Is there a tax treaty with that foreign jurisdiction to make sure that you’re not going to be paying dual tax on your income? The bottom line is the right country is going to be different for every business and for your particular business the right country might change over time as the new political regimes are exiting and entering the various countries. As we heard from every presentation due diligence is key and making sure your diligence is up to date and current.
What else do I need to worry about? There’s a few considerations, legally, that actually apply to some Canadian laws that you may not realize are going to apply to your foreign company. International contracting is very different in some ways from domestic contracting. While for the most part, as we’ve heard, you’re pretty much free to contract for your normal business terms, any contracts with foreign entities could automatically have the application of the UN Convention on the international sale of goods. That Convention creates a uniform international sales law which regulates rights and obligations of buyers and sellers in any international transaction. Canada’s been a signatory to that Convention since 1992 and the Convention has now been adopted by over 80 countries world-wide. It is very likely that the country that you’re dealing with is a signatory and has adopted that Convention. The thing to be aware of in that Convention is that if both countries are signatories your contract will automatically be subject to the rules of the Convention, unless your contract very expressitly and explicitly excludes the application of the Convention. You’ve probably seen in a lot of your contracts, and what you thought was boiler language, saying the UN Convention on the actual sale of goods does not apply. That is very key if you don’t want it to apply because of the automatic rules. The reason why you want to exclude it is you may prefer your domestic law certainty over contractual provisions and prefer the law of one of the contracting parties.
A related issue in international contracting is conflict of laws rules. Those are the rules that really define which laws govern the contract and which laws will settle any disputes relating to the contract. To avoid uncertainty, or unpredictable judicial interference in international transaction, you need to make sure you have governing law clauses in your contract that will expressly state which laws will not only govern the contract, but which laws and which court will hear a dispute. That being said, you know, make sure again that you do your due diligence as we heard from Jamie this morning, unless you’re using Chinese law they may not enforce a Canadian contract in China. Other jurisdictions as well will say I don’t care what your contract said, I’m exercising my inherent jurisdiction. Again, just be aware of the inclusions to those governing law clauses and the enforceability of them.
Another consideration in contracts is language. Are there are any requirements in that foreign country that the language of the contract must be in the foreign language? We heard from one of our speakers that in China that the contract is in both Chinese and English but which one prevails because you may have translation issues. Again, these are issues that you need to make sure you deal with so there isn’t uncertainty in the future.
Another issue to consider is intellectual property protection. We’ve heard from all of our speakers today about IP rights and the general rule, as most of you probably know, is that your trademark and patent registrations in Canada do not give you any world-wide rights. Rights are based on actual use in the country. One of your first steps before you enter a foreign jurisdiction is going to be search and confirm that you can secure those trademarks, those other IP rights, and to take the steps to actually put them in place before you start carrying on business. When you’re looking at your trademark rights, as well one thing to take into account is the translation of your trademark in those foreign entities. That’ll be one of the factors you’re going to look at about whether to go, find out what your trademark means in the foreign language. I think there’s been some very surprising results in some companies that were caught off guard. That their Canadian trademark, which was very clever here, meant something very, very different in other jurisdictions.
We heard a lot about employment and immigration laws and what those mean in the foreign country. Keep in mind that it’s not just the employment laws there, it’s how are you going to get your Canadian employees to that foreign country to set up the business, train the employees and what do the immigration laws of that country say as far as entry and the ability to work. There’s also education of your employees who are travelling. Simply, what do you say to the customs agent who is inspecting you on entry, making sure they’re not saying, “I’m coming to China to work.” No. It’s you’re on a business trip. It’s little things like that that you can prevent a lot of issues as long as you are aware.
Then compliance with Canadian law. There’s a number of Canadian laws that actually affect outbound investment. One that we’ve heard about this morning, and it’s probably the most obvious to you, is the Canadian anti-bribery and corruption rules. As we’ve heard, and as you would know, in many countries facility payments are an acceptable way of doing business. But from a Canadian perspective they’re not. The Canada Corruption of Foreign Public Officials Act has world-wide reach and prohibits giving, offering or agreeing to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official, directly or indirectly, to obtain or retain an advantage in the course of business. It’s extremely broad reach and what that means is if your subsidiary is giving bribes in the foreign country the parent company here in Canada is the one who is going to be liable and can be held accountable in Canada.
Privacy and data protection. We heard a lot about that in our global world. Data and personal information is constantly in transition and making sure that you’re following the laws of Canada about any personal information that you’re sending overseas. There is lots of requirements to make sure you fulfill, and likewise, what are the rules of the foreign country for exporting personal information. Making sure your customer data base, if they need to be segregated, they are. Or your fulfilling the obligations for both countries on any data transfers.
Export issues. An obvious thing to take into account is the foreign country under any kind of economic sanctions or embargos from Canada. If your business is one where our controlled goods regime would take an effect. There are specific rules about the export of goods which applies primarily in the security national defense or military applications, but not only those so, again, making sure that you’re actually able to export the goods from Canada. And it’s not just goods. Sometimes it’s intellectual property. Exporting from Canada can be regulated.
Those are, again, a very high level snapshot of some of the things that you have to think about from a Canadian outbound perspective. Every business is different and there’s no way that we can get the full scope of all the issues into today’s presentation but we are here to help navigate them and fine tune them for everybody. I’m going to turn it back over to Scott who can wrap up and illustrate again how we can help. Thank you Scott.
Thanks very much Karen and Carole. Before we go any further let me take a minute to thank our speakers from around the world. You’ve dedicated a lot of time to this and we really appreciate you participating. If our experience is any indication going international is a tremendous advantage and it’s been handled very successfully by the Gowling WLG firm. We’d like to help you do the same. Let me end by saying thank you to you for your patience. It’s been 2 and a half hours of your time and we’re really glad you were here. Thank you very much. Thank you Gowling WLG around the world.
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