Canadian liaison meetings, testimony before parliament highlight TEI's fall agenda: comments also filed on IRS budget and Form 5471. (Recent Activities).

Canadian Budget Hearing

In response to an invitation from the Canadian House of Commons Standing Committee on Finance, TEI President Drew Glennie of Shell Canada Limited recently testified on behalf of TEI as part of the Canadian government's pre-budget consultations.

In a written statement filed in connection with the November 6 heating in Calgary, TEI urged the government to adopt a number of measures to ensure that the Canadian business tax system is fully competitive in the global environment. Specifically, TEI recommended that the government continue its phased corporate income tax rate reductions and review whether all business sectors of the economy have competitive tax rates. In addition, TEI said that the Large Corporation Tax--a form of capital tax--is counterproductive to the goals of encouraging capital investment in Canada and enhancing productivity. TEI urged the Committee to recommend repeal of the LCT.

[Editor's Note: In the report to Parliament on the public consultations that was issued on November 29, 2002, the Finance Committee adopted both recommendations. The report recommends that the government fully eliminate capital taxes and also ensure that its corporate income tax rates for all industries is competitive and no higher than U.S. tax rates.]

TEI's testimony reiterated its opposition to draft legislation relating to foreign investment entities and nonresident trusts. TEI said that the third draft of the proposals introduced in October 2002 remains unworkable and urged the government to abandon the legislation. "[A]lthough the proposed legislation includes important and substantial revisions" from the previous drafts, TEI said, "the legislation remains extraordinarily complex, confusing, and, in the case of the FIE provisions, overlaps and conflicts with the entire foreign affiliate regime. As a result, the provisions will likely interfere with legitimate business operations." Moreover, the proposed January 1, 2003, effective date is unreasonable, TEI said, because taxpayers will need time to digest and understand the mind-numbingly complex legislation and to modify company information systems to capture and report the additional required information. TEI urged that the effective date of the legislation be postponed at least a full year if it is not withdrawn. For TEI's previous comments on earlier drafts of the proposed legislation, see the November-December 2001 issue of THE TAX EXECUTIVE, beginning at pages 469 and 471, and the March-April 2001 issue, beginning at page 138.

TEI's statement was prepared under the aegis of its Canadian Income Tax Committee, whose chair is Monika Siegmund of Shell Canada Limited. Ms. Siegmund, Glenn Wickerson, TEI Vice President for Canadian Affairs, and TEI's Executive Director, Timothy J. McCormally, accompanied Messrs. Glennie to the hearing. The full text of TEI's statement to the Standing Committee on Finance is reprinted in this issue, beginning at page 567.

Canadian Liaison Meetings

On December 3 and 4, TEI met with representatives of the Canadian Department of Finance and Canada Customs and Revenue Agency (CCRA) on income and excise tax issues. TEI President Drew Glennie of Shell Canada Limited and TEI Vice President for Canadian Affairs Glenn Wickerson of BP Canada Energy Company led the Institute's delegation, which included Martina Krummen of Air Canada, chair of TEI's Commodity Tax Committee, and Monika Siegmund of Shell Canada Limited, chair of TEI's Canadian Income Tax Committee.

The December 4 meeting with CCRA on income tax issues opened with questions related to audit administration, including the effective oversight and management of the audit/ reassessment process by large-case file managers. The Institute noted that several companies have experienced multiple reassessments of a single taxation year--up to seven in one case. TEI inquired about improvements CCRA might implement to minimize the number of reassessments that companies receive and to ensure that issues are examined and resolved as quickly as possible. A number of other issues were discussed with CCRA, including enhancing the impartiality of the Appeals Division, improving the transparency of the GAAR Committee's deliberation and decision-making process, the effect of recent jurisprudence on the scope of the term "series of transactions," the effect of CCRA's Future Directions initiative on compliance, audits, and penalty administration, and various issues affecting foreign affiliate reporting.

In a separate meeting with CCRA on excise tax issues, TEI discussed the process for appealing the imposition of customs duties (as well as appeals of penalties levied under the administrative monetary penalty system), the duties applicable to "wheeling" electricity, and several other import duty questions. TEI's delegation also raised questions relating to the application of the Goods and Services Tax (GST) in various situations, including repairs of locomotives, aircraft leasing, and services provided by "seconded" employees. In addition, the application of the place of supply rules to specific cross-border transactions were reviewed as were the rules relating to the availability of, and documentation required to claim, input tax credits. Finally, the Institute alerted CCRA to the need to provide guidance about the effect of the decision by the Canadian Payments Association Board to implement a $25 million ceiling on all paper-based payments settled via the Automated Clearing Settlement System.

On December 5, the TEI delegation met separately with the Department of Finance on income and excise tax matters. In the meeting on income tax matters, TEI urged the Department of Finance to consider introducing legislation to repeal the LCT. In the absence of repeal, TEI recommended various changes in the LCT to minimize the effect of required changes in financial accounting methods on the computation of LCT, to correct the treatment of hedged debt, and to alter the LCT treatment of certain transactions. TEI also inquired about the prospects for changes in the tax-free reorganization provisions, the corporate residence test, the term-preferred share rules, the incentives for Scientific Research & Experimental Development, and the rules governing notices of objection. TEI also urged the Department to press for adoption of arbitration provisions in Canada's tax treaties and to continue to negotiate reduced withholding rates for interest and dividend payments in the Canada-U.S. tax treaty.

Excise tax issues included in the Department of Finance agenda related to the application of GST to promotional allowances paid to a third party based on purchases made by the third party's customers; the potential for applying a zero-rating to intangible personal property, services, and telecommunications; and the potential for harmonization of Ontario's provincial retail sales tax with GST. In addition, there was a discussion of various interpretation issues related to the place of supply rules and the application of the subsection 156(2) election to treat transfers of assets in connection with business reorganizations as a taxable supply for nil consideration.

The Institute also continued to build its tradition of liaison meetings with the Canadian Department of Justice. For the third consecutive year, representatives of the Institute and Department of Justice met to discuss various procedural matters affecting issue and case resolution, including the GAAR Committee process, penalty administration, the Department of Justice's role in CCRA's Appeals Division processes, alternative dispute resolution mechanisms, and litigation.

The agendas for the CCRA and Department of Finance liaison meetings in respect of income tax issues are reprinted in this issue, beginning at pages 534 and 550, respectively. The agendas for the CCRA and Department of Finance meetings in respect of excise tax issues are reprinted in this issue, beginning at pages 542 and 562, respectively.

CCRA and Finance once again have agreed to provide written responses to TEI's questions and comments. When final, the responses will be made available on TEI's website.

IRS Budget

On December 10, TEI sent a letter to President George W. Bush citing concerns about recent reports that the IRS budget request for business modernization will be reduced by as much as 50 percent. TEI urged the Administration to ensure that the IRS has the funding needed to complete the sweeping reform and reorganization begun five years ago. The Institute noted that reducing IRS's funding because of management concerns is not the best response given that failure of the ongoing reform efforts would have broad impact, especially on taxpayers. TEI asked the president to restore funding for IRS modernization.

The Institute's letter is reprinted in this issue, beginning on page 569.

Form 5471

On October 18, TEI President Drew Glennie wrote Carol Dunahoo, Director of the IRS's International Tax Programs, concerning the need to revise the Form 5471, Information Return of U.S. Persons with respect to Certain Foreign Corporations. The letter responds to an IRS request for comments on the form.

In the letter, Mr. Glennie commended the IRS for undertaking a review of the information required on this form, which imposes considerable administrative burdens for taxpayers. "Regrettably, despite previous efforts by the IRS to streamline it," he stated, "the form requires the reporting of extraneous information that is unnecessary for the determination of a taxpayer's tax liability."

TEI recommended eliminating individual filings for each controlled foreign corporation (CFC) and substituting a schedule of CFCs containing key information, including the balance in the earnings and profits (E&P) and tax pools. The Institute also suggested eliminating the U.S. dollar income statement and balance sheet reporting, except for entities subject to DASTM or those using the U.S. dollar as their functional currency, and raising the de minimis threshold for filing for dormant companies from $5,000 to $50,000.

The Institute's comments were discussed in a follow-up conference call with Ms. Dunahoo and other IRS officials on November 4. A supplemental submission responding to questions raised during that call is planned.

The letter and additional member comments are reprinted in this issue, beginning on page 528.