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Volume 2, Issue 3
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Technical Explanation Clarifies Protocol to Canada-U.S. Tax Treaty
Source: WG;&L Journal of International Taxation
Under a new rule in the Protocol, the cross-border provision of services may give rise to a PE of the service provider—the first time that the United States has included such a rule in a treaty with a developed country.
On July 10, 2008, the U.S. Treasury released the Technical Explanation (TE) to the September 21, 2007, protocol (Protocol) to the Canada-U.S. income tax convention (Treaty) and the Canadian Department of Finance publicly signaled its agreement with the TE. 1 Although the TE does not amend the Protocol or the Treaty itself, it is an important interpretive aid that sets out the intentions of Canada and the United States and clarifies several major aspects of the Protocol.
This article summarizes many of the changes to the Treaty resulting from the Protocol and the main clarifications provided in the TE. 2 Many of these changes will significantly affect cross-border structures.
Application of the TE in Canada
The TE is a U.S. Treasury document. However, the Canadian Department of Finance reviewed and commented on it, and agrees with its contents. The introduction to the TE notes that, in the view of both Canada and the United States, the TE “accurately reflects the policies behind particular Protocol provisions, as well as understandings reached with respect to the application and interpretation of the Protocol and the Convention.” The Canadian government confirmed its participation in the preparation of the TE and its agreement with the contents of the TE in a press release issued by the Department of Finance on July 10, 2008.3
Entry Into Force
The Protocol will enter into force once Canada and the United States have notified each other that their ratification procedures are complete. Canada ratified the Protocol on December 14, 2007. The U.S. Senate Committee on Foreign Relations reviewed the Protocol on July 10, 2008, and agreed on July 29, 2008, to send it to the full Senate for ratification. Accordingly, ratification by the United States is expected in 2008.
With respect to withholding taxes (other than on interest payments), the Protocol will generally be effective two months after it enters into force. For other taxes, it will generally be effective for tax years that begin in the calendar year after ratification. Special timing applies to some provisions, such as the hybrid entity rules, as discussed below.
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