Episode 08: Navigating
Customs & Global
Tax Trends
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New and updated trade agreements are shifting the way we approach supply chain structures and immigration, as well as shaping tax trends at a global level. To help you expand your business and form a solid strategy in the movement of good across borders, people between countries or the cost of taxation, BDO Tax professionals Brian Morcombe, Charmaine Goddeeris, Doreen Buksner and Hetal Kotecha provide practical guidance and actionable solutions in this week’s podcast episode.

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Brian Morcombe:
Welcome to BDO Canada's Cross-Border Podcast Series. In this episode eight of the series we're discussing customs and global tax trends. My name is Brian Morcombe and I lead BDO Canada's National Indirect Tax practice. In the past few years, the trade environment has undergone a remarkable transformation. We've seen surtaxes imposed, and then withdrawn, new and updated trade agreements, all leading to a shift in traditional approaches to supply chain structures. For businesses trying to adapt and pivot to these changes, it has been challenging to say the least. So what does all of this mean for those navigating these import export waters? How do these changes impact Canada's approach to immigration? And what tax trends are emerging from all of this change? These are the challenging questions being put to today's panel. Joining me today is Charmaine Goddeeris who leads BDO Canada's Customs and International Trade Services team. Doreen Buksner, BDO Canada's Immigration Services team and Hetal Kotecha, International Tax Partner and leader of BDO Canada's Transaction Services team in Toronto.

Charmaine let's kick it off with your thoughts on customs and international trade, any more steel and aluminum disputes on their horizon for Canadian businesses.

Customs and International Trade
Charmaine Goddeeris:
You know, Brian, my customs consulting career was pretty boring up until January 2017, for the most part goods crossed our borders duty free. Our relationship with the United States was not unlike the closeness of a family. However, that all changed in a change in leadership in the United States, the Trump administration. So for the first time that I can remember, and I've been doing this 20 plus years, there was a trade dispute between Canada and the U.S. over aluminum and in steel. So what we saw happening is movement of those types of products and in some other weird products like coffee and pens and mattresses were attracting 25% or 10% punitive duties.T he idea was, the U.S. had implemented these punitive surtaxes for a couple of reasons. One, the NAFTA negotiations had broke down and two, the U.S. has really tried to take a stance of U.S. first and protect all types of industries.

And of course, steel and aluminum being one of the most important ones. So that dispute settled down, but we saw it ramp back up at the end of 2020, but Canada of course, came back and said, you know what, if you're going to put retaliatory, or if you're going to put surtaxes on our goods, we're going to implement retaliatory measures. The U.S. backed away. But what they did say is, we're going to monitor what you do in Canada, and we don't want you, we called dumping your aluminum into our country and hurting our steel and aluminum industry. So the note there, the reminder there is the trade landscape has been forever changed and punitive duties are certainly one of the hammers that are being used to make things go a particular countries way, not unlike siblings battling over toys.

Brian Morcombe:
Yeah, I hear what you're saying there. As a result of all the surtaxes that were imposed during that period, are you seeing changes in the way companies are structuring their supply chains to adopt an alternate product sourcing as you're referring to earlier?

Charmaine Goddeeris:
Well, that's really interesting Brian, not so much because of the steel and aluminum punitive surtaxes back and forth, we're certainly seeing changes to supply chains, to mitigate exposure to Trump's Chinese tariffs. So for the most part, most products are Chinese origin into United States are attracting an additional 10% again, or 25%, we like those numbers, punitive duties. So what are our manufacturers or our clients' companies around the world are going, how can we best take advantage of free trade agreements that Canada has with U.S. and Mexico? Oh, what happens if we start doing manufacturing in Canada, turn into a Canadian product, use CUSMA or USMCA, which was the replacement for the NAFTA in July of last year. And let's see. So it's great for our Canadian manufacturers that in the COVID times, who are always looking for ways to bulk up, revenue or expand our business. And this is certainly something that we're seeing here in Canada and great for our Canadian companies.

Brian Morcombe:
Yeah, fair enough. And it's interesting, right? Because arguably COVID really overshadowed the introduction of CUSMA. Like it went from being front and center in a lot of discussions and planning, to all of a sudden it came and went on July 1 of last year and people were sort of half paying attention because of course it was weird activity at the border. Maybe you can talk to everybody a little bit about CUSMA and also other more lucrative or not more, but just very lucrative trade agreements that exist globally.

Charmaine Goddeeris:
You know, it's funny, not funny, but COVID did overshadow. And what ended up happening is the ratification process or the signing of the formal CUSMA, Canada, U.S., Mexico Agreement, kind of slid through parliament in March of 2020. And no one really, because we were in the middle of figuring out how we were going to address the COVID emergency. So you're right, there was not a lot of attention placed on it, or it very quickly fell off the radar of many people, but it's here on July 1st, 2020, the North American Free Trade Agreement that we all remembered as NAFTA was replaced with the 21st century trade agreement CUSMA or USMCA. So in Canada, it's referred to as CUSMA, Canada, U.S., Mexico Agreement, we put ourselves first. In the United States, it's referred to as USMCA, United States, Mexico Agreement, and T-Mac in Mexico and I don't speak Spanish Brian yet, I'm trying, but I don't speak Spanish yet. So let's just go with T-MEC.

Brian Morcombe:
Nobody's perfect Charmaine, nobody's perfect.

Charmaine Goddeeris:
So there are many similarities between NAFTA and the new CUSMA agreement, but there's also some big changes. And that's the word of caution there for everyone. NAFTA is just not a rev, or CUSMA is not just a revamp of NAFTA. The NAFTA agreement was 741 pages long. The new CUSMA agreement is over 1500 pages, that's not some minor tweaks. Specifically in the automotive industry the original material threshold has changed, they added in labor value content. So you have to have workers making $16 US or more, that are making automotive parks to go into finished vehicles. There was the addition of a requirement, originating steel and aluminum content of 75 plus or more. So a lot of the rules have stayed the same, but a lot of them have changed. Companies who are taking advantage of CUSMA really need to take a look at whether or not their product now qualifies under the new agreement.

Because the last thing you want, is a surprise duty bill for you or your customers. There's also some other exciting free trade agreements. And this is why Canada is becoming a favorable country to start up manufacturing. We look at the agreements between Canada and the UK or Canada and the rest of Europe. There's our participation in the CPTPP, which is the Trans-Pacific Partnership or the Asian Canadian Alliance. So lots of good things, but remember, it's privilege to use a free trade agreement and you have to play by the rules and meet the rules. So sit down, take a look at the new agreements and make sure that there's no surprises.

Brian Morcombe:
Yeah. So I know we're seeing this with a lot of businesses that we're assisting where, for example, the Comprehensive Economic Trade Agreement, CETA, with European countries, isn’t being employed effectively. It's so much change in such a short window. It's very challenging for everybody to stay on top of it. Now, do you have any predictions on what we should expect to see in terms of trade relations over the next 18 months, say between Canada and the United States.

Charmaine Goddeeris:
So what we're seeing, Brian, we wanted a little bit of a, not a quiet period, but a reflection period about what had happened in 2017 to 2020 and get a feeling for how the Biden administration was going to play on the international trade space. And what we're finding is the U.S. plans to maintain their U.S. first approach to trade. Relationship between Canada and the United States are cordial right now, but certainly nowhere near the friendliness or the family relationship type feelings that we saw pre 2017.

U.S. trade has a new representative, Katherine Tai. Katherine was instrumental in the CUSMA, the hard nose CUSMA negotiations, and she also oversaw the trade enforcement of Chinese goods under the Obama administration. So in short, it's going to be a little bit of status quo for the next little while and our importers and exporters really need to be mindful that things could change at the drop of a hat and they need to have contingency plans in place, because $600,000 duty bills, like one of my clients saw back in July of 2018, that can destroy a business or eat away certainly at any revenue. So be mindful.

Brian Morcombe:
I couldn't agree with you more Charmaine. All of this underscores the importance of understanding that trade opportunities exist for businesses. It seems to me that there's a lot of good money being wasted simply because companies don't know their options. So thank you very much. Some very interesting inputs, very valuable input. And folks, this doesn't just apply to goods. Doreen Buksner's here to help us shift our focus to people and the cross border issues that she can help businesses resolve. Now, Doreen, how did the recent negotiations of the CUSMA trade agreement, Charmaine was just discussing impact immigration policy?

People and Cross-Border Issues
Doreen Buksner:
Thanks, Brian. So actually it turns out that all of these negotiations have been keeping Charmaine so busy with all these changes it's been relatively quiet on our side and basically status quo since the NAFTA came into effect, none of these negotiations actually had any impact. I guess they didn't make it all the way over to chapter 1603 while they were so busy managing all of the new tariffs coming into play. But basically just to provide a little bit of background, the CUSMA or what we knew as the NAFTA acts as the legal foundation for member states, and their citizens to access the Canadian labor markets.

So citizens of Mexico and the U.S. can have facilitated entry either as business visitors, as intercompany transferees, or as professionals into Canada. And it really helps to bypass a lot of the red tape, a lot of the harder work permit requirements, including labor certification processes that are required under some of the other categories. So what this really means is that these member states can almost show up at our borders under non-COVID times, present a work permit application and get adjudicated on the spot and get a three-year work permit with pretty little investment and complications. So it's a really flexible and reliable strategy to obtain that work permit. And it can even act as a pathway into permanent residents, especially for entrepreneurs and for investors.

Brian Morcombe:
So what you're saying is you shouldn't show up at the border and say to the customs guard, you're just coming in to visit your cousin Jenny, you should just frankly, present it for what it is, that you're coming up to work because you won't get stopped at the border. Okay. That's good. So taking those thoughts a step further Doreen, we've seen borders close now for some time, has the pandemic effected immigration policies under CUSMA?

Doreen Buksner:
Well, we don't want to say that the borders have been closed. I like to say that they've been restricted and that's because they're restricting access for essential and for urgent travel, which means that workers who have a work permit are by definition or at least by policy, let's say under these COVID rules considered to be essential. So they're not entirely closed, but the CUSMA and citizens who are making applications under the CUSMA are actually basically unaffected by any of these COVID rules, particularly American citizens. They are the only citizens globally who are still permitted to make those applications directly at the port of entry, whether they're at the land border crossings or at airports, and still get their work permits on the spot. Mexican nationals, as well as all the other visa exempt nationals globally are now required to make their applications in advance at a visa office.

So for those nationals, yes, COVID has definitely changed the speed at which companies and professionals can get their work permits or even get their work permits at all. If there isn't a sense of urgency or essentialness to that work. So a word of warning and of planning is that any employer who is seeking to send a worker into Canada, try to plan as much as possible and get all that information ahead of time so that you can really build in those runways and lead times to make sure that your people can be in the right place at the right time in Canada. So what we're also seeing is that Americans, even if they are allowed to work in Canada, they're still being put through the ringers at the ports of entry. They are being assessed for the urgency of their travel, whether they have ongoing employment in Canada and that they are essential workers going to an essential workplace on an urgent basis.

Brian Morcombe:
Yeah, it's interesting, isn't it? Because when you think about it, all the planning that needs to go into that process, the cost to a business of not being prepared and having its people held up at the border and not being able to fulfill services to customers, et cetera, simply by virtue of not having these points around urgency and other matters sorted out in advance is significant clearly. So once we're through these pandemic restrictions, what do you envision for the future of CUSMA and immigration?

Doreen Buksner:
Well, frankly, I think that there's quite a bit of room for some modernization, particularly with IT sector professionals. Right now we're quite limited, even though there are 63 professionals ranging from business activities to scientific professions. But I think that the IT sector has been a little bit neglected. So I would like to see some modernization of those professionals specifically, and I'd also like to see some more permanent residence options coming available through CUSMA opportunities.

So focusing on investment, I really think that that's also going to help to re-inject some quick funds into the economy as part of Canada's post COVID recovery strategy. So knowing that Biden is in office right now, I'm really hopeful that they can have some productive and mutually beneficial discussions around the mobility chapter of CUSMA and make sure that each country's workforce and labor forces can have access to each country and improve and help to collaboratively improve labor relations and economic conditions as part of the post COVID recovery.

Brian Morcombe:
That's a good vision. I like that vision. So, now I threw this question at Charmaine as well. Curious your thoughts on it, in terms of the immigration considerations and mobility provisions, what are your thoughts on how mobility provisions apply to other agreements such as CETA?

Doreen Buksner:
Well, we're really happy to have the CETA in place, and now as the Charmaine mentioned, we have the UK agreement as well. It's in effect as of April 1st, we're just waiting on some of those details to hit the mobility chapter and see what we're actually working with for the professionals and probably intercompany transfers as well. But we are seeing a big trend in bilateral or regional free trade agreements. And it's giving amazing access to Canadian businesses globally, as well as for international companies to expand their operations into the Canadian market.

And again, bypassing those labor certifications and all that red tape to make sure that their people can get into Canada fairly smoothly. It's been a really good and helpful pathway for companies to set up new businesses and grow through into the Canadian economy. So I'm really happy to see it. We've been leveraging the CUSMA, of course. And we also have similar provisions with countries like Korea and Columbia, Peru, and Chile. What I'd really like to see is something with India. I believe that that's been in the works for many, many years. And I think that that would be a huge landmark if we can do that as a milestone in free trade agreements, particularly on the labor side. So those are my wishes going forward for any kind of free trade agreement and mobility opportunities into Canada.

Brian Morcombe:
Doreen Buksner, thank you very much. People and borders can be a big black hole. You have a great way of categorizing and resolving the complicated questions. I really, really appreciate your thoughts and input today, your vision and ideas. In the last segment of this podcast, we want to tie these ideas together and talk about tax trends. The global tax environment is undergone significant change in the past few years with the advent of U.S. tax reform, base erosion, profit shifting and countries adopting carbon reduction in green initiatives. Hetal, as a partner that is heavily engaged in international tax matters and multinational transactions. Can you touch on some key trends that you see emergin

Key Tax Trends
Hetal Kotecha:
Thanks, Brian, a pleasure to be here this morning. Canada's does not have federal budget for almost two years. Our next federal budget will be tabled on April 19th, the Canadian government's inability to table a budget. And the immediate focus on implementing COVID-19 measures, designed to support businesses and individuals has resulted in delays and implementing Canada to the international tax reforms. That being said, a number of global trends and taxation have emerged which some of my colleagues have discussed in previous podcasts, such as the new sales tax reforms and adoption of BEPS measures, et cetera. The COVID-19 pandemic along with the enormous health and social toll is expected to result in one of the steepest economic decline since World War II. It's not questionable that tax policy issues will play an important role in building a more resilient and stable economy. However there is a delicate balance, any tax legislation designed to increase tax revenues and pay for fiscal stimulus and repay national debt, must take a balanced approach to driving economic growth.

In recent months, we have seen two major countries increase with proposed tax rate increases. For example, the UK has already confirmed an increase in the corporate tax rate from 19% to 25% with effect from April 1st, 2023. The Biden administration has also originally proposed increasing the federal tax rate from 21% to 28%, which is sort of a reversal to some Trump's policies, along with a host of other measures, such as minimum book tax, reform of certain international measures have all have an impact of increasing the effective tax rate. It is conceivable that other major countries including Canada, may look to do the same. For example, Canada could increase the tax rate or the effective tax rate in Canada, by increasing the inclusion rate on capital gains. In addition, the liberal government has also proposed limiting the way interest is tax deductible in Canada.

For example, there is a proposed limit, to limit interest deductible based on 30% of EBITDA, based on various exceptions and other criteria. I also want to touch on some things on global supply chain, as previously mentioned, an important change playing out in numerous countries around the world is increasing pressure to onshore global supply chains, thereby reducing globalization and potentially increasing the opportunities for trade disputes. Recent U.S. tax and trade prejudice are prime examples of this. Even under the Biden tax proposals, there are a number of measures to encourage domestication of manufacturing through various incentives. These include a manufacturing community's tax credit that promotes revitalization, renovating and modernizing existing and recently closed facilities and expanded credits that turbocharged growth in domestic manufacturing. Proposals also include providing a 10% advanceable credit to companies that make an investment in domestic manufacturing by revitalizing closed factories, retooling existing factories, on-shoring production to the U.S. or increasing manufacturing wages.

Other measures include the creation of an opportunity zones for economic distress areas within the U.S. and other targeted measures. We don't see much evidence of this in similar countries, such as the EU, and they don't have a main EU concept, that being said, the EU is evaluating the merits of a carbon border adjustment tax, designed to act like a tariff on non-EU manufactured goods that come with a higher carbon footprint. While this problem achieves an environmental objective, it may also encourage foreign manufacturers to realign some of their global and manufacturing options to be closer to market. It's unclear if Canada will consider similar measures Brian.

Brian Morcombe:
And interesting point about the cost of carbon impacting supply chain structures. It's not dissimilar from Charmaine's comments about the cost of surtaxes, forcing evaluations of purchasing, manufacturing and selling models. And actually taking that even a step further, hearing your comments about how manufacturing wages are going up, how that works its way into CUSMA and making sure that unique to country of origin requirements. Very interesting stuff. So along those same lines, what are some global trends you've seen in response to governments encouraging more investments in the green economy?

Global Trends
Hetal Kotecha:
Sure. Thanks, Brian. As you may be aware, global tax reform is being significantly influenced by increasing social environmental consciousness. Commonly referred to as the green new deal. Governments are designing tax policies that encourage companies to invest in cleaner technologies and products and services that reduce the environmental risks and minimize pollution and resource use. Well such trends were already taking place before COVID-19, many governments aspire to the green led economic recovery, which will entail spending fiscal stimulus on renewable energy and other clean technologies to create jobs while addressing climate change. To support a post pandemic recovery, it's undeniable that many countries will tie the provision of state aid and other tax benefits at least to some degree, to expanding renewable energy and other clean technologies. For example, take the case of France, which recently announced plans to spend a hundred billion euros with more than one third charted to promote green energy policies.

Governments will also impose punitive tax that discourage carbon emissions. Well such tax policy will be put in place to encourage certain social and other behavioral changes. It is also expected that such measures will have the intended impact on increasing tax revenues. From a tax policy perspective, several trends are emerging in response to these green new deals. These include increased pressure to remove subsidies for fossil fuels, increased pressure calls for a more robust tax on carbon and greater emphasis on more regionally focused supply chains. Multinational corporations need to be aware of these changes so we can better plan to meet their climate commitments and understand how demands placed upon them could increase environmental regulation and green based taxation could impact their business model. As previously mentioned, one of the themes from the global pandemic has been supply chain disruption. Even before COVID-19 restructuring global supply chains was underway.

And some of this was prompted by the trade discussion that we previously had. Non-tax and non-commercial factors such as the 2016 Paris Climate Agreement, together with increasing environmental regulations were compelling multinational enterprises to move towards close to source supply chain arrangements. One fall out of the COVID 19 pandemic has resulted in many multinational companies identifying critical weaknesses in their supply chains, causing them to reevaluate their current business models. And in some cases reevaluate their international structures, while it's certainly true that increased environmental regulation was encouraging these multinational companies to bring products and services closer to the end customer. Tax policy decisions were both pre and post COVID have also encouraged more regionable domestication. For example, in response to COVID-19, Japan earmarked 2.2 billion of its economic stimulus package to help manufacturing companies shift production out of China, due to the COVID-19 disruption. Several governments have also adopted unilateral measures to encourage domestication of supply chains.

A good example of this is U.S. tax measures, requiring GILTI and other measures. These provisions were designed to encourage the shifting of income outside of the U.S. historically, but based on these new green U.S. tax reforms, they encourage U.S. multinationals to onshore a supply chains closer to the market. Now, as a final concluding comment, reorganization or on shoring of supply chains to meet environmental and other commercial commitments raise several interesting tax issues. For example, multinationals, we need to consider what business processes and functions are moving, including people, along the implications for intellectual property, patent protection and overall taxation of profits.

Brian Morcombe:
Thanks Hetal, many businesses just aren't giving consideration to these costs as part of their planning, decision-making. If there's one takeaway from your comments and Doreen and Charmaine's comments, it's the old adage that an ounce of prevention is worth a pound of cure here I think. So whether you're faced with the movement of goods over borders, people between countries or the cost of taxation, as you endeavor on your international journey, make sure you have a solid strategy. You want global policy to work in concert with your business to minimize costs and remain competitive. Charmaine, Doreen, Hetal, thank you for your ideas on how to do just that.

If you haven't already done so, subscribe and tune in to the full Cross-Border Podcast Suite and hear more on BEPS and related digital tax challenges, managing your workforce during COVID and much more. I'm Brian Morcombe, coming to you from the shores of Dorset, Ontario, Canada. Stay well everyone.

The information in this publication is current as of March 29, 2021.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
Episode 07: Expanding outside of Canada and setting up business operations in foreign entities

Foreign expansion of Canadian companies and the issues that arise when Canadian companies set up business operations in foreign entities

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