Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
File # 980118
XXXXXXXXXX
Dear XXXXXXXXXX:
Thank you for your letter of December 19, 1997 concerning amounts paid to foreign governments under production sharing contracts.
Mr. Hiltz of this Branch first met with XXXXXXXXXX, tax managers from other companies and officials of the Department of Finance in the spring of 1997 to discuss this issue. Since that meeting, officials of both Departments have met on several occasions, the most recent being May 27, 1998, to consider different aspects of this problem.
I can assure you that this issue has been explored in depth by this Department. Our study indicates that the amount designated as a tax that is paid under a production sharing contract does not affect the income of the contractor or the financial position of the foreign government, as determined under the contract. Given these facts, we are concerned that no tax has been paid.
In the course of our review we have encountered a production sharing arrangement entered into with a foreign government that generated so called tax paid in an amount in excess of 80% of income. The amount of this payment in excess of the tax that would be levied on the source of income at the Canadian corporate tax rate was available to shelter other foreign source income {rom tax in Canada. This illustrates the extent to which the Canadian tax base is vulnerable to erosion by taxes ostensibly paid under production sharing arrangements.
This Department must administer the Income Tax Act in a prudent and responsible manner and we cannot accept that a tax has been paid under a production sharing contract when neither the taxpayer nor the foreign government is affected by such arrangement. Accordingly, in our discussions with the Department of Finance we recommended and continue to recommend that the Act must be amended to provide you with the certainty you seek.
Yours sincerely,
Bill McCloskey
Assistant Deputy Minister
Policy and Legislation Branch
K. Major
(957-2124)
July 8,1998
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