18 September 2002 External T.I. 2002-0153395 - Foreign Tax Credit - Art. 21 China Treaty

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether, for Canadian foreign tax credit purposes, the amount of Chinese tax in respect of royalty payments received by a Canadian resident corporation is deemed to be 15% of the gross amount of the payments regardless of whether the Chinese tax may have been exempt or reduced under certain Chinese legislation described in subparagraph 2(a), 2(b), 2(c) and 2(d) of Article 21 of the Canada-China Income Tax Agreement?

Position: Yes.

Reasons: Interpretation of the law.

XXXXXXXXXX 2002-015339
S. Leung
September 18, 2002

Dear XXXXXXXXXX:

Re: Foreign Tax Credit and Article 21 of
the Canada-China Income Tax Agreement (the "Convention")

We are writing in reply to your letter of July 17, 2002, in which you requested our confirmation of your interpretation of paragraph 2 of Article 21 of the Convention with respect to the amount of foreign tax credit that Canada would provide to a Canadian resident corporation which receives royalty payments for technical know-how from a person resident in the People's Republic of China ("China"). Your interpretation is that even though Chinese taxes with respect to royalty payments are exempt or reduced by virtue of certain legislations of China described in subparagraphs 2(a), 2(b), 2(c) and 2(d) of Article 21 of the Convention, Canada is obliged to provide a foreign tax credit for such taxes to the extent of 15% of the gross payments of the royalties pursuant to clause 2(e)(III) of Article 21 of the Convention.

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving an identifiable taxpayer. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments.

Paragraph 2 of Article 12 (Royalties) of the Convention provides that a Contracting State (in this case, China) in which the royalties arise may tax the royalties if the recipient who is a resident of the other Contracting State (in this case, Canada) is the beneficial owner of the royalties but the tax so charged cannot exceed 10 per cent of the gross amount of the royalties. Paragraph 3 of that Article provides a definition of "royalties" as used in that Article.

Paragraph 2 of Article 21 (Elimination of Double Taxation) of the Convention states, in part, as follows:

"For the purposes of paragraph 1(a), tax payable in the People's Republic of China by a company which is a resident of Canada shall be deemed to include any amount which would have been payable as Chinese tax for any year but for an exemption from, or reduction of, tax granted for that year or any part thereof under any of the following provisions of Chinese law:

(a) ...

(b) ...

(c) ...

(d) ...

(e) For the application of this paragraph, the amount of Chinese tax shall be deemed to be:

(I) ...

(i) ...

(ii) ...

(II) ...; and

(III) in the case of royalties 15 per cent."

Therefore, provided that the payments received by the Canadian resident company are "royalties" as defined in paragraph 3 of Article 12 of the Convention and would be subject to tax in China if not for the exemption from or reduction of tax provided under the laws of China described in subparagraphs 2(a), (b), (c) or (d) of Article 21 of the Convention, we confirm that, for Canadian foreign tax credit purposes, the amount of Chinese tax deemed paid by the Canadian resident corporation would be 15% of the gross amount of the royalties received by the corporation, notwithstanding that the actual Chinese tax paid may be 10% or less.

Other Comments

We offer no comments as to the applicability of subparagraph 2(d) of Article 21 of the Convention to Article 19 of the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises referred to in your letter. It should be noted that, in order for subparagraph 2(e) of Article 21 of the Convention to apply, a provision of the law of China, other than one described in subparagraphs 2(a), (b) or (c) of that Article, must be agreed by the competent authorities of the Contracting States to be of a substantially similar character as those referred to in those subparagraphs.

As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinion expressed in this letter is not a ruling and is consequently not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

??

- 3 -