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Canada & USA Tax Treaty Research Paper

Tax Planning -- Employer (II of II) Tax Planning - Employer

The marketplace that businesses operate in has become more and more globalized and international in nature, not to mention extremely competitive. This particular report will focus on the employer and their tax implications when it comes to operating and/or headquartering in one or more countries around the world. The prior report focused on the employee. While the implications for the employee are complicated and diverse enough, they become even more complicated when speaking of the employer, and for a number of reasons.

Considerations

Just as there were a number of considerations relevant to the employee and their tax treatment, there are a number of tax considerations that USCo will need to consider for themselves and they are as follows:

The actual headquarters location (nation, state/province and county/city)

The actual locations outside of that home country (or state and city) for USCo.

The country or countries from which the employees come from given that many taxes are driven by where the employee lives in work but are paid by the employer (e.g. unemployment taxes, employer share of Social Security or similar taxes, etc.)

The country or countries that employees work in, and for the same reasons mentioned in the last bullet point.

Where the goods manufactured are sold

Where the goods manufactured are made

Where the raw materials and lesser parts of the goods manufactured come from or are manufactured (e.g. many companies get the raw goods or smaller parts from one country and do the assembly in another)

The supply chain and logistics of all of the above

The movement and relocation of employees for all of the above

The obligations of an employer operating in Canada actually run two-fold. First, employers have a burden to withhold all proper taxes for all of their employees that work in whole or in part in Canada, not unlike the same sort of rule that exists in the United States. For example, United States employers must withhold federal withholding taxes consistent with a submitted W-4 and/or IRS orders beyond/instead of that, must withhold Social Security and Medicare, must withhold tax levies, child support and other similar orders and must remit any monies withheld and the associated paperwork to the proper taxing authorities. It is then the employee's responsibility to square things up with the one or more countries that they lived or worked in within a given jurisdiction (IRS, 2014). The taxing authorities in Canada work in a similar fashion. Wages earned in Canada are typically taxed by Canada but any double jeopardy is typically alleviated in whole or in part by the tax treaty that the United States and Canada have had (and amended at times) from 1980 to the present (IRS, 2014; Canada, 2014).

The other burden employers must shoulder is the taxes that they owe as a business. The taxes that are owed by USCo to the United States or Canada depends on a number of factors. The three main ones are where employees are working, where the goods are manufactured and where they are sold. Goods manufactured in Canada or the United States and sold elsewhere (or two the other of the two) are treated differently than if the goods are treated/handled in the inverse way. Where USCo is headquartered (the United States) will certainly have a bearing on the taxes that USCo pays. Unfortunately for USCo, so long as USCo is based in the United States, there are taxes that will always be paid on all income and this holds true even if the goods are not transported within, manufactured or sold in the United States. The fact alone that USCo is based in the United States mean that some income, regardless of its source or where it goes thereafter, must be taxed. The IRS has taken a very dim view of income being made overseas with no taxes being paid and/or having the money sheltered overseas. Countries where money has been hidden, and the Internal Revenue Service is well aware of this, include Switzerland, the Caymans, Lichtenstein and a few other places (IRS, 2014).

A recent crackdown occurred with Swiss bank accounts as the United States and the IRS told Swiss bank UBS (and others) that they would no longer be able to operate and exist within the United States if they did not pay their taxes or helped any of their customer do the same. This is perhaps a law or set of laws that needs to be changed in the sense that USCo probably does not wish to pay taxes for income not earned in the United States in any way shape for form. However, until or unless those laws change, the only real recourse...

In the meantime, USCo needs to remain compliant with all relevant corporate tax laws even if they are not all that fair or equitable including as compared to other countries that regulate (or do not regulate) the same activity (Bachmann, 2009).
To minimize tax exposure, USCo needs to consider several different things and take several distinct actions. First, the overall movement and relocation of employees should be kept to a bare minimum. This can be facilitated by employing a lot of the locals in Canada rather than using employees from the United States. At least a small contingent of United States executives and employees is necessary to preserve continuity and so forth. However, the workforce in Canada is quite educated and adept as compared to the United States and USCo can make heavy use of that. This allows for less international tax implications (although the corporate taxes will be fairly unchanged for the reasons mentioned before) due to the higher amount of simplicity and ease in operations since people do not need to be expatriated, repatriated or otherwise shuffled around due to cultural and societal issues. Further, Canada and the United States directly border each other and most people in Canada live along or very close to the United States border with several cities such as Toronto, Montreal and a few others containing a vast majority of the populace. That all being said, the overall population of Canada is not all that large so finding qualified personnel may be a challenge in some areas (Canada, 2014).

Conclusion

In the end, Canada is close enough to the United States geographically, socially, politically and culturally that both countries and all of the employees involved can benefit greatly from a symbiotic relationship. The tax and wage/hour laws are a bit antiquted and it would serve both countries greatly to at least work out a better solution between the two of them given their proximity and reliance on each other (especially Canada's reliance on the United States). However, there is enough potential and positive energy involved so as to assist and help USCo succeed both domestically in the United States as well as in Canada.

Executive Summary

It is no mystery that the corporate tax rate in the United States and the fact the United States feels entitled to a cut of all income a company makes even when no part of it is made in the United States is a little short-sighted and unequitable. However, Canada's close proximity to the United States and its people affinity and closeness to the same despite it's rather large size can be wielded to USCo's advantage from a tax and operational standpoint. If USCo is going to get double-taxed for income, it might as well be between two countries that are very closely match and close together physically. USCo should push for tax reform through contacting elected officials and the use of political advocates and lobbyists. While there is a quite negative viewpoint being extended towards employers as it relates to avoiding taxes (legally) and relocating corporately to do the same, these events are being attempted and considered for a reason and it is because the laws are not fair or equitable for USCo and other employers who happen to operate internationally.

USCo should never argue against withholding taxes and other required sums from employees consistent with the employee's wishes or, as is applicable, the requirements of the law. Some tax withholdings that USCo are required to pay are somewhat flexible while others are failry fixed and inflexible in nature. USCo should operate as they can to minimize tax burdens and push for reform but doing so in the wrong way can cause a backlash from the public and/or politicians. Just recently, there was some chatter that Burger King would relocate corporately to Canada to save money but the reaction to that was swift and wilting (Hernandez, 2014). USCo should heed the warnings and act with caution.

References

Bachmann, H. (2009, August 20). Can Swiss Banks Thrive After the UBS-U.S. Deal?

Retrieved December 3, 2014, from http://content.time.com/time/business/article/0,8599,1917648,00.html

Canada. (2014, December 3). Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)).

Retrieved December 3, 2014, from http://laws.justice.gc.ca/eng/acts/I-3.3/

Canada. (2014, December 3). Common menu bar links. Retrieved December 3, 2014,

from http://www12.statcan.gc.ca/census-recensement/2006/as-sa/97-550/p3-eng.cfm

Hernandez, S. (2014,…

Sources used in this document:
References

Bachmann, H. (2009, August 20). Can Swiss Banks Thrive After the UBS-U.S. Deal?

Retrieved December 3, 2014, from http://content.time.com/time/business/article/0,8599,1917648,00.html

Canada. (2014, December 3). Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)).

Retrieved December 3, 2014, from http://laws.justice.gc.ca/eng/acts/I-3.3/
from http://www12.statcan.gc.ca/census-recensement/2006/as-sa/97-550/p3-eng.cfm
Retrieved December 3, 2014, from http://theweek.com/article/index/267508/4-
2014, from http://www.irs.gov/Businesses/Income-from-Abroad-is-Taxable
IRS. (2014, December 3). Employment Taxes. Retrieved December 3, 2014, from http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employment-
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