The Limits of Sovereign Immunity: A Study and Analysis of the Canadian Income Taxation of Sovereign Wealth Funds
Podolny, Michael, University of Toronto Faculty of Law Review
I. INTRODUCTION II. DEFINING SOVEREIGN WEALTH FUNDS i. The Question of Pension Funds III. CURRENT CANADIAN TAX TREATMENT OF SWFS i. What Could be Taxed? IV. CURRENT TAX TREATMENT IN U.S. AND OECD PRONOUNCEMENTS i. The United States ii. Integral Part vs. Controlled Entity iii. What Could be Taxed iv. OECD V. TAX TREATIES i. Why are Treaties Important? VI. POLICIES UNDERLYING CURRENT RULES i. Comity and the Doctrine of Sovereign Immunity ii. Reciprocity iii. Economics VII. POPULAR CRITIQUES AND CALLS FOR REFORM i. Removing Tax Exemptions ii. Maintaining the Status Quo VIII. EVALUATION AND RECOMMENDATIONS i. Equity ii. Neutrality iii. Administrative Efficiency iv. International Competitiveness v. Recommendations IX. CONCLUSION
As news of deep government deficits occupies major headlines in North America, it becomes easy to forget that not all public entities are deep in debt and in dire need of financing. In fact, several countries around the world are flush with excess cash and continuously seek out profitable investment opportunities. Be it due to the desire for diversification, political influence, or profit Sovereign Wealth Funds (SWFs) have become the investment tool of choice for several cash-rich governments. Although, due to the obvious lack of transparency associated with foreign government financial dealings, exact figures are difficult to compute, estimates have placed the global amount of assets under management by SWFs between $2 trillion and $3.7 trillion at the end of 2007. (1) Naturally, today some of the largest SWFs are controlled by governments of 'developing' nations in Asia, Middle East and South America, while their investments reside in the more stable 'developed' economies of North America and Europe. Canada, much like the United States, thus finds itself in the interesting position of providing an attractive investment environment for SWFs. (2) Canada now faces the burden of configuring an effective taxation scheme--one which addresses direct investment in private assets by foreign government-owned investment vehicles.
While a variety of difficult issues confront tax policy makers with regards to multi-national corporations, their complexity is compounded by the additional considerations of interjurisdictional immunity and comity which accompany dealings with foreign governments. Although guidelines for the management and operation of SFWs, the Santiago Principles, have been compiled through international cooperation, no equivalent principles have yet come to fruition regarding the appropriate taxation of these investment vehicles. (3) Instead, as the situation stands right now, each country has adopted a unique method of confronting the taxation of foreign government investments. Consequently, under the domestic laws of most developed countries, including Canada and the United States, SWFs enjoy preferential tax treatment over private multinationals with regard to certain investments. (4) Furthermore, tax treaties between nations may address the taxation of public entities and, accordingly, allow for a different set of perks to be enjoyed by SWFs. (5) As a result of such a complex mosaic of tax laws found in each country, few are able to effectively navigate and decipher the relevant tax rules and their underlying policy considerations regarding SWFs.
This paper therefore aims to inform professionals and lawmakers, and fill a void in the current academic literature, by summarizing, critically assessing and making recommendations regarding the future of the Canadian taxation regime for Sovereign Wealth Funds.
SWFs are introduced and defined in Part II. Their current treatment under Canadian tax law is described in Part III. Part IV surveys the equivalent tax rules pertaining to SWFs in the United States of America and the relevant pronouncements by the Organisation for Economic Co-operation and Development (OECD). …