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This article discusses the policy aspects of the March 2007 federal budget proposals and the May 2007 revised proposals concerning the deductibility of interest expense relating to certain foreign investments. It also provides an overview of recent developments concerning the measurement and taxation of foreign income in a number of other countries. Readers should note that this article was submitted for publication in mid-September 2007. Soon after, on September 21, 2007, the Canadian and us governments concluded their negotiations on the fifth protocol to the Canada-us income tax convention, which will amend the treaty provisions on source-country taxation of certain interest income. Then, on October 2, 2007, the Department of Finance released draft legislation to implement the new interest deductibility rules, followed by a notice of ways and means motion tabled in the House of Commons on November 13, 2007. These developments are noted but not discussed in detail in the article. [ABSTRACT FROM AUTHOR]

In the federal budget presented to the House of Commons on March 19, 2007, Finance Minister Jim Flaherty proposed to effectively eliminate the ability to deduct interest on borrowings relating to investments in foreign affiliates. In response to widespread criticism, on May 14, 2007, Minister Flaherty announced a substantially revised and more narrowly focused interest denial rule. The revised proposal, referred to as the anti-tax-haven initiative (ATHI), has as its primary objective the prevention of "doubledipping"--the generation of two (or more) interest expense deductions in respect of one investment. The authors of this article examine the mechanics of the ATHI, including its practical limitations, and explore issues concerning the future integration of the ATHI with the foreign affiliate regime and other provisions of the Income Tax Act. [ABSTRACT FROM AUTHOR]

The Canadian federal budget of March 19, 2007 proposed to deny deductions for interest on funds borrowed by Canadian taxpayers to invest in foreign affiliates. On May 14, 2007, the finance minister announced a much narrower measure that would limit the denial to situations where a Canadian borrowing is part of certain cross-border financing structures-so-called double-dips. In this article, the authors comment on the economic impact of outbound investment, as well as technical issues and problems that can be expected to arise under the government's proposal. The authors argue that any limitation on interest deductibility should be considered in the context of a broader initiative that seeks to achieve greater neutrality between businesses, and at internationally competitive Fax rates. A comprehensive domestic thin capitalization rule is recommended as an alternative to the government's proposal, to limit excessive debt leveraging in Canada in respect of both inbound and outbound investment, and also to address Canadian debt dumping by foreign investors and leveraged buyouts of Canadian businesses. Businesses maintaining reasonable levels of debt financing in Canada would not be penalized. The authors also argue that high Canadian corporate income tax rates attract debt to Canada and discourage Canadian domestic investment, and that any proposal to restrict interest deductibility should be linked with significant reductions in Canada's corporate tax rates. [ABSTRACT FROM AUTHOR]

The US earnings-stripping rules may soon be tightened to severely restrict the amount of interest that may be deducted by us corporations with related foreign creditors and related foreign guarantors. Taxpayers and their advisers should be mindful of the proposed changes when structuring new investments into the United States. [ABSTRACT FROM AUTHOR]

The proposed changes to the interest-stripping rules of Internal Revenue Code section 163(j) included in last session's Thomas bill were not enacted. Yet Congress and the Bush administration appear intent on tightening those rules, as wells as blocking inversions, repealing export incentives, and easing subpart F inclusions. [ABSTRACT FROM AUTHOR]