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Japan shows how we could stop corporations from evading taxes by using tax

havens
There are ways that Canada could curb corporations from using tax havens to
avoid paying their fair share of taxes. The Japanese government has shown us
one way to do this.
Japan has a law called the Tax Haven Counter Measure Law. It applies to any
Japanese subsidiary in a low tax jurisdiction with a tax rate of 20% or less. Under
this law, the Japanese parent is taxed on the undistributed earnings of these
foreign subsidiaries.
In this way, Japanese companies cannot set up subsidiary companies to hold
copyrights, patents, leases, etc, in tax haven countries that then lease these
back to the parent company for a fee and thereby lower their taxable profits in
Japan.
Japan also has the concept of "Economic Logic" which is often used to deny
special treatment to companies in tax havens. Under this concept, if the
businesses could reasonably be carried on in Japan, the 'economic logic' of them
being offshore is lacking, and is hence denied.
There are a few exceptions made. For example, where the subsidiary is in a
country where the tax rate is more than 20%, the earnings can be excluded from
current taxation only if (i) the company has staff, assets, and premises to
conduct the business, (ii) the management, control, and governance is carried
out in that country, and (iii) the transactions with related parties are less than
50% of all transactions. This approach effectively prohibits shell companies while
allowing corporations to still set up legitimate businesses even in countries with
lower corporate tax rates.
Japanese multinational corporations are prevented quite effectively from the use
of tax havens by having a very simple law which was first enacted in the late
70's. Yet Japanese companies are able to compete globally. China treats its
multinational corporations in a similar way.
The Japanese corporate tax rate is in the range of 38-39%, much higher than the
US, UK, and most other OECD countries. The temptation to avoid paying this rate
of taxes would be very strong for Japanese corporations and without such a law
Japan would probably have a lot of difficulty collecting what was rightfully due.
Although the combined federal and provincial corporate tax rate in Canada is
quite low at roughly 25%, many Canadian companies are using tax havens to
lower their Canadian taxes.
Some of the most common strategies are setting up subsiduaries in tax havens
and then selling their patents, trade marks or other intellectual property to them.
The subsidiary then turns around and leases these back to the parent company
for a substatial fee. The fee payments become an expense for the parent

company, which lowers their profits in Canada, and also the taxes due on those
profits.
Loans between parent and tax havens based subsidiary are another way to play
this game. Transfer pricing, where a commodity or good is sold to a tax haven
based subsidiary which then sells it to a final customer at a much higher price is
another commonly used strategy to reduce profits and taxes payed in Canada.
Canadian tax law tries to limit some of these practices by inisting that the "arm's
length" principle should apply to transactions between related parties and that
prices chared should be in line with what migth be charged if the contracting
parties were independent. In practice, this arm's length principle has been very
difficult to enforce. It works for commodities such as copper or wheat that are
widely traded on open markets, but has not worked very well when it is difficult
to determine a fair price such as for drug patents or trademarks.
Japan has shown that there are better ways to effectively limit corporate tax
avoidance using tax havens. What is lacking is the political will to stand up to
corporate tax abuse.