Obama Administration Proposes Major Reforms To U.S. International Tax Rules

On May 11, 2009, the U.S. Treasury Department released details of a major reform to the U.S. international tax rules proposed by President Obama in connection with the Administration's fiscal 2010 budget. Many of these proposals, if enacted into law, will have significant consequences for Canadian entities with U.S. operations, earning U.S.-source income or holding U.S. subsidiaries. Most of these new rules are scheduled to come into force in 2011.

The proposals include the following:

Codifying the "Economic Substance" Doctrine – The U.S. Internal Revenue Code of 1986, as amended (Code) would be amended to clarify that a transaction would satisfy the economic substance test only if it results in a meaningful change in economic position and is supported by a substantial non-tax business purpose. If a transaction does not have economic substance, a taxpayer would not be entitled to the transaction's U.S. tax benefits.