International taxation commitment
The abusive use of low-tax jurisdictions and aggressive tax planning are a societal issue that CDPQ takes very seriously. Such tax strategies have a negative impact on public finances for governments around the world as well as on their ability to meet the needs of their citizens. CDPQ opposes all forms of tax evasion and supports the fight against the abusive use of tax rules. It takes part in international efforts to put an end to unfair tax practices in certain jurisdictions that make it easy to circumvent tax laws.
The structure of our investments is consistent with the letter and spirit of tax laws as well as OECD recommendations in connection with the base erosion and profit sharing (BEPS) initiative—the key international initiative focussing on low-tax jurisdictions. We therefore work with our portfolio companies and partners to promote action that supports the adoption of these recommendations.
As a manager of pension and insurance funds, CDPQ is not taxed on the returns generated by the vast majority of our assets. However, when investing, we carefully examine the tax rate for our investments in different jurisdictions. By relying on internal and external expertise, best practices that are seen and discussed in the industry as well as statements by governments and international organizations such as the OECD, we have developed objective, stringent and robust criteria that we apply when doing our due diligence.
This analysis allows us to assess the proposed transaction structure and influence our partners to avoid using low-tax jurisdictions when there is no legitimate business or legal reasons to do so and to ensure that no undue tax benefits are derived which could ultimately lead to CDPQ’s decision not to invest.
There is currently no global consensus regarding what defines a low-tax jurisdiction. That is why there continue to be significant differences between the reference lists made public by the various organizations and jurisdictions.
Given that there is no broadly accepted or internationally agreed upon list of low-tax jurisdictions, we have established a list of jurisdictions for which any new investment must be carefully analyzed. This list is updated periodically in light of legislative developments or positions taken by various international organizations recognized as having expertise in this area.
A list of countries is not an end in itself. Companies domiciled in countries that could be considered low-tax jurisdictions pay income taxes while other companies domiciled in countries not on these lists can pay very little tax.
That is why CDPQ considers it important to broaden the analytical framework to focus on overly aggressive tax planning rather than being limited to a list of countries to ensure that assets are being managed in a sustainable manner.
The criteria developed by CDPQ with regard to international taxation have been incorporated into the investment process, making it possible for teams to use a structured approach.
Investments must be subject to a consolidated tax rate of at least 15%, no matter where the investment is made. This rate is a generally recognized threshold under which companies may be suspected of employing abusive tax practices. Most companies that meet this criterion generally pay income tax in the countries where they carry on most of their operations.
CDPQ ensures that the structure or partnership are consistent with the BEPS initiative guidelines, when taking part in investment funds or platforms created to support the relationship with partners. In particular, these guidelines provide that an investment structure should not confer on the investor a tax benefit that would not have been available had the investment been made directly.
CDPQ places considerable importance on this, since funds with hundreds of international investors are often incorporated in low-tax jurisdictions. There are legitimate business reasons for these structures. Most notably, they are used to support the relationship and structure between investors rather than being created for tax-avoidance purposes. In fact, the companies in which the fund invests pay income tax where they operate while investors in the fund pay income tax on the returns that they receive.
When there is a limited number of investors, CDPQ may sometimes influence its partners, encouraging them to achieve their business objectives by setting up structures outside of the low-tax jurisdiction.
However, when a fund has many co-investors, CDPQ generally has very little influence in terms of the choice of jurisdiction where these investment funds are originally incorporated. CDPQ derives no tax benefits in these situations.
The issue of abusive use of low-tax jurisdictions or aggressive tax planning is important to many public and private sector stakeholders and requires considerable collaboration. By using our influence to support international efforts and our investment process, which includes best practices, we want to take a clear leadership role and meet all of our obligations.