Given the growth of its international investments in recent years, CDPQ undertook an in-depth review of the evolution of its practices and of the global tax environment. The following statement describes the framework applicable to CDPQ in Canada and abroad, the nature of some of our investments and our commitment to the fight against tax evasion. As of 2017, CDPQ reports on its activities and commitments related to tax matters in its annual report.
- CDPQ is exempt from tax in Québec and Canada, as well as in several countries where tax exemption agreements are in place. Where such agreements do not exist, CDPQ structures its investments to limit the double taxation of beneficiaries — in other words, the majority of Quebecers. CDPQ abides by all laws and meets all of its tax obligations.
- CDPQ’s presence in low-tax jurisdictions, often referred to as “tax havens,” is primarily attributable to its investments in co-investment funds that are constituted in these jurisdictions. The use of these funds in no way affects each investor’s obligation to comply with the tax system in their own jurisdiction and to pay all taxes due.
- CDPQ supports international efforts to counter tax evasion, and leverages its position as shareholder and investor to influence the practices of the companies in which it invests.
CDPQ supports and applies the highest international tax standards. Why? Because the implementation of an effective and transparent tax framework is a necessary condition to ensure a level playing field between investors and the equitable funding of public services throughout the world.
As CDPQ’s international investments have grown substantially over the past number of years, so too have the volume and complexity of its tax obligations. Considering the above, CDPQ wishes to:
- explain its tax obligations and practices;
- encourage the adoption of effective, standardized rules; and
- influence the tax practices of companies and of the investment community.
CDPQ’s tax status in Canada and around the world
As an international investor, CDPQ is subject to the tax laws of Québec, Canada and the jurisdictions where it has offices or holds investments.
CDPQ is exempt from Québec and Canadian income tax on all of its income. Canadian pension funds, like those in the majority of Organisation for Economic Co-operation and Development (OECD) countries, operate according to the EET system (Exempt contributions, Exempt investment income and capital gains of the pension institution, Taxed benefits). Under this system:
- employer and employee contributions are exempt;
- pension fund returns are generally exempt; and
- pension benefits are taxed upon retirees receiving them.
The goal of the EET system is to support and foster retirement savings by deferring the tax payable on contributions and investment returns until retirement. These amounts are fully taxed, as a salary would be, when the retiree receives his or her benefits. As such, the EET principle is similar to the principle applicable to individual Registered Retirement Savings Plans (RRSP).
As a result of various treaties or agreements, CDPQ also benefits from tax exemption in several countries, such as the United States, France, the United Kingdom and Australia.
In jurisdictions where exemptions are not available, CDPQ seeks to structure its investments so as to limit taxes, in full compliance with applicable laws. Since pension benefits recipients cannot claim foreign tax credits, this tax planning aims at preventing CDPQ’s investment returns from being taxed twice — once in foreign jurisdictions and a second time upon the payment of benefits — a form of double taxation that defeats the purpose of the EET system.
Optimization work and the agreements signed with foreign governments aim to replicate the exemption that CDPQ is entitled to in Canada. These exemptions in no way reduce the tax obligations of the companies in which CDPQ invests, nor those of the beneficiaries of depositors’ pension or insurance plans.
As illustrated above, the exemption that CDPQ is entitled to in Canada ensures that it is not taxed on its investment returns. Tax planning and tax agreements signed with foreign governments aim to replicate this exemption in other jurisdictions. These exemptions in no any way reduce the tax obligations of the companies CDPQ invests in, which must pay income taxes on their profits. Nor does it change the tax obligations of our depositors’ pension plan members, who are required to pay taxes on pension benefits they receive.
We support international efforts to counter tax evasion and leverage our position as shareholder and investor to influence the practices of the companies in which we invest.
The case of “tax havens”
The growth in CDPQ’s international investments has expanded its presence in certain low-tax jurisdictions, often referred to as “tax havens.” CDPQ’s investments in these jurisdictions fall under three categories:
- Direct investments in companies operating and domiciled in these jurisdictions;
- CDPQ’s interest in investment funds domiciled in these jurisdictions;
- Investments, in partnership with a limited number of co-investors, in companies or funds that use these jurisdictions to structure certain investments.
The first category comprises CDPQ’s actively managed investments in companies domiciled in low-tax jurisdictions, such as Switzerland. Most of these companies operate and employ a large number of people in these countries, and pay taxes owed on their profits. This investment category does not raise any particular tax issues.
The second category consists of investments made through funds that are constituted in various “tax havens” (e.g. Cayman Islands), alongside hundreds of international investors.
Why use funds like these to invest abroad? When CDPQ invests in foreign markets, it almost always does so with partners. The co-investment vehicles offered by these types of funds are a highly effective means of sharing expertise, managing financial risk and achieving economies of scale by pooling the capital of multiple investors from all over the world.
These funds are regularly constituted in jurisdictions that are known for the efficiency of their corporate laws, the presence of specialized managers, the independence of the courts, shareholders rights regimes and a neutral taxation policy, the latter of which eliminates the risk of double taxation. The use of these funds in no way affects the obligation of each investor to comply with the applicable tax regime of their home jurisdiction and to pay all taxes due. The use of these types of funds is justified by business reasons that satisfy the new criteria of the Principal Purposes Test, or PPT, advanced by the OECD and the international community. These funds account for the largest share of CDPQ’s presence in “tax havens.”
The third and final category consists of investments, in partnership with a limited number of co-investors in companies or funds that, within the limits of current laws, use low-tax jurisdictions to structure certain transactions.
The use of these structures is justified by business reasons that satisfy the Principal Purposes Test. Because the number of investors is small, CDPQ may have influence over its partners, depending on the rights it holds, and can achieve its business objectives without having to use tax havens.
CDPQ is committed to exercising its influence with companies and its partners to persuade them to cease using tax havens for their investment activities.
One thing is clear: whether it is through its investments in operating companies, its interest in investment funds, or its use of holding subsidiaries, CDPQ abides by all tax laws and pays all taxes due in the jurisdictions where it operates.
The need to adopt effective, standardized rules
The use of “tax havens” and the related tax planning strategies is a worldwide phenomenon. While some practices are legitimate, tax havens can facilitate tax evasion. For this reason, the use of these jurisdictions must be governed by effective and standardized rules at the international level.
Major initiatives to counter tax evasion are underway, first among them being the OECD’s BEPS project. The OECD is proposing a concerted and ambitious approach to counter the abusive structures that allow certain taxpayers to unfairly reduce their tax obligations. This OECD project will fundamentally change international tax practices. CDPQ supports the various OECD and government initiatives to combat tax evasion.
Some of these changes have already come into effect, while others will be implemented over the coming years, as countries ratify the international agreements and adopt new laws.
As of 2017, in accordance with the BEPS initiative, CDPQ now produces country-by-country filings that provide more detailed information and facilitate the tax authorities’ audit work.
Influencing the tax practices of companies and of the investment community
While the responsibility for tax planning remains with the senior management of companies, CDPQ favours an approach based on engagement with portfolio companies. As part of its investment activities, CDPQ helps fight tax abuse by performing background checks and by excluding from its private investments all companies which have been found guilty of tax evasion and have not modified their practices.
As part of its investment activities, CDPQ helps fight tax abuse by performing background checks and by excluding from its private investments all companies which have been found guilty of tax evasion and have not modified their practices.
Through its votes at public companies’ shareholders’ meetings, or in discussions with management teams, CDPQ seeks to understand the taxation of the companies in its portfolio and insists on full transparency on this matter. Depending on the circumstances, CDPQ may use its status as shareholder to influence companies and voice its concerns.
Despite these efforts, we are aware that the different tax regimes in place around the world continue to allow certain taxpayers and multinationals to unduly reduce the taxes they should be paying. While numerous low-tax jurisdictions have committed in recent years to show greater transparency and collaboration, there is still room for improvement.
In the months and years to come, CDPQ is committed to playing an active role, both privately and publicly, to advance fair tax practices.
No investor or country can single-handedly eradicate abusive tax practices. The solution must include international co-operation and greater harmonization of laws. As this entails agreement among many governments, and the adoption of new laws around the world, the evolution of company practices will be gradual, and will not happen overnight.
In the months and years to come, CDPQ is committed to playing an active role, privately and publicly, to advance practices that will see all financial actors play by the same rules, in a spirit of fairness and healthy competition. This is a major, long-term undertaking that is essential to maintaining the trust of citizens in companies and governments, and to preserving fairness in our societies.
CDPQ’s approach to tax planning, risk management, compliance, governance and relations with tax authorities applies to all jurisdictions, including the United Kingdom. CDPQ’s tax strategy has been approved by its audit committee and its board of directors and is revised periodically.
CDPQ considers that this statement meets the requirements of Annex 19 of the United Kingdom’s Finance Bill 2016, which requires publication of an investor’s tax strategy for the current financial year.