Your reference The Taxation of Corporate Groups, Consultation Paper, November 2010, Department of Finance Canada

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1 Rio Tinto Canada 1188 Sherbrooke Street West Montreal Quebec H3A 3G2 CANADA T +1 (514) F +1 (514) Geoff Trueman Business Income Tax Division Department of Finance L Esplanade Laurier 17 th Floor, East Tower 140, O Connor Street Ottawa, Canada K1A 0G5 April 11, 2011 Your reference The Taxation of Corporate Groups, Consultation Paper, November 2010, Department of Finance Canada Dear Mr. Trueman Subject Submission from Rio Tinto on Consultation of Group Taxation System In November 2010, the Department of Finance issued a consultation paper on the taxation of corporate groups and is seeking to gather comments from stakeholders with a view to explore whether new rules for the taxation of corporate groups could improve the Canadian tax system. We are writing to you in response to your request and are taking this opportunity to recommend the implementation of a formal system to permit the sharing and utilization of tax losses and other tax attributes within a group of related corporations. Highlights: New system for the taxation of corporate groups should allow for the transfer of tax losses; Common parent corporation of a corporate group should include non-resident corporations; To harmonize with the current legislation and fiscal policy on loss transfer, members of corporate groups should use the current definition of affiliated corporations (ownership threshold of 50%); Canadian branches of non-resident corporations should be included as members of corporate groups; New system should permit transfer of non-capital losses, capital losses as well as investment tax credits and charitable donations. /2 Division of Rio Tinto Canada Management Inc.

2 About Rio Tinto Rio Tinto is a leading international mining group headquartered in the UK, combining Rio Tinto plc, a London and NYSE listed company, and Rio Tinto Limited, which is listed on the Australian Securities Exchange. Rio Tinto s business is finding, mining, and processing mineral resources. Major products are aluminium, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium, dioxide, salt, talc) and iron ore. Activities span the world but are strongly represented in Australia and North America with significant businesses in South America, Asia, Europe, and southern Africa. Rio Tinto s extensive operations in Canada include mining and manufacturing interests in alumina, aluminium, iron ore, diamonds and titanium dioxide; exploration; research and development centres; port and rail facilities to support various businesses, technical and sales service centres; and substantial hydroelectric power-generating facilities in British Columbia and Quebec. In addition, Canada is home to the worldwide headquarters of Rio Tinto Alcan. Background In Canada, the present loss utilization rules work well where a company s business activities operate under one legal entity. In today s global markets it is unlikely that a company s business activities are structured as such. A number of commercial reasons exist to explain the fact that businesses are operated by subsidiaries rather than divisions. These reasons include management independence, financing considerations, limited liability, regulations, minority holdings, corporate identity and labour issues. Under the present regime a corporate group that consists of a profit making company and a loss making company, will suffer cash flow burdens simply because a group relief mechanism is not permitted, unless a corporate reorganization is implemented. Such inequities reduce Canadian competitiveness in the global markets. Benefits from a New System for Taxation of Corporate Groups Over the years, almost all G7 countries have implemented a system to utilize tax losses and tax attributes within groups of related companies. Canada stands out as one of the last large countries where no such system has been formalized. We believe that to remain competitive, Canada should introduce such a system. A new system of loss transfer for corporate groups would increase Canada s competitiveness among developed countries by allowing tax losses to be applied between affiliated corporations, as it is currently possible with the majority of developed countries. Many developed countries offer some form of group relief mechanism to corporations within a related group, either by way of consolidation or group loss transfer. Countries such as Australia, US, UK and Germany are some of the many countries that have a formal mechanism in place whereby corporations may take advantage of group tax loss relief. An example of a less complex mechanism would be the UK group relief system which allows for non-capital losses to be transferred on a current-year basis between profitable and loss-making related corporations. Adopting a system based on similar concepts but with broader application should be favored by Canada. One of the most important benefits of a new system of taxation of corporate groups in Canada would be to formalize into the Income Tax Act 1 the current fiscal policy on loss transfer transactions. The new system should be flexible and simple to avoid the need to put 1 RSC 1985, c. 1, (5th Supp.), as amended (herein referred to as "the Act"). All statutory references in this paper are referred to the Income Tax Act (Canada) (the "Act"), unless otherwise noted. 2

3 in place complex tax planning. The Canadian system would limit administrative complexities and require minimal modifications to the current legislation. Furthermore, it would provide certainty to the outcome of the transaction. Another benefit that would be obtained is fairness among taxpayers. Identical business activities carried on by a stand-alone corporation, by divisions within a corporation or a corporation within a corporate group should have the same tax treatment. To the extent that the system does not permit to achieve this, competitive advantages may result for some economic entities over others. Scope and Form of a Loss Transfer System Rio Tinto is of the view that the approach Canada should favor is a system where losses (current and historical) could be transferred within corporate groups. Similar systems in other countries have proved to be very efficient while being simpler, limiting the additional compliance burden to a minimal extent. In a context where it would not be desirable to increase compliance burden for corporate groups and Tax Authorities, a loss transfer system would be more desirable than a consolidation system. Accordingly, loss transfers should be allowed between a subsidiary corporation and its parent or between subsidiaries within a group owned by a common parent corporation. The transfers should also include other tax attributes such as capital losses, investment tax credits and balance of charitable donations. As proposed in , the system for transferring losses and other tax attributes should operate through annual joint elections by the two parties. Participation in the group taxation regime should be voluntary and should permit the transfer of different portions of transferable losses/tax attributes to several transferees within the related corporate group. The balance of losses (and tax attributes) accumulated by the corporate group prior to the new system s introduction should be available for transfer as it is available under the current approach. To mitigate the impact in fiscal revenue for the governments, during the transition period, the transfer of such losses/tax attributes could be carried out over a period of 3 to 5 years. The proposed loss transfer system should not provide for specified compensation as part of the loss transfer system, but there should be no barrier to reasonable compensation if the parties to an election want to proceed to an agreement in this regard. As proposed in 1985, any compensation paid in respect of a loss transfer system would not be deductible in computing the income of the payer nor would it be included in computing the income of the recipient. Eligible Corporate Groups Under the current regime, the transfer of losses between entities 3, is permitted within affiliated persons. 4 Canada Revenue Agency s (CRA) position has been extensively documented over the past years. The reasoning and policy on loss transfer transactions can be summarized by comments issued from CRA: 2 Department of Finance, Ministerial Discussion Paper, A Corporate Loss Transfer System for Canada, Restrictions apply to losses inherited when a company is acquired by another one. 4 Canada Revenue Agency, Income Tax Technical News, No 9, February 10, 1997: A series of transactions that results in the transfer of the benefit of the losses, deductions or other amounts from one corporation to a corporation with which it is not affiliated will generally be considered to result in an abuse having regard to the provisions of the Act read as whole within the meaning of subsection 245(4). 3

4 There is a scheme to the Act, evidenced by certain provisions, including subsections 69(11) and 111(4) to 111(5.2) that restricts the claims by corporations for losses, deductions or credits incurred by a non-affiliated corporation. However, these limitations do not apply to transactions between affiliated corporations. In addition, several other provision of the Act, notably the stop-loss provisions, prevent the recognition of losses on transactions undertaken within a corporate groups. From this we can conclude that there is a scheme to the Act recognizing and accepting certain transactions between affiliated corporations as being undertaken by the same corporate group. 5 To harmonize the new loss transfer system with the current Canadian tax system, we recommend that the affiliated persons criteria as defined in section of the Act be used to determine which corporations are part of a group and which ones are not. The integration and the harmonization of the proposed new system with the current tax legislation are highly desirable in order to maintain the spirit of the Income Tax Act read as a whole. It would also permit to minimize the legislative modifications required to integrate the new group tax loss regime. We therefore support that the ownership threshold required for group loss utilization be maintained at 50%. As mentioned in Annex 3 of the Consultation Paper, 6 statistics show that the majority of corporate groups consisted of wholly-owned group members. Therefore, the impact in revenues for governments of ownership threshold of 50% rather than 80% (for example) would be minimal. Non-Resident Corporations In the context of current globalization, it is common to have corporate groups which include both, corporations resident of Canada and non-resident corporations. From a Canadian perspective, non-resident corporations that carry on business through branches are subject to Canadian income tax based on the same rules and principles used for taxing Canadian resident corporations. Dividend withholding tax rates imposed on foreign shareholders are equivalent to branch tax rates to which non-resident corporations are subject. As such, there would be limited tax leakage from the inclusion of Canadian branches of non-resident corporations in a corporate group loss transfer system. The same principle applies to the common parent corporations that should include nonresident corporations. The fact that a corporation is owned directly or indirectly by a corporation non-resident of Canada or by a corporation resident in Canada does not change the taxable status nor the amount of tax it pays in Canada. The new system should not discriminate on the basis of who is the common shareholder as the policy should apply to all taxpayers in the same manner. All the subsidiaries of a non-resident corporation of Canada form part of a group of related corporations under the Income Tax Act. Accordingly, it would only be fair to include in the definition of the common parent corporation any corporation whether is resident of Canada or not. This would reflect what the current system permits as there is no requirement for a common Canadian parent company to allow for loss utilizations as the present affiliated persons criteria includes Canadian companies owned by a common foreign shareholder. 5 Canada Revenue Agency, Income Tax Technical News, No. 30, May 21, Department of Finance Canada, The Taxation of Corporate Groups, November

5 Fairness amongst taxpayers is an important tax policy objective. In the context of a loss transfer system, fairness also requires looking at different types of corporate groups. Consequently, members of a corporate group ultimately owned by a corporation non-resident of Canada should be treated the same way as a corporate group ultimately owned by a Canadian corporation. Inclusion of non-resident corporations in the definition of common parent corporation would further increase competitiveness of the Canadian tax system. Provincial considerations As described in the Consultation Paper of November 2010, some provinces have raised concerns about the utilization of tax losses within corporate groups, which may affect provincial tax bases and the interprovincial allocation of income. However, under the current system, a corporate group has or can enter into loss transfer transactions using existing techniques (generally involving reorganizations or other transactions). Accordingly, provinces should be indifferent to the new system since it would only formalize the current system. A harmonized federal and provincial loss transfer system is highly sought since provincial income tax is computed similarly to federal income tax. Provinces should be convinced to buy into the new system, as implementing it without the inclusion of provinces, would put the Canadian tax system in an even less competitive position vis-à-vis its global counterparts. Conclusion In order to become globally competitive and provide sustainable long-term economic growth to Canadian companies the Federal and Provincial Governments should support a group loss transfer regime. The implementation of such a regime would not increase the overall tax compliance burden for both the companies and the Tax Authorities. The implementation of a group tax loss regime would also permit businesses to structure in the best form required for commercial reasons and provide certainty of the tax outcome for the Canadian corporations taking advantage of the group tax loss transfer regime. Respectfully submitted, Jocelin Paradis Head of Tax Canada 5