Examining Policy Options for the Taxation of Outbound Direct Investment

The Department of Finance (Canada) appointed an Advisory Panel on Canada's System of International Taxation (the 'Advisory Panel') to review and recommend changes to Canada's international tax regime. This report provides background research to assist the Advisory Panel with its deliberations. More specifically, the objective of this report, provided by the Advisory Panel, is to identify and assess options for accessing a broader or full exemption tax system with regard to the taxation of outbound direct investment. Part 2 provides a general assessment of advantages and disadvantages, discussed within the academic and policy literature, of the two main approaches to taxing outbound direct investments: worldwide and exemption tax systems. Part 3 discusses the rules for taxing outbound direct investments in ten selected countries - the United States, the United Kingdom, France, Germany, Italy, Japan, Australia, Sweden, the Netherlands, and Hong Kong. Part 4 offers a general assessment of the policy impact if Canada reformed tax laws and policies so that all foreign source active business income is exempt from Canadian tax. Part 5 concludes with a brief discussion of possible reform approaches.