Bank of America

Commentary

Many people in the US consider Canada to be their 51st state. It often comes as a surprise to MNCs which operate there that this is not the case: in fact, Canada can present surprising challenges for businesses. Not only are there two official languages – and French is often mandatory for dealing with the government in Quebec - but laws and regulations can vary significantly across the thirteen provinces and territories. And, of course, the US is not all plain sailing for non-US MNCs, but that is a different discussion……

In this call, peers focused on two areas where they found Canada to be challenging:

• Cheques: Canadian businesses are even more addicted to this payment instrument than their neighbours to the south – and the cutoff times are not always helpful. Most peers have established lockboxes: all the banks offer this service, but some peers still physically carry the cheques they receive to their banks.
• Cross border cash pooling: this presents potential issues, as Revenue Canada can reclassify cross border payments as deemed dividends, in the absence of convincing proof to the contrary. The standard withholding tax on dividends is 25%, though tax treaties with most developed nations reduce this to 5% or 15%. It can be material.

From a banking point of view, most peers are able to use their global relationship banks to satisfy their needs: HSBC exited in 2024; Citi, JPMorgan and Bank of America were mentioned, but are not necessarily present everywhere. Foreign ownership of Canadian banks was restricted until 1989, and Canadian banking regulations are still quite stringent.

The discussion about the deemed dividend rule was lively and not conclusive. Most banks are happy to provide cross border cash pooling, but, as always, they are not prepared to offer tax advice – they are particularly reluctant to do so here. This has led several peers to either suspend their cross border pools, not implement them, or use workarounds. CompleXCountries does not provide tax advice, either: the following is a summary of the discussion, supplemented by Google searches. Any MNC implementing or managing a cross border pool should seek direct professional tax advice.

• In the absence of solid evidence to the contrary, Revenue Canada can consider a payment to an affiliate outside the country to be a deemed dividend, and levy the applicable rate of withholding tax (WHT). For most peers, tax treaties would reduce this to 5% or 15%, depending on the country and ownership percentage.
• This rule is not unusual..........

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Topics covered include:

• Bank relationship strategy in Latin America
• Balancing global and local banking models
• Managing credit lines and wallet allocation
• Bank market exits and entries
• Service levels, pricing and appetite
• Tax payments
• Foreign exchange
• FX documentation and use of proprietary platforms
• Financial transaction taxes and tax payment processes
• Payroll 
• Brazil’s forthcoming tax reform and operational implications

International Banks discussed in the report include:

Bank of America, BBVA, Bradesco, Citi, Itaú, JPMorgan, Santander, Scotiabank, Deutsche Bank, BNP Paribas & HSBC

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• Changes to IOF tax and its impact on FX, loans, and domestic cash structures
• FX transaction practices 
• Cross-border funding and capital structure considerations
• Potential introduction of dividend withholding tax
• Viability of including Brazil in a notional pooling structure under new rules
• Use of boletos and e-boletos for collections
• Adoption and growth of the Pix payment system
• FX hedging, interest rates and BRL volatility
• Use of structured products and offshore hedging
• Investment of surplus cash
• Payroll practices 
• Tax payments
• Working Capital Finance
• Bank Relationships: local vs. global banks and service levels
• Regulatory, tax and operating environment in Brazil

Service providers discussed  in the full report: Bradesco, Itaú, Banco do Brasil, Santander, Citi, JPMorgan, Bank of America, BNP Paribas, Bank Mendes Gans, Deutsche Bank, BBVA, Caixa, FXall and 360T

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