Tax Discrimination and Trade in Services: The Search for Balance in Canada-U.S. Relations

The trading relationship between Canada and the United States represents the largest bilateral flow of goods and services in the world. Notwithstanding this significant trade relationship and the obligations of non-discrimination assumed under trade agreements, both countries boast tax legislation that may negatively impact the competitive position of service providers of the other country. This article examines some of these tax measures and compares the tax treatment of nonresident service providers performing services in the other country to the tax treatment of domestic service providers. The article also considers the tax treatment of the domestic entity hiring the service provider. The article begins with a short overview of the commitments made in the World Trade Organization Agreement and in the North American Free Trade Agreement with respect to non-discrimination and, in particular, to most-favourednation treatment and national treatment. The article also presents the articles of the Canada-US. Income Tax Treaty that most affect cross-border service providers, including the recently signed Ffth Protocol that will have a significant impact. Selected provisions and administrative practices of Canadian and U.S. taxing regimes are then examined as to the potential impact on the competitive position of cross-border service providers. The article ends with a proposal to remove some of the current tax obstacles for service providers supplying services between Canada and the United States, and with a brief look at the broader question of whether more enhanced tax cooperation might better serve the needs of Canada and the United States in this area. This article will be of interest to those who advise cross-border service providers as well as to those with a broader interest in how tax and trade agreements potentially affect them