Canada is clamping down on off-shore tax shelters used by private-equity funds, in a move that may curb investment in the oil and gas industry by KKR & Co. and Blackstone Group LP.
The government has given private-equity firms and other interested parties until April 11 to respond to proposals tucked into the February budget that would curtail energy and mining deals by denying tax benefits to foreign investors setting up holding companies in countries such as the Netherlands, Luxembourg and the U.K. to capitalize on friendly tax treaties. As the 60-day deadline for comments approaches, opposition by private-equity firms has increased, according to lobbyists working on their behalf.
“This would have a damping effect on new investment coming in,” said Albert Baker, a partner at Deloitte LLP, the Canadian unit of Deloitte Touche Tohmatsu Ltd. “This creates a barrier that wasn’t there before.”
The move is part of a global crackdown on tax avoidance following Europe’s sovereign debt crisis. The Organization for Economic Cooperation and Development committed to fast track proposals to stamp out tax evasion and treaty shopping it presented under the base erosion and profit-shifting project at the Group of 20 meeting in Sydney in February.
“Foreign investors have relied on those treaties and used those treaties as the basis for transactions in energy and resources for decades,” said Matias Milet, a tax partner at Toronto-based law firm Osler, Hoskin & Harcourt LLP. “If Canada adopts this it will affect the overall returns for foreign investors and so could make Canada less attractive.”
Blackstone used Luxembourg as the base for a holding company it created with Houston-based Alta Resources LLC called Alta Energy Luxembourg S.a.r.l, to drill for natural gas liquids in the Duvernay formation in Alberta. Chevron Corp. agreed in August to buy the Duvernay assets for an undisclosed amount.
Peter Rose, a spokesman for New York-based Blackstone, declined to comment on the choice of Luxembourg as the location for the holding company and on the finance ministry’s proposal. Leif Sollid, a spokesman for Chevron Canada, didn’t respond to phone and e-mail messages. Jennifer McCarthy, chief operating officer of Alta Resources, didn’t return a phone message.
KKR, the private-equity firm run by Henry Kravis and George Roberts, opened its first Canadian office in Calgary in March to invest in energy firms.
Firms such as KKR and Warburg Pincus LLP are looking to Alberta’s oil patch, partly because they have enjoyed such low taxes. The so-called anti-treaty shopping rule that the Canadian government is proposing may change how investors view the country, said Douglas Richardson, a Calgary-based partner in the tax group at Stikeman Elliott LLP.
“The anti-treaty shopping rule is significant for foreign private-equity firms,” Richardson said. “I expect that due to the passage of time, they have come to realize that this could very well affect their investments in Canada and perhaps even their investment decisions.”
Jeffrey Smith, a spokesman for Warburg Pincus, declined to comment, as did KKR spokeswoman Kristi Huller.
Profits made by foreign private-equity firms on investments they’re exiting either through an initial public offering or a sale would be subject to Canadian tax on capital gains, effectively 12.5 percent, compared with an exemption in certain treaty countries, Milet said.
Multinational firms that use offshore vehicles based in treaty countries could see withholding tax on dividends jump to 25 percent from as little as 5 percent, he said.
The most active foreign private-equity firms in Canada’s oil patch in the past five years are Warburg and Blackstone Group, according to Canada’s Venture Capital & Private Equity Association. Warburg has investments of C$565 million ($512 million), while Blackstone has announced C$376 million, according to the data compiled by Thomson Reuters. Warburg has stakes in seven Canadian energy companies, according to its website.
“There is evidence that treaty shopping has a significant role in inbound direct investment in Canada,” Stephanie Rubec, a spokeswoman for Canada’s finance ministry said in an e-mailed reply to questions. She said comments from stakeholders will be taken into account “in determining any further action.”