Law Times

PAGE 6 COMMENT Law Times Group Publisher ....... Karen Lorimer Editorial Director ....... Gail J. Cohen Editor .................. Glenn Kauth Associate Editor ... Michael McKiernan Staff Writer ............. Robert Todd Copy Editor ......... Heather Gardiner CaseLaw Editor ...... Jennifer Wright Art Director .......... Alicia Adamson Account Co-ordinator ...... Ryan Rogers . . . . . . . . . . . . . . . . . . . . . . . . . . Kathy Liotta Sales Co-ordinator ......... Sandy Shutt Electronic Production Specialist ............. Derek Welford Advertising Sales .... Kimberlee Pascoe ©Law Times Inc. 2010 All rights reserved. No part of this publication may be reprinted or stored in a retrieval system without written permission. The opinions expressed in articles are not necessarily those of the publisher. Information presented is compiled from sources believed to be accurate, however, the publisher assumes no responsibility for errors or omissions. Law Times Inc. disclaims any warranty as to the accuracy, completeness or currency of the contents of this publication and disclaims all liability in respect of the results of any action taken or not taken in reliance upon information in this publication. March 29, 2010 • Law TiMes Law Times Inc. 240 Edward Street, Aurora, ON • L4G 3S9 Tel: 905-841-6481 • Fax: 905-727-0017 www.lawtimesnews.com President: Stuart J. Morrison Publications Mail Agreement Number 40762529 • ISSN 0847-5083 Law Times is published 40 times a year by Law Times Inc. 240 Edward St., Aurora, Ont. L4G 3S9 • 905-841-6481. lawtimes@clbmedia.ca CIRCULATIONS & SUBSCRIPTIONS $141.75 per year in Canada (GST incl., GST Reg. #R121351134) and US$266.25 for foreign addresses. Single copies are $3.55 Circulation inquiries, postal returns and address changes should include a copy of the mailing label(s) and should be sent to Law Times Inc. 240 Edward St., Aurora, Ont. L4G 3S9. Return postage guaranteed. Contact Kristen Schulz-Lacey at: kschulz-lacey@clbmedia.ca or Tel: 905-713-4355 • Toll free: 1-888-743-3551 or Fax: 905-841-4357. ADVERTISING Advertising inquiries and materials should be directed to Sales, Law Times, 240 Edward St., Aurora, Ont. L4G 3S9 or call Karen Lorimer at 905-713-4339 klorimer@clbmedia.ca, Kimberlee Pascoe at 905-713-4342 kpascoe@clbmedia. ca, or Kathy Liotta at 905-713-4340 kliotta@ clbmedia.ca or Sandy Shutt at 905-713-4337 sshutt@clbmedia.ca Law Times is printed on newsprint containing 25-30 per cent post-consumer recycled materials. Please recycle this newspaper. Editorial Obiter Canadian firms should adapt more quickly adapt to changes shaking up the legal sector as a result of the recession. Based on a survey of 130 general A counsel and law firm partners around the world, Eversheds noted that 78 per cent of them believe the recession will have a lasting impact on the profession, particu- larly in the areas of value and efficiency. It also indicated that the economic down- turn has accelerated change in the prac- tice of law by 10 years. In addition, the survey tracks the rise in the influence of in-house coun- sel. Roughly three-quarters of general counsel said they had taken on more active roles in their companies since the report by U.K.-based Ever- sheds LLP last week hammered home the need for lawyers to recession, including taking on additional responsibility for corporate governance. At the same time, technology and the movement of business activity to emerg- ing economies, particularly to countries in Asia, are speeding up the changes law firms are facing. The report purports to apply around the world, so it's interesting to consider what's happening in Canada. Here, firms say that while they're feeling the pressure to provide greater value to their clients, the pace of change is still behind what's happening in places like Britain and the United States. Lawyers here are getting more requests to provide discounts, but Canada's relatively strong position going into the recession has meant firms here didn't feel the effects as emphatically as their counterparts elsewhere. Of course, our financial sector didn't crash, and the fact that the Canadian legal sector tends to be less leveraged with high- priced associates than American firms has allowed lawyers here to escape mass lay- offs. To be sure, the last year or so did pres- ent many challenges, but Canadian firms have remained fairly stable through pru- dent management and controlling costs. The question, however, is whether that will continue to be the case and whether big firms here would be wiser to initiate changes rather than finding themselves forced to adapt later. The easy and obvi- ous answer is that getting ahead of the curve is usually the best approach. The Canadian economy in general has experi- enced several shakeups in recent years that have caught sectors off guard. In the early 1990s, we experienced a painful restruc- turing, particularly in the manufacturing sector, due in part to free-trade agreements with the United States and Mexico. Since then, the rise in the value of the dollar, the shift in economic activity to China, and changes in the auto sector have sparked additional restructuring. The lesson for law firms, then, is that eventually the forces of change will catch up with them. In Canada, we've at least seen firms expand their operations overseas in order to get a piece of what's happening elsewhere. But in terms of adapting their cost and business models to increased competition and the push for value, they'd do well to move more quickly. — Glenn Kauth tionships with the United States to trade with developing coun- tries. A Cheap labour costs have tak- en our textile and low-level man- ufacturing to China, while India is attracting technology and soft- ware industries. Within the next five years, we can expect to see increased outsourcing of legal services for competitive reasons. Every transaction in goods, ser- vices or intellectual property that crosses a national boundary has international tax implications. The legal academy and profes- sion must also expect to adapt to these changes. International taxation de- scribes tax law that applies to transactions across national boundaries. The law of interna- tional tax treaties is a subset of international taxation that deals with bilateral agreements be- tween countries. International tax conventions are economic bargains between countries. Following common usage, we refer to bilateral tax conventions as tax treaties. The s global markets expand, Canada is looking be- yond its traditional rela- Time to start thinking internationally Financial importance of treaty law is di- rectly proportional to the vol- ume of international trade. There are many different types of tax treaties. For ex- ample, there are treaties on income and capital, estates and gifts, inheritance, and administrative assistance in tax matters. There are also limited scope treaties that deal with spe- cific industries, such as shipping and aircraft. Tax treaties address four basic questions: • Which of the treaty partners has the primary and second- ary jurisdiction to tax rev- enues? • What is the character of in- come derived by a taxpayer? • What is the source of the tax- payer's income? • How do we enforce tax collec- tion, avoid double taxation, and prevent tax evasion? Typically, tax treaties seek to prevent double taxation either by exempting particular types of income from tax or by stipulat- ing a maximum rate at which the income is taxed. Tax treaties don't impose taxes; they merely limit the state's taxing Matters By Vern Krishna powers. Thus, although they may reduce a taxpayer's domestic tax, they do not generally increase the burden. For example, a tax treaty between two countries might limit the maximum withhold- ing tax by the source country on interest payments to 10 per cent. That doesn't mean, however, that the source state must impose any tax on interest payments to non- residents. Tax treaties seek to eliminate double taxation of income that residents of one country earn from sources within the other country. Eliminating double tax- ation promotes closer economic co-operation between treaty countries and reduces barriers to trade caused by overlapping taxing jurisdictions. The second purpose of treaties is to reduce tax avoidance and evasion of in- come taxes in international trade and commerce. Thus, Canada is increasingly relying on exchange www.lawtimesnews.com of information articles and agreements to monitor cross- border financial transactions. Canada's treaties with de- veloping countries serve an additional purpose: the pro- motion of politically accept- able investment in developing countries. Various United Na- tions' bodies have endorsed the desirability of promoting greater inflows of foreign investment to developing countries on condi- tions that are politically accept- able as well as economically and socially beneficial. There is some tension, how- ever, in treaties between devel- oped and developing countries. Developed countries adopt the Organization for Economic Co- operation and Development ap- proach of tax credits, exemptions, and reductions in withholding taxes as appropriate in the negoti- ation of bilateral tax treaties. De- veloping countries, on the other hand, accept the first principle of tax reduction by the country of residence through a tax credit or exemption for foreign income. This approach causes the country of residence to yield its jurisdic- tion to tax foreign-source income. However, developing countries are much more reluctant to re- duce their yield on source taxa- tion. Indeed, some developing countries go to the extreme and say the source country should have the exclusive jurisdiction to tax income arising there. As trade relationships shift be- tween developed and developing countries, Canadian policy-mak- ers and lawyers will need to adapt their conventional thinking from domestic to international scenar- ios. Most Canadian law schools are ahead of the curve on the need for internationalizing their curricula. The legal profession is still in first gear but will shift as the economic rewards of doing so become more obvious. If every transaction in goods, services or intellectual property that crosses a national boundary has interna- tional tax implications, how can the profession not do so? LT Professor Vern Krishna is tax counsel with Borden Ladner Gervais LLP and executive director of the CGA Tax Research Centre at the University of Ottawa. His e-mail is vkrishna@ blgcanada.com.

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