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Unformatted text preview: quirements in article xxix a(2)(e). article X XIX a(2)( e ): Ba se-erosion Test
The base-erosion test must also be met in order to qualify for treaty benefits under article xxix a(2)(e). The intention of this test is to prevent the payment of earnings from Canada or the united states to a resident of a third country if the third-country resident would otherwise benefit, indirectly, from the treaty and no benefit would flow to Canada or the united states.
The base-erosion test requires that the deductible expenses that are paid or payable, directly or indirectly, to persons that are not qualifying persons must be less than 50 percent of the gross income of the relevant entity. The technical explanation defines “gross income” to mean gross receipts less the cost of goods sold. The calculation is based on the preceding fiscal period of the entity, except when the entity is newly formed. in this case, the calculation is based on the current fiscal period. 26 andersen and blessing, ibid. Compare the united states, Department of the Treasury, Technical Explanation to the us-Netherlands treaty signed on september 24, 2004 with the technical explanation to the protocol. 27 Cra, supra note 17. 96 n c anadian tax journal / revue...
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