Here’s what Ottawa’s new rules on foreign takeovers by state-owned buyers could look like – by Claudia Cattaneo and Jameson Berkow (National Post – October 26, 2012)

The National Post is Canada’s second largest national paper.

CALGARY — Squeezed between public alarm over increasing ownership of Canadian resources by state-owned entities and investors demanding their payday, Prime Minister Stephen Harper has promised new rules to ensure Canadians don’t get short-changed.

While state-owned enterprises (SOEs) have been quietly building their holdings in Canada’s oil and gas industry, China’s largest attempt at a foreign acquisition to date — CNOOC Ltd.’s $15.2-billion bid for Nexen Inc. — has ignited an intense public policy debate over what Canada should do while foreign governments seek to plant their flags across the oil patch. That debate contributed to the government blocking a $5.9-billion takeover of Progress Energy Resources Corp. by Malaysia’s Petronas last Friday.

With Ottawa under pressure to complete the reviews of the two deals by year-end, the focus now is on what government is planning and how billions in planned investments could be affected.

In interviews this week, industry sources and foreign-ownership experts painted a picture of what we could see when the statement is finally released. Taxes and royalties, transfer pricing, ownership limits and corporate governance policies could all be in play to address concerns ranging from espionage to productivity.

“An issue like this is very consuming,” said Jack Mintz, chairman of the University of Calgary school of public policy and an international tax expert. “There is lots of discussion going on in Ottawa, not just at the cabinet level, but Industry Canada, Finance, they are all engaged in this. It is a very big issue. If I were sitting in Ottawa, I would be asking, ‘What are we worried about and how would we address that?’ ”

“With all of the announced transactions and potential transactions looming, the Government of Canada is obviously struggling with its policy,” Calgary-based investment bank Peters & Co. said in a report last weekend.

Here’s what Ottawa could be looking at:

Taxes and royalties: Government coffers are likely a primary concern. Proponents of both Asian deals say they are bringing much-needed investment to accelerate production of Canadian oil and gas and that it should not matter who is paying the taxes and royalties on that production. But experts say state-owned companies and sovereign wealth funds are in a unique position to exercise tax arbitrage and dodge Canadian taxes and royalties.

They could do it by loading up the Canadian subsidiary with debt to lower their Canadian bill, which also would give them an advantage in the acquisition process

“If when you are bidding on assets you know you can eliminate the tax on the operation of those assets after the takeover, then you can add an extra dollar on the bid until you have outbid everybody else,” said Mr. Mintz, who sits on the board of directors of Imperial Oil Ltd. “I know that has happened.”

State-owned enterprises could also use transfer pricing mechanisms so that the profits are pushed outside of Canada, putting them outside the reach of government cash collectors.

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