Finance Committee on June 14th, 2007

[Prof. Walid Hejazi]

Well, my study has looked at the impact on Canadian trade, so my study—

[John McCallum, Liberal, Markham—Unionville, ON]

You mentioned productivity. I don't want to hear about trade.

[Prof. Walid Hejazi]

I did. So the way I would respond to that is to say that in my study what I've done is I've linked the trade effects to the studies that have shown in the past that firms that increased their trade have also enhanced their productivity. So what I have been able to show, in fact, using a methodology similar to your AER paper on whether borders matter for Canada—

[John McCallum, Liberal, Markham—Unionville, ON]

The gravity model.

[Prof. Walid Hejazi]

The gravity model. That was a great paper.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

[Prof. Walid Hejazi]

It shows that when Canadian companies invest globally but go through Barbados, the impact on Canada's trade is enhanced. Then I linked that in the study to the evidence to show that when companies increased their trade they became more productive.

[John McCallum, Liberal, Markham—Unionville, ON]

That's a good answer.

[Prof. Walid Hejazi]

That evidence is strong.

[John McCallum, Liberal, Markham—Unionville, ON]

My next question would be on the benefits of going through Barbados. I don't know if you ever mentioned tax. You said you weren't an expert on tax. Are you suggesting the fact that so many choose to go through Barbados has nothing to do with tax?

[Prof. Walid Hejazi]

I didn't—

[John McCallum, Liberal, Markham—Unionville, ON]

I would find that hard to believe.

[Prof. Walid Hejazi]

It has almost everything to do with tax, but the question then becomes this. Why do they go through Barbados as opposed to other international financial centres. Why are they choosing Barbados? There are many reasons they're choosing Barbados, but one has to do with transparency and disclosure. I think that speaks volumes about the Canadian business culture, the fact that Canadian companies are accessing the global economy but they're going through a jurisdiction that's subject to audit, where basically if you go through Barbados, there's transparency in disclosure in terms of the kinds of transactions that are moving through there.

[John McCallum, Liberal, Markham—Unionville, ON]

Okay.

[The Chair, Conservative, Brian Pallister]

Mr. Hejazi, I will just interject before we move on. I have just a couple of things. I think much of what you're saying, it seems to me, would be the logical conclusion one would draw that results from the trickle-down effect of paying little tax or no tax. You're saying it's good for the Canadian economy, Canadian businesses, if there's increased trade. You're saying companies are more productive if they trade more. You're saying these are advantages that will lead to Canadian companies being able to be global leaders, and so on.

It would seem to me that a natural consequence of paying less tax would be that it would contribute in a positive way to all those indicators. What I guess you understand, or I hope you understand, is that this isn't about just helping Canadian companies be global leaders. We also have a responsibility to make suggestions as to how we can have a fair tax system and how our country can derive revenues fairly from Canadian corporations and individuals.

It would seem there's a balancing act to be done here. Now, other jurisdictions have not taken the position that unlimited tax-free availability of deductions is a good thing for all their companies. They've taken steps to limit the degree to which deductibility can occur against their domestic tax obligations.

[Prof. Walid Hejazi]

Yes.

[The Chair, Conservative, Brian Pallister]

Other countries have also taken steps...or do not allow tax-free repatriation of dividends, as Canada does. We have a special sweetheart kind of a deal for Canadian companies who choose to use Barbados and other jurisdictions ahead of these other jurisdictions.

Would you be making the argument then that these other countries who have thin cap rules and the like are making their corporations less competitive globally?

[Prof. Walid Hejazi]

I wouldn't argue that. Again, that's a difficult question for me to answer because I don't understand the intricacies of the tax systems across all of these different jurisdictions.

In terms of your question about tax fairness, I believe that making Canadian companies more competitive increases the prosperity of Canadians and therefore allows us to have lower tax rates.

[The Chair, Conservative, Brian Pallister]

I follow that.

I can't help but react that this is a simplistic observation. It would follow from that observation then that no tax of any kind on corporations would benefit the Canadian economy ultimately, that no tax obligation at all would make our country more likely to have global leaders, probably as a natural consequence of a no tax obligation. But what we're trying to arrive at is what's fair and right.

[Prof. Walid Hejazi]

I'm not sure why you're saying there's no tax obligation—

[The Chair, Conservative, Brian Pallister]

You're suggesting that a higher tax obligation makes a company less competitive. You've made that link several times.

[Prof. Walid Hejazi]

When you're playing in a field where multinationals from other countries have fundamentally the same tax structures available to them, now you're going to come along and tell me—

[The Chair, Conservative, Brian Pallister]

I'm not telling you anything...I will tell you this: other countries don't allow repatriation of dividends totally tax-free back to their jurisdiction, as we do. Other countries don't allow unlimited write-down of interest deduction. When a domestic corporation locates in Barbados or elsewhere, they do not allow...through thin cap rules, they limit the amount of the deduction in their jurisdiction.

The point I'm trying to make to you, sir, is that this argument about us being globally competitive and that it's a threat to our country and our companies here if we somehow impose a tax obligation, or restrict the use of unlimited deductions or unlimited tax repatriation of dividends, strikes me as hollow when other jurisdictions have such restrictions. Other jurisdictions we compete with have these restrictions.

Is that not correct?

[Prof. Walid Hejazi]

It seems to me that you've had many tax experts appear before the panel who could answer that question much better than I can. I'll leave it to them to answer that specific question.

However, what I can say to you is that policies that make Canadian companies less competitive in the global economy hurt those Canadian companies, but more importantly and more fundamentally, they hurt the average Canadian worker. That point is clear.

[The Chair, Conservative, Brian Pallister]

I've heard you make that point several times. Of course, the average Canadian worker will be the one who has to pay the taxes if they don't.

I'll go to Mr. St-Cyr now. Mr. St-Cyr, over to you, for four minutes.