Evidence of meeting #83 for Finance in the 39th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was barbados.
A recording is available from Parliament.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
I can see how it works for the big guys in the head office. I can see how it might work for shareholders. What this committee is generally concerned about is the average person on the street. How is it good for them?
Professor, International School of Business, Rotman School of Business, University of Toronto
Forty percent of the Canadian GDP is exported to the global economy. So something on the order of half of international trade is intermediated by multinationals. This means that trade is not a company in Canada exporting to a party in the U.S. that's unrelated. It's all done within the multinational, because in this global economy, multinationals have to tap into global supply chains. It's part of the multinational network to service foreign markets.
To think that a Canadian company is going to sit inside Canadian borders, produce goods, and export them to the global economy without using a multinational network is simply incorrect.
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
Thank you, Mr. Chairman.
If I understand correctly, Mr. Lareau, Ms. Alepin and Mr. Weir, each year it is currently estimated that approximately $4 billion worth of profit that returns to Canada from Barbados, is not taxed. We are therefore talking about perhaps $800 million that is not taxed, and this is on top of the tax credits Mr. Lareau just finished talking about. Can you illustrate the impact this may have on tax fairness?
Mr. Hejazi is saying that this is good for the economy. This is a completely amoral approach. This is strictly an economic calculation. Perhaps Mr. Weir has something to add. I'd like to hear your comments on this.
From what I gather, someone who earns $35,000 a year must pay on his salary a substantial amount of taxes to allow companies to earn money elsewhere, without his knowledge. Am I wrong in saying this?
Professor, Laval University
You are completely right. Tax fairness is about redistribution according to the needs of Canadian taxpayers. When we talk about the needs of Canadian taxpayers, we talk about health and education that fall under respective areas of jurisdiction; and of course, we talk about having sufficient financial resources for the government to allocate these funds.
If there is less money coming in, it is true that there will be more people who will benefit from tax havens, to the extent that the door will be left wide opened. There is only a handful of people who are able to benefit from tax havens, whereas everyone else, unfortunately, will remain exactly where they are, and not draw a single benefit. It is true that jobs in Barbados are created. There are certainly Canadian companies that are able to benefit and possibly create jobs. But ultimately, tax fairness is certainly not being achieved. This is abundantly clear.
Chartered Accountant, Fiscalist, As an Individual
I share your concern. Last year, I worked on a research project at Harvard University with Professor Brian Mandell, who is a former Canadian professor. We could talk about this issue extensively, something I would like to do. When we allow for a minority of taxpayers, who happen to be the most affluent, to benefit from tax havens on a global scale—something Canada is not alone in permitting—we are jeopardizing the entire process of voluntary contribution on which our freedom is based. If this process is put in jeopardy and that people can no longer trust the tax system, how can we continue functioning on the planet? This might be a utopic, perhaps feminine way of expressing it, but I believe that there is also an economic solution. For example, in the process of globalization that also affects capital, given the mobility of capital we must have a centralized tax system. This must be achieved at some point. I believe that Canada could raise this issue at the negotiating table. If we don't, we will be swimming upstream. By not acting, citizens across the world will say that multinationals are not paying taxes, and that this is unfair. We are working against the economy and the goals that we want to reach. If we want globalization to work well for us, multinational companies must pay their fair share of taxes so that ordinary citizens across the world will accept the process of globalization.
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
I would like you to tell us about the economic impact, perhaps in response to what Mr. Hejazi said. What is the true economic impact of this situation on the Canadian economy, as well as on tax fairness?
Economist, Canadian Labour Congress
I will answer in English.
Dr. Hejazi, I think, made the argument that investment in foreign affiliates abroad helps the Canadian economy in a variety of ways. That can be true, and I think we should wish Canadian corporations well in foreign markets. But there's no question that if our goal is to encourage activity in Canada, it makes sense to structure our tax system to promote activity in Canada rather than to promote Canadian investment in foreign countries and hope that some of the benefits trickle back to Canada. That's just a matter of common sense.
So certainly I believe that the effect of tax havens on the Canadian economy is bad both in terms of drawing investment out of Canada and in terms of reducing the tax revenues available to the Canadian government to promote economic activity here. That's essentially my response in a nutshell.
If Canada were to adopt a worldwide system of taxation for Canadian-based corporations, the effect it would have is really to shield us from these tax havens, because Canadian companies would pay the Canadian tax rate regardless of where they operated in the world. If they wanted to have a foreign affiliate in Barbados that—
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
Developing elsewhere cancels out the detrimental effect on the Canadian economy. If there is universal taxation, they may then decide that there are other reasons to invest, and this might possibly be to the advantage of the Canadian economy.
Economist, Canadian Labour Congress
You are right, it is exactly that. The United States, England and Japan use a similar system, and it works well.
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
How is it that Canada is lagging behind in that regard? Why have we not acted? There have been recommendations made by the Auditor General and plenty of other people. Why are we so hamstrung?
Economist, Canadian Labour Congress
I do not know why. I have noted that major companies bear great influence on governments. What we have to do is clear, you are right in saying that nothing is being done.
Conservative
Conservative
Dean Del Mastro Conservative Peterborough, ON
Thank you, Mr. Chair.
I have appreciated the input from all of the members of the panel today. I think actually there may be some support for what everyone is saying. Even though it appears as if several witnesses are coming from opposite sides, I think there may be some merit in several points that have been made.
Mr. Hejazi, I read your report—thank you for sending it to us in advance—and I was able to study it. One of the things that occurred to me is that you're coming to some conclusions I happen to agree with. But I think they're symptomatic of another problem that we have here in Canada, that corporations are seeking this as a solution to being competitive, when really, maybe the case you're making is that Canada is on the inverse side of the tax curve when it comes to corporate taxation.
Do you care to comment on that?
Professor, International School of Business, Rotman School of Business, University of Toronto
I could talk about another study I did for Industry Canada that looked at the role of domestic taxes at the industry level to try to explain why Canadian multinationals are moving abroad. That study is different from the one I circulated.
Basically, I think, to answer your question, we have to understand why Canadian multinationals are moving abroad. If Canadian multinationals are moving abroad to exploit a firm, specific advantage, to open foreign markets to Canadian exports and Canadian talent, that's a good thing, and we should applaud it. On the other hand, if Canadian multinationals are moving abroad because of a poor competitive environment within Canada, that's a bad thing.
There's evidence that both of these things are at play. For example, I know in some industries a lack of skills, a lack of technology, and a lack of research and development are important factors that help explain why Canadian multinationals move abroad. On the other side, some industries within Canada are globally competitive, and multinationals are deciding to locate here. Think of the new Toyota production facility in southwestern Ontario.
The answer to your question is that in many industries, that's exactly the case; there's some underlying competitive issue within Canada, and we as Canadians need to think about how to fix those things.
Conservative
Dean Del Mastro Conservative Peterborough, ON
If we draw that into the context of what the committee has assembled on, specifically the study of tax avoidance and tax havens, certainly no one would argue with the fact that Barbados is a low-tax jurisdiction. When we look at the use of low-tax jurisdictions by Canadian corporations, certainly nobody can make the argument that they're using Barbados because there are skills there that aren't in Canada, or that the financial services sector there is providing a service superior to what they could acquire here at home; they're using it so they can get a competitive advantage, so they can be competitive in foreign markets, and I understand that.
I also appreciate your point that the risk to access new markets is high, and it's important that we do access new markets; it's becoming a very global economy.
I want to talk a little bit about the corporate tax rate in Canada Mr. Weir mentioned. I don't think Canada needs to move towards being a tax haven, but I do think that the Government of Canada talked specifically in Advantage Canada about a timeline to reduce the corporate tax rate down to 17%. We have gotten rid of the corporate surtax, and we will have reduced the corporate tax rate to 18.5% by 2011. Where do you see that Canada needs to be with respect to corporate taxes? Largely, the lower tax rates become, the less incentive there is for tax avoidance. We see that in black market economies and in every instance domestically and internationally that high tax rates encourage tax avoidance. Where do you see what I would call the best tax rate for Canada? It may be a moving target, but where do you see it right now?
Professor, International School of Business, Rotman School of Business, University of Toronto
I'd like to start by saying I'd like to invite you to the Rotman School, because we could write several papers together on these topics you've raised.
I think the fundamental point that you're raising is a very good one. Before I answer your question, I want to say the following.
Making it more difficult for Canadian multinationals to access the global economy without policy changes to improve the competitiveness of the Canadian economy would hurt multinationals, but more importantly, it would hurt the Canadian economy, broadly based. If you want Canadian multinationals to do more investment in Canada, the right way to do it is not to mandate it and the right way to do it is not to make it more difficult for them to access the global economy; the right way to do it is to make it more attractive to invest in Canada. The dean of the business school, Finn Poschman, and many others have made the point that tax rates in Canada are very high. Some people say you should eliminate the corporate tax rate altogether, and tax that income when it actually flows to investors.
I'm not sure what the right tax rate is, but one thing on which there is a consensus is that within Canada corporate tax rates are very high, they're not competitive, and they're hurting the Canadian economy.
Conservative
Dean Del Mastro Conservative Peterborough, ON
Thank you.
I will let you in now with a comment, Ms. Alepin.
Chartered Accountant, Fiscalist, As an Individual
Thank you.
I have asked myself the same question and I also took part in a study commissioned by Harvard University on the matter. I took the annual reports of 50 of the largest Canadian companies ranked this year and calculated their effective tax rate. The effective tax rate is the true amount of taxes paid by multinational companies. The effective tax rate of Canadian multinational companies is the same as rates paid by SMEs.
SMEs represent 98% of Canadian companies. If we want SMEs to become major corporations one day, they must be given favourable tax rates. Along the same lines, it was also said that SMEs must assume additional costs. The future of globalization depends on our ability to transform SMEs into major corporations.
If SMEs are taxed at the same rate as Canadian multinational companies, we are creating an obstacle that they cannot overcome in order to become major companies. I have proof of this, because I analyzed the list of the 1,000 largest Canadian companies, ranked by the Globe and Mail. Since this was a major undertaking, I focused on only 200 of the largest Canadian companies on this list. Over the last 20 years, no SME, aside from Calfrac Well Services, has become a major corporation.
In analyzing tax rates for multinational companies, do not forget to put them into perspective with the tax rate paid by SMEs. SMEs also need a helping hand in this globalized society.
Conservative
The Chair Conservative Brian Pallister
Thank you very much, Ms. Alepin.
Thank you, Mr. Del Mastro.
We continue with Madam Wasylycia-Leis now, for seven minutes.
Judy Wasylycia-Leis NDP Winnipeg North, MB
Thank you very much, Mr. Chairperson, and thanks to all of our presenters today.
I think it's important to start off with the question of these tax incentives for corporations vis-à-vis creating a strong Canadian economy, something that Walid has focused on.
There's another side to this whole argument that I'd like to ask Erin, Brigitte, and André about, and that is, we've seen over the last ten years significant reductions in corporate taxes. There was a huge corporate tax break under the Liberals to the tune of about $10 billion over five or six years. We've seen tax havens continue to the present and not addressed. We've seen all kinds of benefits on the corporate side but no return, as far as I can tell, in terms of investment in Canada.
So I think we need to address that for a moment before we go back to the issue of tax havens, because there is that whole side to the equation that needs to be addressed.
Erin.