Evidence of meeting #92 for Finance in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was companies.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Walid Hejazi  Professor of International Business, Rotman School of Management, University of Toronto

11:10 a.m.

Conservative

The Chair Conservative Brian Pallister

Order, please. We'll begin our discussion on the pre-budget consultations now so we don't have to just sit here aimlessly. Mr. Hejazi's videoconference connection is there, but not ours to him.

Oh, I'm told that we're not in camera so I can't proceed with a discussion on pre-budget consultations unless I clear the room. I don't want to clear the room because I'd like us to be able to hear Mr. Hejazi as soon as possible.

Is there any chance you hear me now, Walid? No? This is like talking to my teenage children, really very similar.

11:10 a.m.

Liberal

Robert Thibault Liberal West Nova, NS

Technology is great, when it works.

11:10 a.m.

Conservative

The Chair Conservative Brian Pallister

Yes, when it works.

11:10 a.m.

Professor Walid Hejazi Professor of International Business, Rotman School of Management, University of Toronto

Can you hear me?

11:10 a.m.

Conservative

The Chair Conservative Brian Pallister

Yes.

11:10 a.m.

Prof. Walid Hejazi

I can't hear you. Should I just proceed?

11:10 a.m.

Conservative

The Chair Conservative Brian Pallister

Yes, please proceed for five minutes. We are in session.

11:10 a.m.

Prof. Walid Hejazi

I was reading your lips, so I heard that you were trying to get my attention.

It's nice to see everyone again—virtually. Thank you for the opportunity to once again appear before this committee. I apologize for not being able to appear in person, but given the short notice, I was not able to adjust my obligations at the Rotman School of Management.

I am a professor at the Rotman School of Management. I have a doctorate in economics. As a professor, I do extensive research on issues related to international trade in Canadian competitiveness and have published extensively in this area. I have undertaken many studies for the federal government, including Industry Canada, Foreign Affairs, and CIDA.

In my opening comments I would like to address four points. The first relates to the benefits to Canada of the use of IFCs, international financial centres, by Canadian companies. I would like to talk about the impact on tax revenues. I would like to talk about the enhancement of Canadian competitiveness by the use of IFCs by Canadian companies. I'd also like to discuss the statement about why it would be misleading to conclude that these conduits or these entities are somehow a drain on Canadian tax revenue.

First, globalization has been a source of significant prosperity for Canadians. There is little doubt that the free trade agreements between Canada, the United States, and Mexico have significantly increased Canadian trade. This increase in Canadian trade has enhanced Canadian productivity, employment, and investment in Canada. Canada's prosperity has improved as a result of the surge in globalization.

Half of Canada's trade is intra-firm, which means that a significant portion of Canada's trade is between related parties. As Canadian multinationals move into foreign markets, the penetration of Canadian exports into those markets improves; that is, investment by Canadian firms into foreign markets complements or enhances Canadian exports, which enhance Canadian productivity, investment, and employment. The benefits of Canadian investment abroad are recognized by many in government, academia, and the private sector. When Canadian firms invest abroad, this is a good development for the Canadian economy. It has been reported by the Globe and Mail and many other media outlets that Canadian multinationals have recently made significant international investment or acquisitions abroad. It's important to the Canadian economy that this increase in breadth continues.

The relevant question here is whether these positive benefits that are associated with Canadian business investment abroad are sustained when the investment moves through an international financial centre. I have studied this issue in considerable detail and I have found that in fact there are two clear and very strong effects of Canadian investments that move through Barbados, as one IFC, on Canada.

First, Canada's trade with the global economy, broadly based, is enhanced when Canadian companies access the global economy through Barbados.

Second, the increased use of Barbados has allowed Canadian firms to diversify away from the U.S. economy; that is, allowing Canadian firms the ability to use Barbados as a conduit to the global economy has allowed Canadian firms to access less familiar markets such as those in Latin America and East Asia. These are significant benefits to the Canadian economy. I believe these results would also extend to other IFCs that have similar levels of transparency and disclosure as Barbados—for example, Hungary.

With respect to the impact on tax revenue, it is an empirical question; that is, it is not clear as to what the net impact is on Canada's tax revenues. I think it is quite incorrect to assume that tax revenues are lower as a result of the use of IFCs by Canadian companies. There are many reasons why one could expect Canadian tax revenues to be higher as a result of the use of IFCs by Canadian companies. The additional effects that result from the use of IFCs generate additional Canadian government tax revenue that must be taken into account. It seems to me that often these additional effects are ignored. The enhanced competitiveness of Canadian companies abroad results in greater earnings that result in a greater capital base for the Canadian economy. The enhanced revenues, whether repatriated to Canada, reinvested abroad, or even distributed to shareholders, increase Canadian economic activity, which ultimately raises Canadian tax revenue.

The increased use of IFCs by Canadian companies has coincided with the diversification of Canadian business activity outside the U.S.; that is, Canadian MNEs—Canadian companies—are using international financial centres to access less familiar and more risky markets. There are many reasons to believe that Canadian firms would be in a less competitive position in the new markets relative to U.S. or European companies.

The reduction in the cost of capital associated with financing structures that utilize IFCs allows Canadian companies to be more competitive. If Canadian companies did not have access to these financing structures, especially given that companies from the U.S. and Europe continue to have an access to fundamentally the same type of benefit, the competitiveness of Canadian companies would be significantly diminished. But there are many other reasons why Canadian companies would be less competitive, and hence the reduction in the cost of capital is very important.

Finally, I'd like to make a statement about why I think it's misleading to conclude that these entities represent a drain on revenues from Canada. Once again, I want to stress that there's absolutely no evidence to say that these entities have drained tax revenue from Canada. To the extent that Canadian multinationals are made more competitive, the revenues in foreign markets are enhanced, and whether these are repatriated to Canada or reinvested abroad, they do result in the enhancement of the Canadian capital base and Canadian economic activity, which are ultimately taxed by the Canadian government.

Thank you.

11:20 a.m.

Conservative

The Chair Conservative Brian Pallister

Thank you, sir.

Now can you hear me?

11:20 a.m.

Prof. Walid Hejazi

I cannot hear the audio from Ottawa.

11:20 a.m.

Conservative

The Chair Conservative Brian Pallister

Okay. Thank you.

I'm going to ask that we get a cellphone here, and we're going to phone you directly and convey questions to you in that way. I'll ask—

11:20 a.m.

Prof. Walid Hejazi

I'm going to step out of the room for a moment to ask someone to help. Is that okay?

11:20 a.m.

Conservative

The Chair Conservative Brian Pallister

All right. Thank you. That's very good.

11:20 a.m.

Prof. Walid Hejazi

Okay. I do hear you now.

11:20 a.m.

Conservative

The Chair Conservative Brian Pallister

Excellent. We'll begin with Mr. Pacetti, for five minutes.

11:20 a.m.

Liberal

Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC

Thank you, Mr. Chairman, and thank you for appearing once again, Mr. Hejazi.

I have a couple of quick questions. I'd like to start with one of the points you made. You were saying that it's advantageous for Canadian companies to flow their investments through Barbados to have access to Latin American or Asian markets. Can you expand on that? I'm not sure why we need to flow the money through Barbados in order for us to make investments in those countries, so could you start with that one? I have a few other quick questions as well.

11:20 a.m.

Prof. Walid Hejazi

That's a terrific question. Trying to understand why Canadian companies are using Barbados to access these less familiar markets is difficult to explain. It's difficult to explain why it's happening, but it is happening.

One thing I can say is that Canadian companies possibly would have not gone to these less familiar markets had they not had access to a conduit like Barbados, because in the past we've seen a surge in globalization to markets beyond the U.S. and we're seeing that Canadian companies are accessing these markets through Barbados.

11:25 a.m.

Liberal

Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC

I understand that. I understand there's a global market and they have access. But why not make the investment directly from a Canadian multinational? There could be risks, but you could set it up through different layers.

I don't understand why it has to go through Barbados, unless you're telling me there are other moneys coming from foreign revenues, where the money is taxed at a lower rate in Barbados, and then that money, because it's taxed at a lower rate, is used for investment in another foreign jurisdiction. But that's not what I'm hearing.

I still don't see what this conduit in Barbados is being utilized for. I understand this is global, but there are companies doing it out of Canada and making those investments directly out of Canada.

11:25 a.m.

Prof. Walid Hejazi

Yes, there are companies doing that. But proportionately, the companies that are going through Barbados are going to less familiar and riskier markets, which I can discuss.

11:25 a.m.

Liberal

Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC

Why?

11:25 a.m.

Prof. Walid Hejazi

I believe this is the reason. For all of the other multinationals that are operating in countries in Latin America and east Asia, these multinationals are coming from jurisdictions in Europe and the United States. These other multinationals have access to fundamentally the same types of financing structures. It means if Canadian companies do not go through a financing structure such as that, which is available through Barbados, they would be disadvantaged in the Latin America economies.

You have an American multinational, a European multinational, and Asian multinationals that are using these same types of financing structures. If Canadians were not allowed to use the financing structures, they would be disadvantaged relative to these other global multinationals.

Secondly, I think what's very important is there are many reasons to believe Canadian companies need this reduction in the cost of capital to go global. The infrastructure available to Canadian companies is not nearly as well developed as is the case for American or European multinationals.

I can give one particular example that has to do with the number of lawyers deployed globally. When a Canadian multinational moves into Latin America, they need to get access to legal counsel for compliance with Canadian law, and so on. It's very expensive for Canadian companies to do it because there are not nearly as many Canadian lawyers deployed globally relative to American multinationals. For the American multinational operating in Brazil, the cost to get legal counsel to make sure compliance is in order is far less costly than for Canadians.

There are many reasons to believe Canadians really need the reduction in the cost of capital to be able to compete with American and European multinationals.

11:25 a.m.

Liberal

Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC

I could take that, spin it another way, and say because there's a lot of debt dumping here in Canada, corporations are paying less tax here in Canada.

Is that not another way, instead of doing this complicated structure and flowing money through Barbados? Couldn't the companies organize their structures in such a fashion that they would do more debt dumping here, because there's a higher corporate rate, and then float the investment overseas or to foreign points?

11:25 a.m.

Prof. Walid Hejazi

I'm not an expert on taxation. I look at Canadian competitiveness, and I know how tax structures fit in. But it is quite clear that the relatively high rates of corporate taxes in Canada have driven many multinationals to move abroad.

Having said that, I think this point is very important, and it goes to the heart of a taxation system. Many corporations operate within Canada. They generate income within Canada. We're not talking about those companies. For companies that operate within Canada and that generate income within Canada, all of the income is subject to Canadian tax.

Separate from that are many Canadian companies that are moving into the global economy. That's really what we're talking about. We're talking about tax rates that apply to capital that's driving globalization.

I think it would be irresponsible to treat these two kinds of capital in the same way.

11:25 a.m.

Liberal

Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC

Thank you.

11:30 a.m.

Conservative

The Chair Conservative Brian Pallister

The next member in line to ask questions is Mr. St-Cyr.

You have five minutes, sir.