Finance Committee on June 14th, 2007

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Thank you, Mr. Chairman.

I understand quite well where you are coming from when you say that using Barbados, for example, as a financial structure for foreign investment is one way of improving the productivity of Canadian businesses that invest abroad. That said, in my opinion— and I am interested in getting your impressions— it is not so much the fact that using Barbados enhances their productivity, but more the fact that they pay less tax .

It is clear that companies that invest in higher risk countries, where the constraints are the same and where they must compete with other companies, benefit from a lower rate of taxation in Canada. They could invest directly abroad without using this financial structure. The parties are being somewhat hypocritical, that is the companies that are using Barbados because they claim they need to, as well as the government which is leaving this door open, arguing that our businesses need to be productive and competitive. In point of fact, this is nothing more than a roundabout way for companies competing in these markets to pay less tax.

In your opinion, do companies really want to carry out these types of transactions in Barbados because of that country's financial structure and the benefits it provides, or is the main reason why they use Barbados tax related? For example, if Canadian companies were not required to pay tax, would they even consider using Barbados for operations of this nature?

[Prof. Walid Hejazi]

I don't agree with what's underlying that question.

I think you really have to separate the operations of a company. You have companies operating within Canada and generating income within Canada. Those companies, whether they operate in Barbados or not, continue to pay tax rates on all of that income generated in Canada. Those companies are not going to use Barbados to in any way reduce the taxation for income generated in Canada. That's a very important point. I think that blurs the issue when people try to imply that somehow companies are using Barbados and other international financial centres to minimize taxes on income generated in Canada.

What we're talking about here is Canadian companies reaching out to the global economy. Canadian companies are not closing factories or operations in Canada; that's not what's going on. You have Canadian companies that are very successful, that have firm-specific assets, that are reaching out to the global economy to exploit those firm-specific assets and increase the market for Canadian goods, services—

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

I see...

[Prof. Walid Hejazi]

Now when Canadian companies move into those foreign jurisdictions, in order for them to be able to compete, they need access to these financing structures.

There's one more thing I want to say. When companies from competing countries like the United States and Europe have access to these same financing structures, Canadian companies will not be able to compete, and that will hurt the average Canadian worker.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

I understand, but when you talk about financial structures allowing these businesses to compete globally, the main advantage is not their geographical location per se or the quality of the educational services or manpower training in these countries. The only positive feature of these financial structures is the lower tax rate they offer.

I just want to make it clear that we are talking about allowing companies that must compete with other countries to benefit from a tax rate similar to the one enjoyed by our American or European competitors operating in the same environment in these same foreign countries. You mentioned South America, for example. When we talk about competitiveness, what it really comes down to is the rate of taxation.

[Prof. Walid Hejazi]

I think that is a very narrow view of the issue. The idea that somehow preventing Canadian companies, Canadian multinationals, from getting the tax benefit associated with using the international financial centre is somehow going to generate more revenue for the Canadian government I think is very narrow

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

I must stop you there because that is not what I said. I only asked for confirmation—I am not even saying that if we do away with these tax havens—We are not there yet, we are not yet looking at our recommendations. However, if companies look to these countries, it is primarily because they offer a tax advantage. There is no other reason. We have noted that these companies do not have actual operations centres in Barbados.

[The Chair, Conservative, Brian Pallister]

Thank you.

[Prof. Walid Hejazi]

That's not the reason. They're using these structures to be able to compete with companies in foreign jurisdictions—

[The Chair, Conservative, Brian Pallister]

No.

[Prof. Walid Hejazi]

As I said in my opening speech—

[The Chair, Conservative, Brian Pallister]

No.

Diane Ablonczy.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

What a tough guy that chairman is.

We welcome your testimony. I think this is new ground for many of us. As you know, there has been some public expression of concern about foreign investment in Canada. There has been a suggestion that we need to examine it and put a hold/stop on foreign acquisitions in Canada for however long it takes to examine the issue.

What would be the effect of that measure?

[Prof. Walid Hejazi]

That would not be a good thing to do. The issue is worthy of study. I'm a proud Canadian, as we all are, and we want the Canadian company to be the global leader. We want to know why Canadian companies are being bought up by American or European companies.

We need to better understand what it is about Canadian managers and financial markets, the Canadian economy, that's not allowing the Canadian company to take Alcan to the next level. Why does it have to bought out?

Putting a moratorium on foreign takeovers would send completely the wrong message. One thing about these types of policies that restrict foreign investment is that they're very long-lived. When we had the national energy program in FIRA back in the seventies, these effects were very long-lived; they have a lot of memory. So it would be wrong to restrict foreign takeovers.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

It has been suggested that Canada apply a proper test of net economic benefit on these transactions. Do you have any comment for the committee on the adequacy of such a test, what might be a more adequate test, or whether there should be a test at all?

[Prof. Walid Hejazi]

That whole foreign takeover should be looked at by the federal government, but looking at the net benefit is a very difficult question. We know that foreign investment in the Canadian economy has been a good thing. When you put up barriers to foreign investment in Canada it hurts our economy, our competitiveness and productivity, and the average Canadian employee. So we have to tread very carefully here, because restricting foreign ownership has been shown in the past to be the wrong road to go down.

Having said that, I want investments to come to Canada that are going to benefit the Canadian economy. If we had a way of identifying that perfectly it would be terrific, but if we get it wrong the costs will be very high.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

It has been suggested that one way to ensure proper benefit is for corporations looking to sell or buy in Canada to have meetings with stakeholders, other than shareholders, about the transactions.

Do you think that would be a positive way to get to the results you suggest are needed?

[Prof. Walid Hejazi]

As a professor, we talk to students about whether the shareholder or stakeholder model is most appropriate. When managers make decisions, should they be thinking only about shareholder wealth or should they be thinking more broadly? The evidence is quite clear that when you focus on shareholder wealth, the impact on Canadian prosperity is highest.

That's a philosophical question, and maybe I'm not the right person to think about it. But purely from a wealth perspective, focusing on shareholder wealth has been demonstrated to be the way that wealth and prosperity are maximized.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Would it be possible to put a moratorium or a halt on acquisitions in Canada without having any kind of impact on Canadian acquisitions abroad?

[Prof. Walid Hejazi]

That would be tough. You'd want your cake and to eat it too. You would want foreign companies to say, “Sure, you can come into the United States or Europe and take over our companies, but when we want to go into Canada you're not going to allow us to take over your companies.” That would quite quickly—especially with the surge in protectionist sentiment within the United States—have a negative effect on the Canadian economy.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Thank you.

[The Chair, Conservative, Brian Pallister]

We'll continue now with Mr. McCallum.

We have several who want to ask questions. We started late; we will use that time at the end.

So four minutes, Mr. McCallum.

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

Just for the record, this isn't really a question. The moratorium in question was only for the largest transactions, for 90 days, and when one considers the delays like the Alcan-Pechiney transaction, which took 300 days to complete, I think the opposition is exaggerating this point.

I'd also mention that the Prime Minister's favourite business leader, Gwyn Morgan, said he really liked the idea that they have now in the U.K., where boards are required to look at the long-term interests of the company and not simply the short term. So this is an ongoing debate.

My question is this. Did I hear you say it was inbound foreign direct investment or outbound that's good for competitiveness of Canada, or productivity?

[Prof. Walid Hejazi]

They have both been shown to enhance Canadian—

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

Well, when you say “been shown”—I'm an economist—it's easy to make these statements, that “The evidence shows unequivocally”—but economists aren't really quite as certain as you make them out to be.

Can you describe, in precise terms, what is your evidence or proof? I don't deny you're right, but I would like to know the proof that external foreign direct investment through Barbados enhances Canadian productivity. How do you know that?