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.
