Thank you very much, Mr. Chair, and members of the committee. Thank you for inviting us to appear today on Bill C-45.
CME represents about 10,000 manufacturers and exporters across the country who account for 80% of Canada's manufacturing production and over 90% of all exports of goods and services. Innovation and productivity are obviously two increasingly important drivers of manufacturing growth in industrialized countries, and Canada is not an exception.
In the last 10 years, Canadian manufacturers have had to cope with increased competition from developing markets combined with a very rapid appreciation of the Canadian dollar. The only sustainable strategy in the long term is a stronger focus on innovation and productivity. From that perspective, I'll focus my remarks today on the proposed changes to the scientific research and experimental development tax credit, the SR and ED, which is, for our members, the most important issue in this legislation.
The Canadian manufacturing sector, despite representing now about 14% of Canada's GDP, accounts for 55% of all business R and D expenditures in Canada. It is by far the most R and D intensive industry in the country. Roughly half of SR and ED users are actually manufacturers.
Last week, CME published a special report on the economic impact of the proposed changes to SR and ED on business innovation in Canada. The first conclusion is that proposed measures will result in a net diminishment of R and D performed in Canada. We estimate that all proposed measures by the government will reduce R and D tax incentives in Canada by $750 million a year starting in 2016-17. To give you an idea of the size this amount represents, it's 5% of all business R and D expenditures in Canada last year. In our sector, according to our latest management issue survey, 69% of manufacturers will reduce R and D spending while another 20% will start looking at other jurisdictions to conduct R and D activities as a result of these changes. We estimate that the full impact of these changes on actual business R and D expenditures in Canada will be approximately $1.5 billion every year.
Our report also compared the generosity of the R and D tax credits for large companies in different countries. The international competitiveness of our R and D tax credit will fall from number 13 to number 17 in the OECD as a result of the 5% proposed reduction in the tax credit.
The budget also proposes to completely eliminate capital expenditure from the tax base. Again, no other sectors of our economy will be impacted as much as the manufacturing sector, which tends to have more capital intensive R and D activities. While on average in the overall economy only about 5% of all R and D expenditures are related to capital, in our sector it is more than 30%.
Our report compared the fiscal treatment of capital expenditures related to R and D in other countries. The vast majority of countries studied provide either a tax credit or a rapid depreciation rate, such as the U.K., for example, for capital expenditures related to R and D. Again, our international attractiveness as a destination for R and D will decrease.
Another change in the budget was the reduction of the proxy used for claiming overhead costs under the SR and ED program. By proposing to reduce the proxy from 65% to 55%, the government estimates that the proxy is too generous, and that reducing it would best reflect the actual overhead costs of companies. We have not seen any evidence or analysis provided by the Department of Finance that suggests this is really the case. We rather believe that the use of the proxy has to do with the simplification of the claim process, as suggested by the Jenkins panel in their report. Therefore, the government should proceed with a full analysis before making a change that will make more companies turn to the traditional method of claiming overhead instead of using the proxy. We think this will increase compliance costs for companies, and it will also add a burden on CRA's auditors. That was also a key recommendation of the Jenkins report.
In conclusion, there are three ways of looking at the impact of these proposed changes on business R and D. In terms of actual dollars, as I said, changes would reduce business expenditures in R and D to an estimated $1.5 billion a year once all the measures are implemented. In terms of taxation of large companies, the negative impact of the 5% reduction in SR and ED exceeds by far all the benefits that resulted with the corporate income tax, CIT, cuts that have taken place at the federal level since 2008, if you look only at the large manufacturers.
In terms of international competitiveness and our capacity to attract foreign investment from large R and D performers, our ranking would decrease from number 13 to number 17. Even more importantly, all the major developing countries such as India, China, Turkey, and Brazil will now offer more advantageous R and D tax credits, according to our report.
We are making three main recommendations that will mitigate the negative impact of these proposed changes.
The first one is to provide more direct support to large companies by way of a partially refundable tax credit that would be targeted at projects related to enhance productivity. The second one is to allow companies to more rapidly depreciate the cost of machinery and equipment used for R and D purposes. The third one is to conduct a more detailed analysis of overhead costs and the use of the proxy before implementing the 10% reduction.
Thank you very much for your time. I'm available to respond to questions.