International Trade Committee on Dec. 6th, 2010

[Brigitte Alepin]

Mr. Chair?

[The Chair, Conservative, Lee Richardson]

Excuse me?

[Brigitte Alepin]

I'm sorry.

I think I misunderstood when you invited us to do our entire presentation. If you wish, I can continue my presentation after Mr. Laurin or I can continue right away.

[The Chair, Conservative, Lee Richardson]

I thought it was a bit brief.

[Brigitte Alepin]

I thought you were asking for a brief introduction about us. It was a mistake on my part.

[The Chair, Conservative, Lee Richardson]

You'll excuse me. We've all been here before. Please carry on.

[Brigitte Alepin]

I'll continue then. A free trade agreement between Canada and Panama involving a considerable fiscal value has been signed but not ratified. You asked me here today so that I could give you my opinion on the matter. You are hoping to find out whether Canada should ratify this agreement.

First, this question is not getting so much attention from the Canadian government, because Canada is currently doing a lot of business with Panama. Nor is it because this agreement is necessary to make business with Panama possible. The earlier testimonies pretty much cover these two points.

In reality, this agreement is getting so much attention from the Canadian government, seemingly for fiscal reasons. Ultimately, this agreement could allow the wealth of Canadian companies piling up in Panama and being taxed at a lower rate, or not at all, to be exempt from Canadian taxes as well.

This type of agreement is harmful for the public finances of industrialized nations but, unfortunately, Canada is stuck in the dynamic of international tax competition. If the competing countries conclude these kinds of agreement, which is the case here, it will be difficult for Canada to say no.

However, in light of the current situation, allow me to respectfully bring forward another issue that should pique your interest. The issue is so important that it makes the current issue pointless. The issue is this: could the gradual reduction of taxes for businesses be a failing of globalization?

Globalization as it is now is fundamentally different from globalization in the past. In 2010, financial capital is more mobile than human capital. This new relationship between financial capital and human capital was made possible through recent technological discoveries that make an increased mobility of financial capital possible, and new barriers to immigration limit human capital.

This increased mobility of financial capital allows multinationals to set themselves up in the most fiscally generous countries, creating fierce fiscal competition and the gradual decrease in business taxes. Since human capital is generally more limited in a specific jurisdiction, it ends up forming the group of taxpayers who make up the difference.

The statistics show that, for a number of countries, the tax revenue losses caused by reducing business tax are not financially offset by anticipated increases in economic activity and the corresponding taxes. Some countries, such as Greece and Ireland, can no longer keep up.

In Canada, corporate tax rates have dropped 50% since 2000, dropping from 29.9% in 2000 to the planned 15% for 2013, the largest decrease in the taxation rate in Canada's history, and the largest for all OECD countries.

According to the most recent statistics compiled by the OECD, between 1975 and 2007, the substantial decrease in corporate tax rates in Canada supposedly created a decrease of 25% in the proportion of income tax that Canadian companies pay to the public purse. This trend can also be seen in other countries. Take a look at the situation in Japan and the United States, where there have been decreases in the fiscal burden of companies and in public finances as well.

So far, most countries have been able to avoid a tax crisis because those countries were growing. The tax bases were broadened as the taxation rates went down. The loss could be made up by increasing the countries' debt or the tax burden of workers. However, both have their limits.

In Canada, the public finance burden supported by personal income tax rose from 22% in 1975 to 37% in 2007, an increase of 70%. In May 2007, the newOECD Observer explained that:

Without action, we could be on the verge of a global tax crisis that could hurt economic activity. The tax burden cannot be carried by labour and consumption alone. The upshot of inaction would be a loss of revenue for governments and a downward spiral in economic activity.

In May 2000, when corporate taxation rates of countries began dropping, the Harvard Law Review showed that:

Thus, globalization and tax competition lead to a fiscal crisis for countries [like Canada] that wish to continue to provide social insurance to their citizens at the same time that demographic factors and the increased income inequality, job insecurity, and income volatility that result from globalization render such social insurance more necessary.

I hope that my presentation has helped you to understand that Canada is currently trapped in a tax competition. Obviously, regardless of what we say here today, Canada is probably going to sign what needs to be signed so that Canadian companies can benefit from the tax haven that is Panama because it is trapped in this global trend.

I invite the committee to think more about this. Because now that we are all in this dynamic and that is shown to affect the public finances of countries, perhaps now would be the time to ask the bigger question. Thank you.

[The Chair, Conservative, Lee Richardson]

Monsieur Laurin, maybe you have something to say about the trade agreements.

[Jean-Michel Laurin, Vice-President, Global Business Policy, Canadian Manufacturers and Exporters]

Thank you, Mr. Chair.

Good afternoon, everyone.

I can see that there are a few new faces around the table. First, I'd like to introduce the association that I have the privilege of representing here today. Then I will give you a little explanation as to why our association supports the free trade agreement that you are currently studying.

Canadian Manufacturers and Exporters is Canada's largest commercial and industrial association. The association has existed since 1871, and we have members in all industrial sectors in every province. To my knowledge, our association is the only one with permanent representation in Washington, in the United States.

Eighty-five percent of our members are small and medium-sized enterprises across the country, as I said. Just to give you an idea, Canadian manufacturing contributes to 13% of our GDP and to 12% of the workforce. It is a highly diversified sector and very export-oriented. In fact, we export more than half of what we produce. The manufacturing sector accounts for approximately two-thirds of Canada's total exports. So, our sector has an international focus and depends on access to foreign markets to survive, prosper and enjoy commercial success.

We're here today to support the Canada-Panama free trade agreement for a number of reasons. You probably know that manufacturing was the sector most affected by the recession that we have gone through lately. Shipments went down by about 25% from the peak to the bottom of the recession.

Since we've been out of the recession, manufacturing has outpaced other sectors of the economy and is actually growing faster than the rest of our economy. When you look at manufacturing shipments by province, you will see that between now and a year ago, things have improved.

There still remains some considerable challenges, but we're certainly seeing orders pick up, not only in our main market, which is the United States, but also internationally, in other growing, emerging markets.

When we do ask our members what drives business success in manufacturing in Canada going forward, one of the top answers we'll get from most manufacturers, if not the top answer, is around the importance of developing new markets around the world. There are a number of other important factors, whether it's trying to be more innovative with a focus on developing and incorporating new technologies into your business or making better use of the skills and knowledge of people, but I'd say that export and international trade development is at the top of the list.

The more you see manufacturing companies become niche players, more specialized in what they're doing, the more they have to look beyond Canada and North America for customers. This is why trade agreements, such as the Canada-Panama free trade agreement we're looking at today, previous trade agreements that have been ratified by Parliament and the ones still under negotiation, are very important in removing some of the business barriers our members are facing when they go to other markets. They're also very critical to making sure that Canada keeps up with its main trading partners, keeps up with some of our competitors, namely the United States.

In other words, when the United States negotiates and ratifies free trade agreements, we need to be in some ways aligned with what the Americans are doing, but also very strategic, because our sectors and our sensitivities can in some cases be different.

To wrap up, Panama accounts for a very small share of Canada's total exports, but when you look at the numbers, as I know you have, you see it's a growing market for Canadian exporters. Discounting the fact that we have had a recession, I think the long-term trend is that markets such as Panama, which are growing at a better pace than some of our existing customers, represent a wealth of opportunities for Canadian businesses.

In many sectors tariff barriers remain a significant hurdle to doing business in these markets. This agreement, by removing or improving most tariffs paid by Canadian exporters when selling goods to this country, would help Canadian companies to better position their goods and services into this market.

I would say that an increasing share of world economic growth is coming from emerging economies such as Panama. We're seeing a greater share of economic growth, globally, coming from such markets. Canadian businesses are looking to get into these markets. They're facing some tough competition from other parts of the world, and having a free trade agreement is a first step to helping Canadian businesses better position themselves in some of these growing markets.

Obviously more is going to be needed if we want to translate a trade agreement into additional business for Canadian companies. Companies are doing what they need to do to get into these markets, but support from the government and other service partners is going to be essential if we want to do a better job of exporting and engaging in international trade with these growing economies.

I'll stop here. Thank you very much.

[The Chair, Conservative, Lee Richardson]

Thank you, Monsieur Laurin. That was very good.

I'm pleased that all three of you were able to get as much in as you did in five minutes. It happens today that we do have limited time.

I think we're going to have to change the format a little and go to five-minute rounds so that each of the parties can have a chance to ask their questions.

I'm going to try to stick very closely to five minutes each. We're going to begin with Madam Hall Findlay, then Monsieur Laforest and Mr. Julian.

There will be five minutes for questions and answers. I'll ask the panel to try to get their answers in within that time as well.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you very much, Mr. Chair.

I would also like to thank everyone for being here this afternoon.

Mr. Laurin, you represent a lot of small and medium-sized enterprises. Are they interested in a free trade agreement with Panama because they want to take advantage of a tax haven?

[Jean-Michel Laurin]

This isn't something that I heard our members talk about when we consulted them on this topic.

For most small and mid-sized Canadian manufacturing enterprises, Panama is not on their radar. But I know that businesses have contracts or clients there.

I know, for example, that you have heard from representatives from SNC-Lavalin. They have a number of suppliers who are with them when they do projects abroad. For some businesses, it's an important market, but for most of them, that market isn't a priority.

However, as for investment, the topic of tax havens isn't something that we heard when we spoke to our members.

[Martha Hall Findlay, Liberal, Willowdale, ON]

I asked that question because I have a lot of respect for the suspicions. We know there were discussions. We absolutely must try to uncover and stop illegal operations. We all agree on that.

However, we aren't talking about full globalization; we're talking about free trade between Canada and Panama. We need to take note of all the testimonies that we've heard from farmers. Frankly, they aren't interested in Panama as a tax haven. They are interested in Panama because they can sell more produce. It's good for their economy. We've heard from other witnesses from small- and mid-sized enterprises who want to take part. They want the prosperity that is possible through additional trade with Panama. We heard the same thing from witnesses from Panama.

I'm not trying to show a lack of respect here for the other topics and other things we need to do, absolutely not.

Ms. Alepin and Mr. Deneault, knowing that so many people want us to support this agreement for all sorts of good reasons, despite the suspicions that you are raising, can you now say no? Can you now say that Canada should not say yes to this agreement, knowing that a lot of people want it for their business and their prosperity? Do you really think we should turn it down?

[Brigitte Alepin]

Do you want to respond?

[Alain Deneault]

Yes. I don't know if that's a question or a reprimand.

[Martha Hall Findlay, Liberal, Willowdale, ON]

No, it's a question. I want to know. It's a fairly simple answer.

Do you want us to say no?

[Alain Deneault]

I heard the question.

First, on the matter of bank secrecy, which is quite central when we're talking about tax havens: for people who skirt the rules of law, this involves hiding. Of course, no one is going to come to us and say that they are trying to benefit from tax havens—

[Martha Hall Findlay, Liberal, Willowdale, ON]

But—

[Alain Deneault]

Can I finish?

[Martha Hall Findlay, Liberal, Willowdale, ON]

We don't have a lot of time, but—

[Alain Deneault]

Mr. Chair, can I please finish? By definition—

[Martha Hall Findlay, Liberal, Willowdale, ON]

Is it yes or no?

[Alain Deneault]

By definition, tax havens involve hiding information and assets from a rule of law, shielding activities or accountability from the place where the activities are being carried out.

So, you say that so many people are for it; but what I have noticed is that so many people are completely unaware of what a free trade agreement between Canada and Panama would really mean. The public is in—

[Martha Hall Findlay, Liberal, Willowdale, ON]

Excuse me. We are the committee. We are the ones who call the witnesses.

[Alain Deneault]

I would like to finish. Can I finish just one of my sentences?