Mr. Speaker, I will take advantage of this allotted day to show that the lack of a coherent business taxation policy has a negative effect on the fiscal situation in general and on the government's chronic indebtedness.
At the end of the 1996-97 fiscal year, the federal net debt will be over $600 billion. According to the Minister of Finance's own projections, by the end of its mandate, this government will have added $110 billion to the country's debt. The minister keeps shouting from the rooftops that he has the government's finances under control and that he has finally managed to slow down debt growth. This is definitely not the case. The minister has no precise plan to eliminate the deficit, and he refused to commit himself to balance the budget according to a specific timetable.
He is making cuts to program spending and transfers to the provinces, taking over the UI fund surplus, penalizing families
with unfair individual taxes, and going after the pensions of those who have saved all their lives to enjoy some leisure in old age, instead of making the urgent cleanup required in business taxation, instead of closing tax loopholes and collecting as quickly as possible the $6.6 billion in unpaid taxes.
The government has not solved the public finance problem, even if it would have us believe so. According to the budgetary plan tabled on March 6, Canada's net public debt represents close to 75 per cent of the gross domestic product, while Europeans countries insist on a maximum debt of 60 per cent of the GDP as a condition of joining the European Economic Community.
The Prime Minister keeps saying that the government's objective for next year is to bring the deficit down to 3 per cent of the GDP. Let us not forget that European countries impose that criterion as a condition of joining the community, but it includes all levels of government. From that angle, Canada's deficit will be much closer to 5 per cent than to 3 per cent of the GDP.
Let us now take a closer look at corporate taxation in terms of tax avoidance and federal tax expenditures.
In the July 1995 issue of CA Magazine , the publication for chartered accountants, it was said that: ``Substantially all major Canadian multinationals use firms based abroad as part of their tax strategy''.
Tax havens provide several tax benefits. As early as 1987, the Conservative finance minister had pledged to conduct studies on tax havens. But these studies have yet to be done, even though the auditor general and the revenue department have been most insistent about them.
However, it should be recognized that in the 1994 budget, following repeated demands from the official opposition, the Minister of Finance finally amended the Income Tax Act provisions relating to foreign affiliates. These amendments reflect the recommendations made by the auditor general and by the public accounts committee, which tabled a report on the issue in 1993.
Several experts, including Mr. Corcoran from the firm Arthur Anderson, recognize the effectiveness of these new measures, but they also see their limits, since they will not prevent multinationals from continuing to use foreign affiliates to improve their tax planning.
Other experts also point out that these major changes to the foreign affiliates taxation system were not those announced several years earlier. Major tax evasions are still possible in spite of the changes made in the 1994 budget.
It is difficult, if not impossible, to estimate the amounts the Canadian tax system has lost to tax havens. However, certain indicators can give us a good idea of the extent of the moneys lost. Instead of relying on the revenue department to measure the extent of these tax losses, let us listen to the experts and the representatives of the consulting firms specializing in tax havens who are making their services available to corporations and individuals.
International Privacy Corporation, a firm specializing in tax havens, says it has hundreds of Canadian clients. Moreover, most of the 16,000 corporations incorporated in the Turks and Caicos islands are Canadian owned. Several hundreds of millions of dollars have gone out of Canada, according to that firm.
Mr. LeBreux, another expert on tax havens, estimated that several billion dollars are moved out of Canada every year. Mr. Naylor, a McGill University professor and an expert on the flight of capital at the international level, considers that the total capital flight out of Canada amounts to tens of billions of dollars.
The recovery of these amounts would make the Canadian deficit and debt melt away like the snow. In his book, Hot Money and the Politics of Debt , Mr. Naylor said the situation was alarming. It can be said that the popularity of tax havens is reaching today unheard of proportions and that they have a disastrous impact on Canadian tax revenues.
A few years ago, Harris and Harris, the biggest firm in the tax haven business, represented some 30 to 40 companies abroad. This number has now reached 400 to 500, a 13-fold increase. Numerous reports on this growing phenomenon are published in newspapers and magazines, but the Liberal government just sits on its hands.
Let us have a closer look at the impact these tax havens have on the behaviour of Canadian companies. A number of countries considered as tax havens have very low taxation rates, something like 2 or 3 per cent for foreign countries, whereas the Canadian taxation rate stands at 40 per cent. This spread makes for unfairness in taxation and can cost millions of dollars to the Canadian government. Foreign subsidiaries can also transfer their dividends to the Canadian corporation tax free, even if the corresponding revenues have not been taxed at a rate similar to the Canadian rate.
Companies that want to benefit as much as possible from these two situations can implement the three following strategies: They can transfer to the Canadian parent company the losses of foreign subsidiaries, they can transfer abroad revenues of the Canadian company, and finally they can convert into exempted revenues the revenues of Canadian companies-revenues that would normally be taxed are not, because of transfers to the foreign subsidiary.
What is the government doing to fight tax avoidance, which has become an alarming problem, and the measures used by the corporations to get the most out of it? One could argue that the government has finally become aware of the problem. But the government says that it cannot get rid of tax avoidance made possible through tax havens, because its tax system has two conflicting objectives, which are to be efficient and to remain competitive.
The government maintains that, even though several corporations are using these tools to avoid paying taxes, given the globalization of the economy, Canadian tax rules must remain competitive.
In 1994, the federal government finally reduced the number of countries where tax avoidance is possible, by withdrawing from the designated countries list the countries which had yet to sign a tax treaty with Canada. All this despite the reassuring statements by the deputy minister of Finance, who said, before the public accounts committee that I chaired during two years, that all the countries with which Canada has a tax treaty have high corporate taxes.
There are still 11 countries which have signed tax treaties with Canada and which have lower tax rates than we have. Among the major ones are Barbados, which a maximum tax rate of 2.5 p. 100; Cyprus, Malta and Switzerland, with a maximum tax rate of 10 p. 100; and the Bahamas, with a tax rate of 0 p. 100.
Moreover, there are 11 other countries who offer tax exemptions which help to significantly lower their tax rate. Among the major ones are Barbados, Ireland, Malta and the Netherlands. When you compare their tax rates with the 40 p. 100 tax rates Canadian corporations have to deal with, you can easily understand the many financial benefits these companies get by setting up business in these tax havens.
How can we stop this massive outflow of exempt dividends from foreign affiliates? The government solved part of the problem by reviewing its list of designated countries which are given an exemption to ensure that the listed countries had signed tax treaties with Canada. Nevertheless, the problem remains, because some of the designated countries have much lower tax rates than Canada.
The problem can easily resurface if the designated countries lower their tax rates after the fact, that is, once they have signed tax treaties with Canada, since Canada cannot constantly monitor these countries' taxation system.
The government is using the competitiveness of Canadian businesses as an excuse not to act. This argument does not hold. Our main competitors in this field are our neighbours to the south, the United States, whose reputation is firmly established when it
comes to opening up to businesses. They solved the problem by establishing a system where foreign affiliates are subject to U.S. taxation, with deductions for taxes paid in foreign countries.
Great Britain has a similar system. Thus, the competitiveness argument is no longer valid, since our main competitor and trade partner has rules that are less attractive than ours. This system is already in place in Canada but only with countries that have not yet signed tax treaties with us. The gap is thus closed in part although significant tax revenues still evade the Canadian tax system.
The Bloc Quebecois' position on this is crystal clear: The Canadian government must urgently revise all its tax treaties with countries that are considered tax havens to make sure that foreign affiliates are subject to tax rates similar to the Canadian rates.
When the tax rate in a foreign country is not similar to the one in Canada, this country would be subject to the same rules governing revenues on foreign affiliates' exempt dividends.
I would now like to talk about tax expenditures, a major component of business taxation. According to a very conservative estimate of the Department of Finance, the cost of tax expenditures was $9 billion in 1991 and $10 billion in 1990.
There are 59 tax expenditures associated with the tax on profits of corporations. Seven of them, namely the low small business tax rate-over $2 billion; the low tax rate on manufacturing and processing profits-another $353 million; R and D tax credits-$543 million; the partial inclusion of capital gains-$415 million; the surplus between the capital cost allowance and book depreciation-$886 million; the Part I tax refund on investment income of private corporations-$876 million; and non-capital loss carry-over-nearly $1.3 billion; all these made up, in 1991, 71 per cent of all the tax expenditures associated with taxes on corporate profits, for a total of $6.4 billion.
The concept of tax expenditure includes all deductions, exemptions, tax deferrals, tax credits and other such provisions which reduce taxes payable by a corporation or an individual. Therefore, they are a substitute for direct spending by the government: the latter does not subsidize directly, but it decides not to collect funds from certain taxpayers, which is the equivalent of a subsidy.
The implicit aim of a corporate tax expenditure is to change, with this incentive, the behaviour of certain companies in a desirable manner for the community. Tax expenditures create, however, two main problems: first, they diminish the government's tax base, which puts a heavier burden on all taxpayers who cannot afford them; second, they cause many inequities by allowing certain taxpayers not to pay their fair share of taxes. The concept of the ability to pay is not respected anymore, and this gives rise to a feeling of injustice among the people.
The greater the number of tax expenditures contained in a taxation system, the more complex the system gets, and this requires the consultation of experts whom only the well-to-do can afford. So the government misses out on revenues. We must also weigh the benefits gained against the cost to the tax system, as well as the inequity which can ensue for all taxpayers.
The Bloc Quebecois believes that, in terms of taxation, a threshold has been attained where collective benefits-these are very difficult to evaluate; in fact, they are only assessed by those who benefit from them-are less important than the inequities and the loss of earnings by the government. The various federal tax expenditures are far from attaining the objectives for which they were designed, and, often, their objectives are not consistent with society's best interests.
To improve the effectiveness of our tax system, especially our business tax system, we should consider a minimum tax on corporate profits. This form of taxation already exists in the United States. Its implementation may be complex depending on the tax base used. However, to be effective, this minimum tax must go hand in hand with a tax expenditure base that does not substantially reduce corporate taxable income.
Instead of constantly trying to plug holes in the legislation as it is doing now, Revenue Canada could make the business tax system more flexible. This system is extremely complex and cannot provide for every possible situation. Making it more flexible could mean using section 145 of the Income Tax Act, which is a general anti-avoidance clause. This section gives the minister the discretionary power to take action against anyone who tries by whatever means to avoid taxes. In fact, this section gives the minister the power to enforce the spirit of the law. Right now, such power is seldom used, if ever.
In closing, I would like to say that business taxation is complex. Everybody knows that. However, while continuing to be competitive globally, Canadian businesses have to carry their fair share of the tax burden, even though specific sectors of our economy need preferential treatment. All this is based on equity, and equity depends on the political will of a government to bring together experts and parliamentarians by setting up a parliamentary committee which will determine what kind of business tax system Canada needs.
In this sense, I strongly support the motion brought forward this morning by my colleague from Saint-Hyacinthe-Bagot. However, the Canadian government has not shown this political will so far, and we cannot be overly optimistic with regard to our chronic debt and deficit problem.