Across Canada and around the world, the Harper cabinet is enthusiastically pushing its open-for-business message to investors.
A big part of the pitch are the deep cuts in corporate tax rates – to 15 per cent next year, down from 19.5 per cent in 2008.
By next year, Ontario businesses will pay a combined 25-per-cent federal and provincial tax rate. That compares with roughly 35 per cent in the United States.
You would think the growing gap would be a big incentive for U.S.-based multinationals to invest in Canada, perhaps even offsetting the damaging effect of the higher Canadian dollar.
You would be wrong. For this huge slice of Canada’s business community, the tax cuts are a big yawn.
“It is a big issue,” acknowledged Jayson Myers, president of the Canadian Manufacturers & Exporters and a staunch supporter of lower corporate taxes.
The problem is that U.S.-based companies, unlike most foreign multinationals, are taxed by the Internal Revenue Service on their global income. So any profits they don’t reinvest and try to repatriate are hit with the higher U.S. rate, not the Canadian rate.
“The lower tax rate makes their profits look better in Canada, but that just means they are taxed more in the United States,” Mr. Myers explained.
“There’s no direct impact on U.S. subsidiaries operating here.”
U.S. companies, it turns out, still make up a significant chunk of the Canadian business landscape. Think about auto making, car parts, packaged goods, pharmaceuticals, technology companies and resources.
Statistics Canada reported that 26 per cent of corporate profits and 30 per cent of revenues were in the hands of foreign companies in 2007. Roughly half the foreign ownership is American.
For them, Mr. Harper’s tax cuts aren’t a huge draw, particularly coming out of a recession.
Scott Clark, a former deputy finance minister, also pointed out that after a recession many companies are reporting losses or depressed profits, making tax breaks a lot less attractive than when the economy is booming. Other critics argue that other sorts of tax cuts, including income tax reductions, would generate a greater economic boost.
A federal Finance Department official acknowledged the different tax treatment of U.S. companies. But the department insists that “a low corporate income tax rate makes Canada an attractive location for investment from all countries, including the U.S.”
The lower Canadian rate allows U.S. companies to generate higher after-tax profits, creating an incentive to “reinvest in Canada,” the official added.
In spite of the problems, Mr. Myers insists the tax cuts are a good thing overall. His organization hosted a series of events last week at members’ plants across Canada at which federal cabinet ministers pushed the case for lower taxes.
The CME also produced a recent report that showed the tax cuts would pump billions into the economy and boost economic growth by 3.2 per cent over two years.
Even U.S. companies benefit because lower taxes mean more jobs, and more business. “So there are indirect benefits,” Mr. Myers argued.
The key, Mr. Myers said, is finding a way to get those companies to keep their profits in Canada, perhaps by making research and development tax credits refundable. That would allow U.S.-based multinationals to monetize their R&D tax savings and apply them against such costs as payroll taxes.
Jack Mintz, director of the School of Public Policy at the University of Calgary, said the unique tax status of U.S. companies is a moot point because most keep their profits in Canada anyway.
“A lot of companies don’t want to bring [profits] back to be subject to tax, so they reinvest,” Mr. Mintz said. “Most companies will say those tax cuts matter. They help a lot.”
Sadly, the tax cuts have become a political wedge between the Conservatives and the Liberals. Liberal Leader Michael Ignatieff has vowed to scrap next year’s planned cut and roll back a Jan. 1 decrease.
The lesson here is that corporate tax cuts probably aren’t the best terrain on which to fight the next federal election.
Making a country that’s good for business is a lot more complicated than shifting the business tax rate a few percentage points, and both parties would be wise to duke it out over something else.