The authors are students in the University of Toronto's Rotman School of Management master of business administration program. This was the winning submission in an essay contest organized by the faculty.
U.S. President Barack Obama has called them "corporate deserters": multinationals that use legal methods to minimize their global tax liabilities.
But big companies, in the United States and elsewhere, have a variety of perfectly legal techniques at their disposal to lower their taxes in the countries where they operate. One common method involves moving a patent or a trademark to a subsidiary in a low-tax jurisdiction, then charging a royalty to subsidiaries in other countries for using it, thus shifting profits away from higher-tax countries.
In recent years, U.S. multinationals have attracted most of the negative attention for such techniques. Starbucks Corp. faced so much controversy over its tax planning in Britain that it voluntarily agreed to pay £20-million ($38-million) in extra tax two years ago. And many hands were wrung over last year's Burger King takeover of Tim Hortons in a tax inversion, partly aimed at moving the burger chain's headquarters out of the United States and into Canada, to take advantage of this country's less onerous corporate tax regime.
We have no doubt that corporations have the legal right to pursue such strategies to minimize their global tax payments. But it seems not everybody else does.
According to Canadians for Tax Fairness, a group that calls for the government to crack down on tax avoidance, Canadians had $170-billion invested in the world's top 10 tax-haven countries at the end of 2013.
There are those who argue that corporations receive numerous benefits from operating in Canada. They receive access to a highly educated work force, universal health care for employees, well-enforced intellectual property rights and support from highly regulated Canadian financial institutions. And if a multinational is minimizing its tax liabilities by funnelling some of its profits made in Canada through a different jurisdiction, then, the argument goes, they are reaping the benefits that Canada provides without paying their fair share.
This is the issue that the 34-member Organization for Economic Co-operation and Development has been asked by the Group of 20 leading industrial nations to tackle. The OECD's Base Erosion and Profit Shifting (BEPS) initiative, which aims to multilaterally restrict aggressive corporate tax planning, is one of the first indications that the landscape on tax minimization is shifting, both in Canada and globally.
But shift it should not.
Certainly, Canada should not unilaterally adopt changes to limit corporations' ability to minimize taxes. But if we want to continue to compete in what is constantly becoming a flatter global economy, we should go further and decline to support the BEPS initiative altogether, as it would disadvantage Canadian companies that seek to expand abroad.
Foreign multinationals, such as South Korea's Samsung, receive large amounts of support from their national governments, allowing them to compete globally. Forcing higher taxes (and a higher cost of capital) onto Canadian corporations will only damage their ability to compete with other, better-supported firms.
The benefits strong Canadian corporations bring to the broader Canadian economy are not measured exclusively by the tax dollars collected from them. Strong Canadian corporations provide domestic employment and increase the value of Canada's human capital through training and by maintaining head-office functions here.
Examining the problem through a cost-benefit analysis shows that even with the loss of potential tax revenue, allowing for global tax minimization by Canadian corporations still provides a net benefit to Canada and the broader global economy.
Corporations are established to maximize long-term shareholder value, not make ethical decisions based on notions of fairness that could erode that shareholder value, such as volunteering to pay extra tax, as Starbucks did. In democratic societies, elected governments representing the people pass laws to proscribe limits on what corporations can and cannot do.
Expecting corporations in a competitive global environment to engage in their own ethical analysis is a slippery slope that Canada has decided it does not want to go down. Provided that the multinationals are acting within their legal rights, they are fulfilling their ethical obligations when minimizing their global tax liabilities.
Because Canadian corporations provide our economy with peripheral benefits beyond tax revenue, Ottawa has correctly decided that these benefits outweigh the support they receive from taxpayers.
Canadians are required to file their individual tax returns by April 30 every year. By various means, we do our best to ensure that as much income as possible remains in our pockets, rather than the government's. Ultimately, Canadian corporations face the same choice, and nobody wants to pay more tax than the law requires.