International tax avoidance: Is it eroding Canada’s tax base and how should we respond?

TORONTO , Oct. 2, 2014 /CNW/ – Aggressive international corporate tax avoidance by multinational corporations has become the subject of intense political scrutiny. U.S. politicians have called out some American multinationals, including Apple, Amazon, Starbucks and Google, for relocating profits abroad to avoid U.S. taxes. More recently, politicians accused Burger King of being unpatriotic for its own purported “tax inversion” maneuver, acquiring Canada’s Tim Hortons and shifting its head office from Florida to Ontario , thereby benefitting from lower Canadian tax rates. But how is aggressive international tax planning by these multinational corporations affecting Canada overall, and how should we respond?

A report released today by The School of Public Policy as part of a symposium on corporate tax-avoidance takes an in-depth look at aggressive international tax planning from the Canadian perspective.

Canada sets its tax system to, in part, promote international competitiveness. Measures to ensure competitiveness require that countries make efforts to protect their domestic tax bases from corporate tax avoidance. Several countries, including Canada , have adopted thin-capitalization rules, controlled-foreign-corporation rules and exit taxes to help prevent the erosion of their tax bases. Recently, the OECD’s plan to fight against base erosion and profit sharing (BEPS) has gained significant support from G20 nations, and has resulted in several OECD countries, including Canada , taking unilateral action against aggressive international tax planning by multinationals.

However, as authors of the report Brian Arnold and Jim Wilson explain, “Despite Canada’s commitment to the OECD’s BEPS Action Plan, the Canadian government has been reluctant to follow through on implementing rules that might affect its own resident corporations and their international competitiveness.”  Why? Because Canada needs the U.S. to take the lead.  Were Canada to enact rules that target corporate tax-avoidance in the absence of U.S. action, Canada would be immediately and significantly disadvantaged.  So far, the U.S. shows no signs of getting serious about enacting such rules.

“As the examples of Apple, Amazon, Google and Starbucks demonstrate, the American government has so far been unable to bring itself to take any meaningful action against aggressive international planning by U.S. – resident corporations. Were Canada to enact and enforce rules that clamped down on aggressive international tax planning by its own resident corporations, Canadian firms would be at a competitive disadvantage relative to American (or other international) rivals. Until the United States is willing and able to take the lead on aggressive international tax planning by multi-national corporations, the reality is that smaller countries, including Canada , should be cautious about making changes to its international tax rules that are dependent on other countries making similar changes.”