Another view: Low tax rates no way to build economy
Canada should not count on building its economy by luring U.S. multinationals over the border with low tax rates in light of an announcement from the U.S. Treasury Department this week. The department outlined new measures to block companies from escaping U.S. taxes by moving earnings outside the country. This means Burger King may or may not succeed in cutting its taxes by its merger with Tim Hortons, announced Aug. 26. The Obama administration clearly means to stop the kind of monkey business known in the trade as a tax inversion.
Burger King said from the start its merger with Tim Hortons was not aimed at avoiding taxes. You would expect them to say that because the U.S. Internal Revenue Service will whistle down any such manoeuvre that is obviously just a tax dodge and not related to strengthening the company.
In the Treasury Department’s view, genuine cross-border mergers make the American economy stronger by enabling U.S. companies to invest overseas and by encouraging foreign investment to flow into the U.S. But these transactions should be driven by genuine business strategies and economic efficiencies, not just a desire to avoid U.S. taxes.
Treasury Secretary Jacob Lew announced he was forbidding the use of loans and dividends within a group of companies as means for the U.S. company to get hold of overseas earnings without paying tax on them. He also strengthened the existing requirement that the U.S. owners of the company have to own less than 80 per cent of the new company. The government, he announced, is going to keep looking for more ways to block such devices, even if Congress cannot be persuaded to approve a more complete solution.
The merger of Tim Hortons and Burger King looked at first as though it might bring a huge corporate head office to Canada, but on closer inspection it involves no such thing. The companies made no promise about the number of people who would be employed in the head office of the new merged company. They did say that the Miami head office would continue to run Burger King and the Oakville, Ont., head office would continue to run Tim’s. The head office of the merged company may turn out to be an answering machine in a corner of the Tim’s building in Oakville.
While the Internal Revenue Service keeps inventing new ways to tax companies’ overseas earnings, the tax lawyers will be working just as hard to avoid those U.S. taxes. The political winds are likely to favour the government, whatever the economic merits of the argument, because it is easy to denounce a tax-avoiding multinational company in the political arena and hard to defend one.
Low corporate tax rates are a good way to persuade U.S. multinationals to create corporate shells with Canadian addresses where their overseas earnings will be reported. This provides work for the lawyers who create corporate shells and it should create a stream of corporate tax revenue for the government. It is not, however, a good strategy for developing the Canadian economy.
Republicans and Democrats in Congress all recognize that the U.S. corporate tax rate is far too high and they say they want a tax reform that will bring it down. Eventually, economic logic is likely to prevail and the attraction of tax inversions will be eliminated. When that day comes, Canadian companies created as tax avoidance devices will melt away like snowdrifts under the spring sunshine.
Canada should aim to build companies that will flourish because of this country’s inherent advantages of location, skills, climate and natural resources. We should support companies that will employ Canadians and offer distinctive goods and services to Canadians and to the world. We should tax corporations at a level that is consistent with other advanced economies. We should not, however, drive corporate taxes steadily lower in the hope of becoming another Ireland. That strategy worked for Ireland for a few years, and then it didn’t work anymore.