Budget move likely to discourage global expansion

Yesterday’s Globe and Mail:

The federal Finance Department is acknowledging it could reap a bonanza of additional tax revenue from a controversial budget move to scrap the deductibility of interest that companies incur to fund foreign operations.

I’m trying to understand the logic here but I can’t.

Caribbean beachI know this is money leaving the country, but shouldn’t the law focus on foreign ownership of the overseas operations at least, if that’s what this is about? After all, the money leaving has already been taxed anyway.

As well, this is inconsistent with how interest is generally treated for tax – it’s deductible if used to earn income. It was simpler that way, and when simplicity and consistency intersect within tax law, that’s a good thing.

And this from the CBC’s budget coverage:

The government will crack down on corporations that use tax havens to avoid paying taxes by eliminating the deductibility of interest incurred to invest in business operations abroad, improving information agreements with other countries and providing more resources to the Canada Revenue Agency to strengthen their audit and enforcement activities.

But I think the government could do more to stop this by focusing on the last two points: strengthening information agreements with the countries deemed tax havens, and increasing audits where there is suspected abuse.

Otherwise I expect foreign investment by Canadian firms to decrease sharply. It’s never a good thing when tax influences decisions, but this is going to hurt our global competitiveness too. It sucks when a few bad apples ruin it for everyone.

So it sounds like it’s similar to proposed legislation I blogged about a while ago in the US brought forward by a group which included Barack Obama.

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