The Globe and Mail, a Canadian daily, has a feature on their website today where three tax experts from Couzin Taylor LLP and Ernst & Young LLP answer questions from readers about the interest deductibility “feature” of the Federal government’s budget.
I’ve blogged about this complicated topic a couple of times now but never really felt I understood the issue as clearly as I could’ve. I think I made that apparent to my readers! The discussion on the Globe really helped me get the gist of this situation better than my rudimentary research before.
Some highlights:
The government has ignored the adverse macroeconomic impact of the proposals. The measure has specifically targeted double-dips that reduce foreign taxes. Reducing foreign taxes increases Canadian wealth and enhances Canadian companies’ ability to compete abroad. There is no benefit to Canada or hard working Canadians from the measure announced today, which increase foreign taxes.
Seems pretty counterproductive to hurt Canadian companies and think this is going to have any kind of positive impact on our country. This will reduce jobs here and abroad in Canadian multinationals and will not increase federal tax revenue here (but it will abroad).
In practice, companies headquartered in countries like the US and UK will have a competitive advantage as they are able to reduce their foreign taxes and thereby reduce their cost of capital, relative to Canadian companies. The budget materials suggest that other countries are considering adopting similar policies, but that remains to be seen. No other country of which we are aware has compromised the international competitiveness of its own multinationals to this extent.
Why are we enhancing the competitive advantage companies already have over our companies? Because those other countries have looked at the same measure in their own tax laws, but have yet to implement them? Sometimes it’s better not to be ahead of the curve.
The proposal as drafted encourages Canadian companies to deduct interest in the highest tax jurisdiction. In this regard, Canada has among the highest marginal tax rates in the industrialized world. In addition, there is often additional complexity and cost associated with obtaining a foreign interest deduction. Most companies will forgo trying to get a foreign interest deduction for these reasons, and will instead just take the Canadian deduction. This will increase foreign tax revenues and reduce Canadian tax revenues.
Wow. I guess a pretty important question is whether there was anyone in the Finance department warning the Minister of these very serious drawbacks to his plan, or whether they were just being ignored. This whole thing is approaching debacle status.