Alcan and Interest Deductibility
Subsidizing the transfer of jobs abroad
Monday, June 4, 2007
Byline: Erin Weir
Source: Special to the Sun
At a time when Kitimat and many other Canadian communities are losing manufacturing jobs, why would the federal government continue subsidizing the transfer of such jobs abroad?
In the last federal budget, Finance Minister Jim Flaherty pledged to stop corporations from deducting interest on debt used to finance foreign affiliates from their Canadian taxes.
Ottawa should have kept this budget promise. Along with the provinces, it needs to develop economic strategies that maximize public returns from natural resources and create good jobs.
In the wake of Alcoa’s bid to take over Alcan, Flaherty has narrowed his budget measure to apply only to interest already deducted abroad and delayed its implementation for five years. In other words, corporations will generally be allowed to deduct foreign-affiliate interest costs in Canada even though they generally do not pay Canadian tax on their foreign-affiliate income.
Alcan is a Montreal-based multinational that processes aluminum in Kitimat and in Quebec. Bauxite, the basic raw material, is cheap to transport, but refining it into aluminum requires huge amounts of electricity. Therefore, Alcan mines bauxite in countries with rich deposits, but refines it in jurisdictions with cheap and plentiful electricity.
Dick Evans, Alcan’s CEO, had tried for months to merge with Alcoa, a Pittsburgh-based competitor. After talks broke down, and anticipating that Alcoa would consequently try to buy Alcan, Evans said in late April that the end of foreign-affiliate interest-deductibility made Alcan vulnerable to takeovers from countries that allow such deductions.
What he and other Canadian business leaders consistently neglect to mention is that many of these countries — including the U.S., Japan and Britain — tax the foreign-affiliate income of their corporations. Since Alcan does not pay Canadian tax on its foreign income, why should it deduct foreign financing costs in Canada?
Evans initially emphasized that bauxite mines abroad sustain aluminum processing in Canada. Then, on May 1, he announced that Alcan would invest in a huge new aluminum-processing facility in Saudi Arabia, which generates cheap electricity from its abundant natural gas. While this announcement was quickly overshadowed by Alcoa’s takeover bid, it proves that there is no global bauxite shortage and contradicts the notion that Alcan’s foreign investment aims to mine bauxite for processing in Canada.
Alcan processes aluminum in B.C. and Quebec not because the federal government provided tax incentives for foreign investment, but because these provinces provide cheap hydroelectricity. The company is reducing employment in Kitimat because it is more profitable to resell the electricity than to make aluminum with it.
If the province sold the electricity at market prices, the people of B.C. would receive the revenues. When Alcan resells the electricity, British Columbians receive neither the jobs nor the revenues. Although the B.C. Supreme Court recently ruled that this practice is legal, it is poor provincial policy.
By contrast, Saudi Arabia is collecting large public returns on its oil exports and using its natural gas to promote aluminum processing and other economic diversification. Canada should implement a similar economic strategy.
Erin Weir is an economist with the Canadian Labour Congress