Barbados and Worldwide Taxation
Earlier today, I appeared as a witness before the House of Commons Finance CommitteeÂ regarding “Tax Havens and Tax Avoidance”. The panel included a representative from Barbados who contended that it is not a tax haven. A business-school professor supported him by arguing that low-tax conduits for Canadian investment abroad benefit Canada. A couple of tax specialists from Quebec made the case that tax havens, including Barbados, are a serious problem and outlined potential solutions.
My main point was that, if we continue to allow corporations to deduct foreign-affiliate interest here, we should start taxing their foreign-affiliate income. Simply taxing Canadian corporations on a worldwide basis would go a long way to addressing tax havens. If the Barbadian affiliates of Canadian corporations were assessed Canadian taxes (minus any taxes paid in Barbados), there would be no tax incentive to shift operations there.
As noted previously on this blog and in the CLCâ€™s letter to Flaherty, the United States, Britain and Japan tax their corporations on a worldwide basis. The “Backgrounder” released yesterday by Finance Canada confirmed this point:
This “exempt surplus” treatment is a significant advantage for Canadian companies. Many other countries, including the United States, the United Kingdom and Japan, do not provide a comparable exemption. Instead, they tax their residentsâ€™ foreign affiliate dividends, providing a credit for any foreign taxes paid on the underlying income. In any case where foreign tax rates are lower than home-country rates, Canadaâ€™s exemption system is more generous than a credit-based system, since no Canadian tax is payable by the parent company when it receives the foreign earnings as dividends.
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The combination of Canadaâ€™s tax exemption for foreign affiliate exempt surplus dividends, and the deductibility of interest expense on borrowed money used to acquire shares, thus creates a mismatch between income and expenses.