Barbados and Worldwide Taxation

Earlier today, I appeared as a witness before the House of Commons Finance Committee 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 CLC’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 residents’ 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, Canada’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.

. . .

The combination of Canada’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.

7 comments

  • Your comment that “if we continue to allow corporations to deduct foreign-affiliate interest here, we should start taxing their foreign-affiliate income” shows a complete lack of understanding of how the global economy works.

    If Canada were an island unto itself, your idea would have merit. However, Canadian companies have to compete with other multinationals.

    Canada currently has a number of strong, Canadian-based multi-national companies. The head office jobs that these companies create are a definite benefit to the Canadian economy.

    What you propose would lead to the hollowing out of corporate Canada.

    Canada can not afford to unilaterally bring in a punitive tax regime unless it does it with all of those countries that Canadian companies compete with.

  • The countries that employ a worldwide corporate-tax system – the United States, Britain and Japan – have substantial numbers of strong multinational companies. In fact, companies based in these three countries are the main competitors of Canadian-based companies.

  • Exactly, and they ALL allow the deductibility of interest and, if Flaherty’s measures pass, they will all have substantially more lenient tax systems than Canada thereby putting Canadian multinational companies at a distinct disadvantage.

    Canada currently has one of the more favourable regimes which are offset by our extremely high tax rates, but Flaherty’s proposals would move us to dead last – high tax rates and an uncompetitive international system of taxation.

    Is that where Canada wants to be? Given the relative size of the Canadian economy, I would submit we need to be very competitive from a tax perspective (see comments of C.D. Howe Institute on Canada’s tax competitiveness).

  • My comment was that, “if we continue to allow corporations to deduct foreign-affiliate interest here, we should start taxing their foreign-affiliate income.” The US, Britain, and Japan allow foreign-affiliate interest deductibility and tax foreign-affiliate income. Why do you object to my proposal that Canada pursue the same approach?

    The other legitimate option, proposed in Budget 2007 but abandoned by Flaherty, would be to end the deduction of foreign-affiliate interest and retain the exemption of foreign-affiliate income. But corporate Canada wants to have its cake and eat it too: interest deductibility and tax-exempt foreign income.

    Canadian corporate-tax rates are already much lower than American and Japanese corporate-tax rates. The C. D. Howe Institute’s comparisons are based on the dubious concept of “marginal effective tax rates” and pit Canada against countries like Slovakia:

    http://progecon.wordpress.com/2006/10/13/the-skinny-on-metrs/

  • Huh? Canada doesn’t lose any money in Barbados! All of the banks in Barbados are Canadian owned. Like FirstCaribbean International Bank-FCIB which is owned by CIBC. RBC is in Barbados. As is ScotiaBank. Drive anywhere through the countryside all you see are Canadian bank drive up ATM machines…. The only other banks are the Royal Bank of Trinidad and Tobago and the Republic Bank of Trinidad and Tobago.

    The ATM network of Barbados is part Canadian owned. The power company Barbados Light and Power Company Ltd. is 37% owned by Canadian International Power Co. Ltd.

    Any money that Barbadians make through any “offshore” from or with Canada is flowing back into Canada via their banks or other business in Barbados as profits.

    Canada politicians should really stop and actually look at the amount of Business ownership in Barbados that is in Canadian hands.

    Many Hotels are Canadian owned. The Crane Beach hotel comes quickly to mind. http://www.thecrane.com/

    Canadian money lost in Barbados? HA– that’s some good spin….

  • EVEN the Hockey events in Barbados were started by Canadians.

    http://www.barbadosballhockey.com/

  • The allegation is that Canadian business invests in Barbados, or through it, to avoid paying taxes. The strong presence of Canadian banks in Barbados and extensive Canadian ownership of businesses there are entirely consistent with this allegation.

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