Corporate Tax Giveaway to the IRS

The main objection to my argument about the treasury transfer effect is that American companies do not actually repatriate their Canadian profits and pay US corporate tax on them. As The Globe reported:

Jack Mintz, director of the School of Public Policy at the University of Calgary, said the unique tax status of U.S. companies is a moot point because most keep their profits in Canada anyway.

“A lot of companies don’t want to bring [profits] back to be subject to tax, so they reinvest,” Mr. Mintz said.

Reinvestment in Canada is obviously not an end unto itself. US corporations invest here (or anywhere) to generate profits that they intend to ultimately repatriate and distribute to their shareholders. However, the longer repatriation is deferred, the more Canadian corporate taxes affect US corporations.

So, Mintz raises a valid question. Fortunately, we do not need to accept the answer he asserts. The Internal Revenue Service (IRS) publishes statistics on how much profit US corporations repatriate from Canada.

A challenge when I wrote my paper on the treasury transfer effect in 2009 is that the most recent available IRS figures were for 2004, the first year of an American tax holiday on repatriated profits. Some of the repatriation from Canada between 2004 and 2006 might have been motivated by that holiday.

Certainly, not all of the profits repatriated during this period were taxed at 35% in the US. That was Nathan Boidman’s main criticism of my argument in The Financial Post.

I am delighted to see that the IRS recently updated its data to 2007. In that year, even after the tax holiday, US corporations still repatriated $30.4 billion from Canada.

By comparison, Statistics Canada figures indicate that US corporations had Canadian operating profits of $43.1 billion in 2007. Given that some operating profits are used to cover non-operating expenses like interest, US corporations were repatriating (rather than reinvesting) the lion’s share of what was left.

Multiplying $30.4 billion by 35% indicates American tax obligations of $10.6 billion. But the IRS reports credits for Canadian taxes of only $8.3 billion. Therefore, the implied transfer of corporate tax revenue from Canada to the US treasury is $2.3 billion.

Significantly, in 2007, the statutory Canadian tax rate in most provinces at least equaled 35%. There is every reason to fear that the treasury transfer has grown, and will grow, as federal and provincial governments slash their combined corporate tax rates far below the US federal rate.

UPDATE (February 4): Quoted, along with Jim, in an excellent column in today’s Toronto Star

UPDATE (February 8): We also appear in this Saskatoon StarPhoenix editorial.

8 comments

  • Given the level of integration, the transfer pricing, the expenditures and creative accounting, I am hard pressed to believe much of what is reported officially- actually represents the larger dynamics involved here.

    The central argument should be, the Canadian CIT cut pads the profit margins of many American companies operating within Canada. So instead of shouldering a proper share of the costs of the social and economic infrastructure to enable profits, the Canadian corporate tax cut will line the pockets of American companies. Given the seemingly longer term direction of the dollar, more than offsets any incentive of a corporate tax cut.

    The whole CIT cut point is moot, given the dollars rise.

    And on the subject of the dollar, is it just me, but as the price of oil has closed in on $100 a barrel, why is it the Cdn $ seems to have stopped its rise?

    Could it be some new efforts by Mr. Carney to try and hold the dollar from some oil fueled rise. I do not see any major sustained strength in the American dollar contra other currencies.

    Kind of weird that the correlation in oil price and the Canadian dollar seems to take a different trajectory when we get near parity.

    pt

  • Spell It Out For Me

    So, just to be clear, & for those who may have missed it earlier,* do you still estimated that the bottom-line for this in the current debate is:

    Of the $6 billion in annual Canadian revenue lost by cutting the corporate tax from 18% to 15%, as much as $1.3 billion will go to the U.S. Treasury?

    * http://www.progressive-economics.ca/2011/01/31/corporate-tax-giveaway/

  • I know numbers do matter, so disregarding my complaints, extrapolating that over the previous rates in 2007, what do you estimate that the Tories have transferred to the US treasury?

    I still say we need to have a fairly high profile series of reports from a progressive perspective completed on this.

  • anybody have a good source for history of corporate taxes in Canada or a previous lit review. I am trying to put an updated literature review together.

    paul

  • Does this analysis still work if companies actually pay a much lower rate of tax in the USA, than 35%, as is often the case? See NY Times today for instance:

    “Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.”

  • Great question. The answer is affirmative.

    US corporations pay less than 35% of profits because of tax deductions. Check out the IRS spreadsheet linked in my post. Repatriations from Canada reflected “gross income” of $52.2 billion.

    The $30.4 billion figure that I cite is the “taxable income” remaining after deductions. So, US corporations are paying 35% of $30.4 billion (which is about 20% of $52.2 billion).

  • In answer to your question about a good source for history of corporate income tax in Canada Paul: I linked to it in my post on this topic, five reasons to say no…..
    An excellent summary prepared by Alexandre Laurin for the Parliamentary Library in August 2007.

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