I was reading your lips, so I heard that you were trying to get my attention.
It's nice to see everyone again—virtually. Thank you for the opportunity to once again appear before this committee. I apologize for not being able to appear in person, but given the short notice, I was not able to adjust my obligations at the Rotman School of Management.
I am a professor at the Rotman School of Management. I have a doctorate in economics. As a professor, I do extensive research on issues related to international trade in Canadian competitiveness and have published extensively in this area. I have undertaken many studies for the federal government, including Industry Canada, Foreign Affairs, and CIDA.
In my opening comments I would like to address four points. The first relates to the benefits to Canada of the use of IFCs, international financial centres, by Canadian companies. I would like to talk about the impact on tax revenues. I would like to talk about the enhancement of Canadian competitiveness by the use of IFCs by Canadian companies. I'd also like to discuss the statement about why it would be misleading to conclude that these conduits or these entities are somehow a drain on Canadian tax revenue.
First, globalization has been a source of significant prosperity for Canadians. There is little doubt that the free trade agreements between Canada, the United States, and Mexico have significantly increased Canadian trade. This increase in Canadian trade has enhanced Canadian productivity, employment, and investment in Canada. Canada's prosperity has improved as a result of the surge in globalization.
Half of Canada's trade is intra-firm, which means that a significant portion of Canada's trade is between related parties. As Canadian multinationals move into foreign markets, the penetration of Canadian exports into those markets improves; that is, investment by Canadian firms into foreign markets complements or enhances Canadian exports, which enhance Canadian productivity, investment, and employment. The benefits of Canadian investment abroad are recognized by many in government, academia, and the private sector. When Canadian firms invest abroad, this is a good development for the Canadian economy. It has been reported by the Globe and Mail and many other media outlets that Canadian multinationals have recently made significant international investment or acquisitions abroad. It's important to the Canadian economy that this increase in breadth continues.
The relevant question here is whether these positive benefits that are associated with Canadian business investment abroad are sustained when the investment moves through an international financial centre. I have studied this issue in considerable detail and I have found that in fact there are two clear and very strong effects of Canadian investments that move through Barbados, as one IFC, on Canada.
First, Canada's trade with the global economy, broadly based, is enhanced when Canadian companies access the global economy through Barbados.
Second, the increased use of Barbados has allowed Canadian firms to diversify away from the U.S. economy; that is, allowing Canadian firms the ability to use Barbados as a conduit to the global economy has allowed Canadian firms to access less familiar markets such as those in Latin America and East Asia. These are significant benefits to the Canadian economy. I believe these results would also extend to other IFCs that have similar levels of transparency and disclosure as Barbados—for example, Hungary.
With respect to the impact on tax revenue, it is an empirical question; that is, it is not clear as to what the net impact is on Canada's tax revenues. I think it is quite incorrect to assume that tax revenues are lower as a result of the use of IFCs by Canadian companies. There are many reasons why one could expect Canadian tax revenues to be higher as a result of the use of IFCs by Canadian companies. The additional effects that result from the use of IFCs generate additional Canadian government tax revenue that must be taken into account. It seems to me that often these additional effects are ignored. The enhanced competitiveness of Canadian companies abroad results in greater earnings that result in a greater capital base for the Canadian economy. The enhanced revenues, whether repatriated to Canada, reinvested abroad, or even distributed to shareholders, increase Canadian economic activity, which ultimately raises Canadian tax revenue.
The increased use of IFCs by Canadian companies has coincided with the diversification of Canadian business activity outside the U.S.; that is, Canadian MNEs—Canadian companies—are using international financial centres to access less familiar and more risky markets. There are many reasons to believe that Canadian firms would be in a less competitive position in the new markets relative to U.S. or European companies.
The reduction in the cost of capital associated with financing structures that utilize IFCs allows Canadian companies to be more competitive. If Canadian companies did not have access to these financing structures, especially given that companies from the U.S. and Europe continue to have an access to fundamentally the same type of benefit, the competitiveness of Canadian companies would be significantly diminished. But there are many other reasons why Canadian companies would be less competitive, and hence the reduction in the cost of capital is very important.
Finally, I'd like to make a statement about why I think it's misleading to conclude that these entities represent a drain on revenues from Canada. Once again, I want to stress that there's absolutely no evidence to say that these entities have drained tax revenue from Canada. To the extent that Canadian multinationals are made more competitive, the revenues in foreign markets are enhanced, and whether these are repatriated to Canada or reinvested abroad, they do result in the enhancement of the Canadian capital base and Canadian economic activity, which are ultimately taxed by the Canadian government.
I understand that. I understand there's a global market and they have access. But why not make the investment directly from a Canadian multinational? There could be risks, but you could set it up through different layers.
I don't understand why it has to go through Barbados, unless you're telling me there are other moneys coming from foreign revenues, where the money is taxed at a lower rate in Barbados, and then that money, because it's taxed at a lower rate, is used for investment in another foreign jurisdiction. But that's not what I'm hearing.
I still don't see what this conduit in Barbados is being utilized for. I understand this is global, but there are companies doing it out of Canada and making those investments directly out of Canada.
I believe this is the reason. For all of the other multinationals that are operating in countries in Latin America and east Asia, these multinationals are coming from jurisdictions in Europe and the United States. These other multinationals have access to fundamentally the same types of financing structures. It means if Canadian companies do not go through a financing structure such as that, which is available through Barbados, they would be disadvantaged in the Latin America economies.
You have an American multinational, a European multinational, and Asian multinationals that are using these same types of financing structures. If Canadians were not allowed to use the financing structures, they would be disadvantaged relative to these other global multinationals.
Secondly, I think what's very important is there are many reasons to believe Canadian companies need this reduction in the cost of capital to go global. The infrastructure available to Canadian companies is not nearly as well developed as is the case for American or European multinationals.
I can give one particular example that has to do with the number of lawyers deployed globally. When a Canadian multinational moves into Latin America, they need to get access to legal counsel for compliance with Canadian law, and so on. It's very expensive for Canadian companies to do it because there are not nearly as many Canadian lawyers deployed globally relative to American multinationals. For the American multinational operating in Brazil, the cost to get legal counsel to make sure compliance is in order is far less costly than for Canadians.
There are many reasons to believe Canadians really need the reduction in the cost of capital to be able to compete with American and European multinationals.
I'm not an expert on taxation. I look at Canadian competitiveness, and I know how tax structures fit in. But it is quite clear that the relatively high rates of corporate taxes in Canada have driven many multinationals to move abroad.
Having said that, I think this point is very important, and it goes to the heart of a taxation system. Many corporations operate within Canada. They generate income within Canada. We're not talking about those companies. For companies that operate within Canada and that generate income within Canada, all of the income is subject to Canadian tax.
Separate from that are many Canadian companies that are moving into the global economy. That's really what we're talking about. We're talking about tax rates that apply to capital that's driving globalization.
I think it would be irresponsible to treat these two kinds of capital in the same way.
Thank you, Mr. Chairman.
I understand quite well where you are coming from when you say that using Barbados, for example, as a financial structure for foreign investment is one way of improving the productivity of Canadian businesses that invest abroad. That said, in my opinion— and I am interested in getting your impressions— it is not so much the fact that using Barbados enhances their productivity, but more the fact that they pay less tax .
It is clear that companies that invest in higher risk countries, where the constraints are the same and where they must compete with other companies, benefit from a lower rate of taxation in Canada. They could invest directly abroad without using this financial structure. The parties are being somewhat hypocritical, that is the companies that are using Barbados because they claim they need to, as well as the government which is leaving this door open, arguing that our businesses need to be productive and competitive. In point of fact, this is nothing more than a roundabout way for companies competing in these markets to pay less tax.
In your opinion, do companies really want to carry out these types of transactions in Barbados because of that country's financial structure and the benefits it provides, or is the main reason why they use Barbados tax related? For example, if Canadian companies were not required to pay tax, would they even consider using Barbados for operations of this nature?
I don't agree with what's underlying that question.
I think you really have to separate the operations of a company. You have companies operating within Canada and generating income within Canada. Those companies, whether they operate in Barbados or not, continue to pay tax rates on all of that income generated in Canada. Those companies are not going to use Barbados to in any way reduce the taxation for income generated in Canada. That's a very important point. I think that blurs the issue when people try to imply that somehow companies are using Barbados and other international financial centres to minimize taxes on income generated in Canada.
What we're talking about here is Canadian companies reaching out to the global economy. Canadian companies are not closing factories or operations in Canada; that's not what's going on. You have Canadian companies that are very successful, that have firm-specific assets, that are reaching out to the global economy to exploit those firm-specific assets and increase the market for Canadian goods, services—
I would like to pursue this matter further because although I am not an expert on the subject either, I am nonetheless convinced that companies use tax havens purely for taxation purposes. That seems rather obvious to me.
To answer your question about other international centres and why most Canadian companies use Barbados, I would have to say that the main reason is the tax treaty that Canada has signed with Barbados which allows Canadian companies to transfer home to Canada tax free any profits made in Barbados. Obviously a company will not use a tax haven that does not have a treaty with Canada because it would not be able to transfer home tax free any profits made.
Earlier, I asked if the main reason was not purely tax related. Let me put it another way, to help the committee understand the issue at hand.
Some Canadian companies are setting up legal entities in Barbados. We are talking about corporate entities, not actual places of business. These companies do not have employees working for them, no decisions are actually made. Corporations are created and business is transacted in various countries around the world, for example, in South America or Latin America. The corporations earn profits and after paying a tax of one or two per cent in Barbados, they transfer the profits home to Canada, where these profits are tax exempt because of the tax treaty in place.
If the Canadian government were to tell these same corporations that, instead of this arrangement, it was prepared to offer them the same rate of taxation as Barbados, namely 1% or 2%, while the rest of their operations would not be taxed, do you think that even one company would continue to use Barbados and to contend with all of these problems? Would even one company be willing to continue doing this?
Thank you, Professor Hejazi, for appearing again before committee. I value your input on this issue.
I wanted to go back to the comments of Mr. McCallum and those of my colleague, Madam Ablonczy, and the questions she asked specifically pertaining to foreign investment and foreign takeovers. I wanted to suggest that your comments on that are very much in line with what we've heard from other analysts around the country. Specifically, the Financial Post remarked that, “Rarely has a political news release contained as many bad economic ideas as the Liberals compacted into their call yesterday for a national frenzy over foreign investment”. The Edmonton Journal said, “In what can only be construed as a lame attempt to exploit public angst about foreign takeovers....” The National Post said, “ Unfortunately, a more typical case of politicians meddling in a world of which they know little....” I wanted you to know you're not in exclusive company on that.
I want to come back to thin cap rules and debt dumping. I recognize you've indicated a couple of times that you're not a tax expert per se, and that's okay. We talk about double dipping, which the minister has specifically said is an area we would like to pay a little bit of attention to. I agree with you that it's important that we enable our companies so they can operate efficiently and effectively and so they can expand into global markets. That's good for Canada and good for Canadian jobs.
Having said that, if we are allowing them to bring what I would term illegitimate debt back into Canada, or if we allow them to operate outside of thin cap rules, effectively they don't pay any Canadian tax or they dramatically reduce their Canadian tax burden on Canadian income earned in Canada. If we are to look at that solely as a means of trying to get more in step with the 75% of OECD nations that do have thin cap rules, do you have any suggestions on that? Obviously we have to be very surgical in how we're doing this. The last thing I want to do is hamper Canadian industry from being able to succeed, but I also want tax fairness. Do you have any suggestions on that?
: Merci, monsieur le président
, and thank you for appearing once again.
You said in answer to an earlier question that the advantage that Canadian corporations have in using financial centres like Barbados is to do business in risky markets, areas where we don't have a lot of experience or we don't have the facilities within Canada to finance them properly.
You mentioned also that we're competing in those markets against the United States, Europe, and Asia, which do have different systems in their nations, in their home countries, where they don't necessarily have to use centres like Barbados and can do the investment directly.
Could you outline what those differences are? Is it our taxation system? What are the differences between Canada and the U.S., Asia, and Europe?
Thank you, Mr. Chairman.
I appreciate your presenting today. It was very interesting.
I don't have a long question; most of the questions have been asked. One thing you did mention—and I'm not sure you're qualified to comment on it, but I would appreciate it if you are—was Alcan, as an example, and how people seem to be somewhat upset that a foreign takeover is happening, that a foreign buyer is interested, and why we haven't been able to take it to the next level.
With respect to my question, sir, as an economist, do you find there's a reason Canadians aren't more aggressive in investing in Canadian companies? Instead of us complaining when foreign organizations buy our firms, why aren't Canadians coming forward to buy these firms and keeping things Canadian?
I wish we had two hours to speak about this one topic. I think it's a very important question, and it's one I've discussed on many other occasions.
Basically, what is it about Canada that prevents the Canadian managers from taking over those companies? There are many hypotheses—they have not been quantified—but we think they have to do with managerial talent within Canada. For example, if you look at the number of MBAs that graduate in Canada relative to the size of the population, we lag behind that of the United States significantly. That has an effect 10 to 20 years down the road, when you look at the stock of managerial talent.
Secondly, when you think about how thin financial markets are in Canada relative to how thick they are in the United States or Europe, if you look at the amount of bank credit, for example, relative to the size of the economy, Canada lags behind that of other G-7 countries significantly. In terms of raising the capital that's required within Canada, that really limits the ability of Canadians. The whole infrastructure that underlies what would be needed for Canadian entities to rise up to buy these Canadian companies is really lacking.
I could go on, but again, I think this panel of experts should consider that topic as well. That's a very important issue.