Tax Quarry

Canada currently has a marginal corporate tax rate of 35.6%.  It is lower than our US partner which applies a 39.3% tax on corporations, but still not competitive enough to discourage multi-national corporations from relocating parts of their operations abroad to lower tax jurisdictions.  Although a corporation’s marginal tax rate is not the only factor considered when deciding where to locate a foreign entity, it can be very influential if the jurisdiction of interest has a stable political and commercial environment.  To assess the actual tax benefits associated with conducting business in a particular jurisdiction it is insufficient to simply compare tax rates.  A review of the deduction, credit, and profit computation rules are essential in calculating potential tax liability.

Below is a list of the lowest tax rates as of January 1, 2004 as reported in “KPMG’s Corporate Tax Rate Survey – January 2004”.  At the time this report was published, there was evidence of a global trend to lowering corporate tax rates.  Presumably, the lower rates were a result of the desire to be more competitive internationally.   

It is likely that over the next few years this trend will continue.  More countries are aware that an increasing amount of multi-national companies are locating holding companies in low tax foreign jurisdictions, which creates opportunities to market tax savings as a way to attract new businesses within a countries borders.  This trend is not limited to smaller centers.  In fact, both the Canadian and United States governments have prepared studies that advocate for decreasing corporate tax rates in order to retain some of the multi-national businesses within its borders as opposed to using domestic rules that permit tax credits and deductions for foreign generated income.  Proponents for this approach argue that such a system would better meet the government’s goal of transparency.  It is not clear whether the proposal for a more competitive corporate rate will be implemented any time soon in Canada.  However, the government does currently recognize the right of multi-national businesses to structure their affairs to take advantage of low tax jurisdictions when deciding the best place to operate certain functions of their business, within certain limitations.  For example, multi-nationals should be aware of the Canada Revenue Agency’s new policy on Aggressive International Tax Planning and various anti-avoidance provisions in the Canadian Income Tax Act that could potentially limit the implementation of any tax saving structure or expose the company to penalties on already implemented structures.

In our global economy, a multi-national corporation that does not take advantage of potential tax savings associated with establishing a permanent establishment or residency in another jurisdiction may lose their competitive advantage and, maybe, their business.  Despite the limitations imposed under the new CRA policy, given that the government policy is to support foreign investments, at the very least, since the potential savings could be substantial it is worthwhile exploring the opportunities.   

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