Lexpert Magazine

32 LEXPERT MAGAZINE | APRIL/MAY 2017 | TAX COMPETITION | long way. "When NAFTA arrived in 1994, our average corporate tax rate was between 41 and 43 per cent," says Jack Millar, a partner with Toronto tax boutique Millar Kreklewetz LLP. So much so that we cur- rently enjoy an advantage of more than 10 percentage points over the US corporate tax rate. e United States also imposes tax on a corporation's worldwide income, which means that repatriated profits from a foreign subsidiary are taxed again by the US, subject to some credits for the taxes paid overseas. Not only would a 15- or even 20-per- cent rate encourage companies everywhere to do more business in the United States, it could also encourage US companies — in- cluding Apple, Google and Microso — to repatriate a large chunk of the estimated US$3 trillion they have generated abroad. It would also put an end to the phenom- enon that has seen American and other for- eign companies combine to form holding companies in lower-tax jurisdictions, with the merging companies then becoming subsidiaries of the new parent. In recent years, Canada has attracted a number of such transactions, includ- ing those arising from Texas-based Waste Connections' merger with Progressive Waste Solutions; Tim Horton's combina- tion with Burger King; Valeant's acquisi- tion of Biovail; and others, particularly in the life-sciences industry. While Canada According to Ted Citrome, a tax part- ner at Dickinson Wright LLP in Toronto, it's the "border-adjusted" part that's "the 800-pound gorilla in the room." Histori- cally, border-adjusted tax (BAT) is referred to in the context of a value-added tax (VAT), common in the European Union and in some 160 countries. Canada's clos- est equivalent is the goods and services tax (GST). "VAT and GST use the same sort of mechanism as BAT by taxing imported goods and exempting exported goods from that tax," Citrome explains. But VAT and GST are consumption or sales taxes: they are ultimately paid by the end users in the taxing jurisdiction, regard- less of whether the products are completely or partially imported. So Canadian resi- dents pay the GST whether their car is Ca- nadian, European, American or Japanese in origin. As a result, these cannot be seen as protectionist import taxes. Some coun- tries, of course, choose not to impose VAT on their own exports, but that alone does not make VAT protectionist. BAT, by contrast, is a business tax. e GOP plan would exempt exports from tax by not including them in a company's in- come; at the same time, companies would not be able to deduct the expense of acquir- ing or producing imports from the income the imports generate. In this form, BAT is an import tax — and protectionist — be- cause it treats exports differently from im- ports in the taxing jurisdiction. Levying this form of BAT could mean that, using the automobile industry as an example, that a car produced in Canada and Japan would be more expensive for is not as attractive as other destinations such as Ireland or the Netherlands from a straight tax perspective, the prevailing conditions here, in terms of politics, eco- nomics, capital markets, currency valua- tion and interest rates, are business-positive and make acquisition financing favourable from a buyer's perspective. Still, without the lure of Canada's lower tax rate, these types of acquisitions may be less likely to continue making their way here. "If [Presi- dent] Trump succeeds in pushing his tax proposals through, it will affect the entire matrix of decision-making for Canadian multinationals, including how to finance US operations and where to locate op- erations that generate profits," says Drew Morier, a tax partner in Osler, Hoskin & Harcourt LLP's office in Toronto. But it's not just the multinationals that should be concerned. "Canada's mid-mar- ket is a major beneficiary of trade with the US," says Vitaly Timokhov, a partner at TaxChambers LLP in Toronto. "Almost all of these businesses have US sales, espe- cially those dealing in consumer goods and information technology." e simple reduction of the US corpo- rate tax rate, however, cannot be viewed in isolation. In June 2016, Republicans in the House of Representative released a tax reform proposal that overlaps considerably with statements President Trump made during his campaign. e proposed plan, which would con- vert the current system into a "destination- based cash flow tax," would lower the tax rate to 20 per cent, but it goes further than a simple tax cut. Capital investments would be expensed rather than depreciated, busi- nesses would not be liable for US tax on overseas earnings, companies could no lon- ger deduct interest as an expense, and the tax would be "border-adjusted." "Any cut in the corporate tax rate in the US, whatever form it takes, will be a challenge because we're a small, open economy that is very close geographically to the US but has still managed to enjoy an economic advantage because of our lower corporate tax regime." Claire Kennedy Bennett Jones LLP

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