Lexpert Magazine

34 LEXPERT MAGAZINE | APRIL/MAY 2017 | TAX COMPETITION | US companies and in other cases they will be damaging and possibly devastating," Citrome says. Companies in the United States that rely heavily on domestically produced ex- ports are, of course, among BAT's most strident supporters. But retailers and consumer-goods companies, which fear that currency adjustments will not offset BAT's impact on the costs of the foreign goods they import, have formed a group called Americans for Affordable Products to lobby against BAT. Producers of oil and other commodities, which are priced in US dollars on global markets, are concerned that their output will become much more expensive. Businesses dependent on a large number of foreign customers, such as those in the education and tourism sectors might also suffer from a US dollar inflated by BAT's implementation. In his Financial Post column, Mintz predicts that the complexities may force the US to choose a different route to tax reform. "I suspect the Trump administra- tion and Congressional Republicans will find themselves preferring a simpler way to spur economic growth: a sharply lower cor- porate income tax, accompanied by tighter rules to tax profits le abroad and fewer special carve-outs for favoured businesses," Mintz writes. What shouldn't be ignored in the discus- sion about corporate tax reform, however, is the potential reduction in personal tax rates in the United States. If that happens, Canada's combined federal-provincial marginal rate of 53 per cent — fourth highest in the OECD and already quite a bit higher than existing US rates — could, Mintz predicts, cause "a repeat of the same 'brain drain' we experienced in the 1990s." If the US dollar rises in response to BAT, the flow of talent southward could become of many commentators who have noted that, to the extent that the US is disadvan- taged by VAT in other countries, the situa- tion could be rectified through the imposi- tion of its own consumption-based BAT. e difficulty with that proposition, however, is that imposing a pure VAT on the existing US tax system without other reforms would amount to a tax hike — political suicide, to be sure, in the current political climate. "ere's a general lack of understanding everywhere of the com- plexities that are inherent in corporate tax systems," Kennedy says. e arguments against BAT are varied and numerous: even the Republican tax reform blueprint concedes that BAT might be a violation of international law. Promi- nent economists have testified and written that BAT will do nothing for the balance of trade because the US dollar would au- tomatically appreciate, making exports from that country more expensive for for- eign purchasers and imports cheaper. "e consensus view among economists seems to be that the new rules are unlikely to ac- complish their protectionist objectives," Citrome says. Perhaps most tellingly, the US business world is split on BAT, a point underlined by the relative silence of the American Chamber of Commerce on the issue. "In some cases, the changes will be helpful to even more conspicuous. Foreign investment in Canada could also suffer. Mintz and Phil Bazel, also of the University of Calgary's School of Public Policy, modelled the impact of a 15-per-cent US federal tax rate on new investment (see graphic). e effective tax rate in the US would fall by one-third, from 34.6 per cent to 23.1 per cent. at's still slightly higher than the Canadian rate of 20.1 per cent. "However," writes Mintz, "in certain sectors, where Cana- dian policy discriminates against indus- tries — namely, construction, utilities, transportation and retail trade — U.S. investments will be taxed at lower rates than Canadian investments." "I think we're going to see an im- port duty framed in terms of some kind of border adjustment rather than a tariff," says Peter Kirby, a partner in Fasken Martineau Dumoulin LLP's Montréal office. In other words, call it what you want — BAT, modified BAT, tariff or whatever — the upshot will be that the United States will reduce corporate taxes and Canada will have to compete on a brand new play- ing field. And if history is any indication, that could mean the equivalent of building a new stadium here as well: when the Rea- gan administration brought in reforms in 1986 that lowered personal and corporate rates in the US, Canada's federal and pro- vincial governments had no choice but to respond to the competitive pressure with reforms of their own. Kennedy suggests, however, that the Lib- eral government is unlikely to reduce the federal portion of the corporate tax rate, which currently stands at 15 per cent. "e feds don't have much room to manoeuvre, especially because they're already facing big budget deficits, and giving corporations any more breaks would be politically un- popular," she says. In Kennedy's view, the real problem lies with the 10- to 14-per- cent add-on to the federal rate that comes from provincial corporate taxes. Whether the provinces have much more room to manoeuvre than the federal government, however, is debatable. What manoeuvrability Canada may have could appear in the form of targeted tax breaks or their equivalents. "We could, for example, see changes to the small busi- "Canada's mid-market is a major beneficiary of trade with the US. Almost all of these businesses have US sales, especially those dealing in consumer goods and information technology." Vitaly Timokhov TaxChambers LLP

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