LOUD AND CLEAR by Denzil Doyle

After a few years our productivity will improve even though we are not necessarily running any faster on the treadmill.

Looking better from MNE tax vantage
From SCAN's Print Edition

Of all of the goodies handed out by Finance Minister Flaherty in his recent mini budget, the one that is likely to have the most impact on the Canadian economy is the reduction in corporate taxes. It will encourage multinational enterprises (MNEs) with Canadian operations to leave more of their profits in Canada and it could have a dramatic effect on Canadian productivity as we now measure it.
MNEs spend a lot of time and effort analyzing corporate tax rates in the various countries where they operate and ensuring that they make as little profit as possible in those that have corporate tax rates higher than the average around the world. Unfortunately, Canada’s rate has not been that attractive in recent years. What’s worse, we have had politicians at both the federal and provincial levels who seem to think they can sock it to the MNEs and they have no choice but to ante up.
How wrong they are!

A fact of life in the new global economy is that there is no longer any such thing as an integrated company in which a product is taken from idea to production and distribution within the same corporate entity. R&D might get done in Canada, marketing in the United States, manufacturing in Ireland, China, or Puerto Rico, and selling in dozens of countries around the world. Try as they might, it is nearly impossible for the various host countries to monitor inter-company transfer pricing to ensure they are getting their fair share of the global tax pie. What the MNEs are shipping around the world are unfinished products that do not carry price tags.

To illustrate the linkage between corporate tax rates and productivity, one need only look at what happens when a Canadian high tech company gets taken over by an MNE. Its new owners may decide that the only function that should be performed in Canada is R&D and that the Canadian subsidiary will derive its revenues by invoicing the parent company for labour, some administrative costs, and the minimum amount of profit that will be tolerated by Revenue Canada. The sales per employee is usually much less than it was before takeover because the high priced jobs have been moved out of Canada. The MNE may shift manufacturing and assembly that used to be done in Canada to Ireland, where the corporate tax rate is about half of Canada’s – even at the new rate.

The Canadian high tech landscape is made up almost entirely of branch plants and very few Canadian MNEs. Up until now, our corporate tax rate has been above the average paid by most MNEs around the world. It is a recipe for reduced productivity – as we now measure it. The Canadian R&D workers are likely as efficient at writing code or designing circuits as their counterparts in Silicon Valley are, but when we measure productivity we essentially compare the sales per employee of the Canadian R&D workers with that of the MNE in total. They just don’t stack up.

Under the new corporate tax structure, MNEs will be more inclined to leave more profits in the Canadian branch plants. At least they won’t put as much emphasis on avoiding Canada as a place to leave profits. What Mr. Flaherty has to do now is go on a sales campaign to tell the world that our tax rates are competitive because that is not how the world sees us at the present time. He also has to convince his provincial counterparts to be reasonable with their rates. After a few years, they will see our productivity improve even though we are not necessarily running any faster on the treadmill.

Guru in one guise, angel in another, Denzil Doyle is a member of the Order of Canada, a professional engineer, founder and former CEO of Digital Equipment Corp. in Canada, company director, mentor, consultant, investor and author of the best-selling ‘Making Technology Happen’. He can be reached at ddoyle@doyletechcorp.com.

Submit a comment

Please leave your name, which will be used to sign your submission to the SCANsite. Thanks for contributing your thoughts. Come back again. Tony Patterson, Editor & CEO.

© 2006 - 2009 SCAN
Site by Citadel Rock