Canadian tax system a model for U.S. reform
Canadians gripe and complain about our tax system. But if we look at the bigger picture, clearly Canada is doing a lot things right and, as we learned last week in the wake the Burger King/Tim Horton's merger, the U.S. could learn a few lessons in tax policy from us.
First, let's take a look at our corporate tax system. While Burger King executives claimed that the "transaction is not really about taxes," the $12.5-billion takeover of Tim Horton's has further fuelled the debate going on south of the border about corporate tax inversions. It's a hot topic in the U.S. right now, but one we have traditionally heard little about in Canada. And for good reason - it's simply never been an issue for Canadian companies. An unfamiliar term for most Canadians until this week, corporate inversions are a U.S. phenomenon, as some U.S. companies with significant global operations and profits seek to merge with a foreign corporation, and, in so doing, move the headquarters of the merged corporation to that foreign, lower-taxed jurisdiction. This achieves two objectives: a lower corporate tax rate and, more significantly, the avoidance of U.S. tax on repatriated earnings.
According to KPMG's recently published "Corporate and Indirect Tax Rate Survey 2014," the U.S.'s combined federal and state corporate tax rate of 40% is the highest in the world next to the United Arab Emirates' rate (55%), although a footnote is quick to add that "having the highest statutory rate does not mean that the tax is actually levied." Canada's combined corporate federal and provincial rate stands at 26.5%, making Canada a relative haven. To the extent that income can be shifted into Canada (or any other lower taxed jurisdiction) in future years as a result of a foreign merger, there would be an absolute tax savings realized by the former U.S. corporation. But an even stronger motivation for inversions is the U.S. tax rule that requires U.S. corporations to pay U.S. corporate tax on global earnings when they are repatriated, even though those earnings will most likely already have been taxed abroad in the foreign jurisdiction. Canada, like the other five G7 countries, taxes on a territorial basis, and does not impose its own tax on income earned abroad.
So from a corporate tax policy perspective, if the U.S. is worried about more corporate inversions, it could look to Canada as an example of a globally competitive corporate tax rate and move to a territorial-based corporate tax system like its G7 partners. It doesn't end there. When it comes to personal taxation, the U.S. continues to stand alone (other that Eritrea) by taxing its citizens on their worldwide income no matter where they live. Canada and most other nations impose personal taxation based on residency or domicile as opposed to citizenship. While in many cases, no U.S. taxes are owing, the obligation to file a U.S. return along with various other forms to disclose interests in foreign bank accounts, trusts, and retirement plans has lead to the highly controversial FATCA regime in which most global financial institutions are now required to collect information about U.S. citizen clients and send it along to the Internal Revenue Service. Among the most notable effects of this onerous and intrusive system is large numbers of people renouncing their U.S. citizenship - a glaring sign that something is wrong with U.S. fiscal policy.
Finally, the U.S. has no national consumption tax, like our GST/HST regime. If the U.S. were to adopt such a tax, which many economists would welcome but dismiss outright as a virtual impossibility, the revenue obtained from so doing could offset the cost of modernizing its corporate and personal tax systems.