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Alberta
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Alberta
Business Tax |
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Released: September 13, 2000 REPORT AND RECOMMENDATIONS If you would prefer to download this file in
pdf format, click here. Part 1 - Background and Principles Go to: Part 2 - Issues and Recommendations Go to: Part 3 - Appendices ALBERTA BUSINESS TAX REVIEW COMMITTEE Honourable Steve West
Dear Dr. West: During the course of our review, we heard from a number of different groups and individuals who contributed views and ideas to our analysis. We would like to extend our appreciation to all those who provided input to the process. Given the breadth of the business taxes under consideration and the diverse backgrounds of Committee members, if there were any cases where a conflict of interest may have been perceived, members abstained from participating in discussions and voting on recommendations. We wish to thank you for the opportunity to participate in this review. We believe the recommendations will improve and maintain Alberta's tax advantage, for the benefit of all Albertans. [original signed by] Jack Donald, Co-Chair
Index
The Alberta Business Tax Review was launched in February 2000. The primary purpose of the review was to examine the impact of Alberta's business taxes on the province's economic and business climate and our international competitiveness, and to make recommendations to improve Alberta's competitive position. In the past eight months, the Business Tax Review Committee has reviewed tax trends across Canada and around the world, assessed how Alberta's competitive position measures up with other jurisdictions around the world, advertised widely to seek the views of interested Albertans, reviewed submissions, and listened to a wide range of ideas and suggestions for changes to Alberta's current business taxes. This report provides a summary of the wealth of information and ideas considered by the Committee and the Committee's recommendations for improving Alberta's competitive tax advantage.
Competitiveness of our tax regime and sustainability of our overall fiscal plan are therefore linked. The level of tax revenue depends on the size and health of our tax base – both people and businesses – for which we compete globally. In preparing its recommendations, the Committee sought to strike the right balance between these two interconnected objectives – improving Alberta's competitive position and ensuring that tax cuts are sustainable over time. The Committee reviewed each of the various taxes paid or collected by Alberta businesses and assessed those taxes in terms of key questions:
OVERALL CONCLUSIONS: ACTION IS NEEDED TO IMPROVE ALBERTA'S TAX COMPETITIVENESS
RECOMMENDATIONS: LOWERING CORPORATE INCOME TAXES IS THE TOP PRIORITY Alberta's corporate income tax rates for all corporations should be substantially reduced to the lowest in the country and competitive with other leading jurisdictions around the world.
The corporate income tax rate for Alberta's small businesses should be cut in half and the threshold should be doubled.
With some specific exceptions, other taxes paid or collected by businesses in Alberta should be maintained at current levels.
Changes should be made to capital gains taxes to improve Alberta's competitive position.
EXPECTED IMPACT: ALBERTA'S TAX COMPETITIVENESS IMPROVES AND ALBERTANS BENEFIT The Committee looked at the impact of its recommendations on Alberta's financial picture, economy and competitive position. Financially, the proposed cuts in business taxes would reduce revenues to the province by an estimated $741 million a year (based on the latest revenue forecasts included in the government's first quarter update for 2000-01), excluding any offsetting estimate of the positive impact of stimulating economic growth in the province. This is less than two thirds of the reduction in personal income tax revenue recently announced by the provincial government. It is sustainable based on current forecasts, and it is money well spent to improve Alberta's competitive position, ensuring Albertans will enjoy the prosperity which results from a healthy business environment. Highlights of the economic impact include:
ü Short term economic benefits would include:The level of Alberta's real GDP is up by 1.5% by 2006 ü An additional increase of 2.3% in real business investmentü An increase in productivity of 1.2%ü Lower prices for consumersü Lower costs to business.
ü Comparisons of marginal effective tax rates show that Alberta would have the most competitive business tax regime in the country and be able to compete with leading countries around the world. ü The real benefits of the tax changes would take place in the longer term when:
CONCLUSION: ALBERTA MUST SET ITS SIGHTS WELL BEYOND THE CANADIAN BORDERS
In February 2000, the provincial government launched a review of Alberta's business taxes. This step followed the government's decision to move to a new, single rate provincial personal income tax system designed to lower taxes for all Albertans, encourage economic growth and enhance Alberta's competitive position. The "deficit elimination" surtax has been removed. On January 1, 2001, the other "deficit elimination tax" will end. Following the recommendations of the Alberta Tax Review Committee, a new, single rate personal income tax system will be implemented. This new approach to taxation at the personal level marks a bold new step on the part of Albertans, maintaining Alberta's lead as the lowest taxed province in the country. With a new provincial personal income tax system designed and ready to be implemented, government's attention turned to the business side of Alberta's overall tax system. The Business Tax Review Committee was established with a mandate to examine the impact of business taxes on Alberta's economic and business climate and on our international competitiveness, to consider the impact of technology on business and commerce, and to make recommendations to improve Alberta's competitive position. The objective is to ensure that Alberta's business tax system is competitive but, at the same time, continues to provide a solid revenue base to help support Alberta's priority programs. Specifically, the Business Tax Review Committee was asked to examine the level and mix of taxes paid or collected by Alberta businesses including the following:
As part of its review, the Committee:
The following sections summarize the wealth of information and ideas reviewed by the Committee and present the Committee's recommendations for changes to business taxes in Alberta.
Who pays what? Alberta's current business tax environment Let's start with a basic question – Why tax businesses? Taxes are the primary source of revenues for the provincial government. They support programs and services Albertans value highly – our education system, the health system, roads and highways, a high level of innovation and science, and care for children in need. Businesses are taxed for a number of reasons. First, taxing business recognizes the benefits they receive from Alberta programs and services, whether that includes a highly skilled, well educated and healthy workforce, an efficient transportation and telecommunications network, safe communities, or the overall quality of life in the province. Taxes also reflect the fact that some businesses create costs through their operations, through greater use of roads and highways, the need for environmental protection, or demands on services in communities across the province. Business taxes ensure that people cannot avoid paying taxes by "parking" revenue in a business rather than paying personal income taxes. They also ensure that government gets a share of the profits made by businesses operating in Alberta, but owned by individuals outside the province or country. Business taxes are one component of Alberta's mix of taxes. Without the revenue generated from business taxes, individual Albertans and families would face a significantly higher personal income tax burden. At the same time, high rates of corporate taxes are a disincentive for businesses to locate, operate and grow within the province. In increasingly competitive global markets, capital is highly mobile and investors will quickly move their investments to locations where they get the best return. Provinces like ours need to be able to compete not only with other provinces, but also with leading countries around the world. Both the level and mix of taxes have to be competitive so that Alberta can continue to attract business investment, economic growth, and jobs for Albertans.
The following is a summary of the different types of taxes paid or collected by businesses in the province. In addition to these provincial taxes, Alberta businesses also pay taxes to the federal government and to municipal governments, as well as to other provinces if they operate outside of Alberta. Provincial corporate income tax Corporate income tax has been levied by the province since the 1940s. All incorporated businesses with a permanent establishment (e.g., office, mine, farm, oil well, etc.) in Alberta at any time in a tax year pay income tax on the portion of their taxable income that is allocated to Alberta. Although Alberta is one of three provinces that levies and administers its own corporate income tax, the Alberta calculation of taxable income closely parallels the federal calculation. Alberta businesses may claim different amounts of specific deductions for federal and provincial purposes. Alberta's general corporate income tax rate is 15.5%, the rate on manufacturing and processing profits not eligible for the small business deduction is 14.5%, and the small business rate is 6%. For corporations operating both in Alberta and in other provinces, taxable income is allocated among the provinces where the corporation has a permanent establishment according to an allocation formula based on the province's share of the corporation's total payroll costs and gross revenues. Alberta is one of three provinces that does not levy a capital tax on large corporations in addition to corporate income taxes. However, capital taxes paid by corporations to other provinces are deductible for Alberta corporate income tax purposes. Small Business Deduction Corporations which are Canadian-controlled private corporations, including professional corporations, throughout a full taxation year, may claim the small business deduction of 9.5%, reducing the provincial tax rate to 6% on the first $200,000 of active business income (i.e. non-investment income) from a business carried on in Canada. The Alberta small business deduction is structured in the same manner as the federal small business deduction. There is no cap on how much total lifetime income is eligible for the small business deduction and no set number of years for which the deduction may be claimed. Since 1994, however, the deduction has been limited to smaller and medium sized companies. The deduction begins to be phased out for companies with $10 million of "taxable capital," as defined for the federal Large Corporations Tax, and is fully phased out at $15 million of taxable capital. Manufacturing and Processing Profits Deduction (M&P) The Alberta M&P deduction parallels the design of the federal deduction. The 1% deduction may be claimed in respect of Alberta manufacturing and processing profits which do not qualify for the small business deduction. Generally speaking, activities which include making, assembling, shaping or forming something would qualify as "manufacturing", while preparation or physically altering something would be "processing". The 2000 federal budget announced that their preferential treatment of manufacturing and processing will end in 2005 in conjunction with the planned reductions in the general corporate income tax rate. Alberta Royalty Tax Deduction Crown royalties are paid by companies to the provincial government for the right to extract natural resources owned by Albertans. They have not been deductible in calculating taxable income for federal tax purposes since the 1970s. Instead, companies may deduct a "resource allowance", an amount equal to 25% of their resource profits. Alberta did not adopt this federal policy. If royalties exceed the resource allowance, companies may claim an additional deduction, equal to the difference between crown royalties paid and the resource allowance claimed. This makes royalties fully deductible for Alberta purposes. Alberta Royalty Tax Credit (ARTC) The ARTC is a royalty program administered through the income tax system. It returns a percentage of Alberta crown royalties paid by an oil or gas producer in a year on conventional oil and gas production, up to a maximum limit. Both the credit rate and the maximum credit have varied over time. The rate has been as low as 25% and as high as 95% of eligible royalties. The maximum credit has been as low as $1 million and as high as $4 million. The current rate varies between 25% and 75% and reflects fluctuations in quarterly oil and gas prices. Maximum benefits for a company or an associated group of companies are currently equal to the product of the ARTC rate for the taxation year and the lesser of Alberta crown royalties, or $2 million. The maximum benefit receivable under the program ranges from $500,000 to $1.5 million, depending on the prices of oil and gas. Capital Gains Taxation There has been much concern expressed about the level of personal income tax paid on capital gains. The Canadian tax system has always taxed capital gains less than other income. The question is how much less. The effective rate of tax on capital gains is affected by both the inclusion percentage and the statutory rate of tax. The 2000 federal budget reduced the inclusion rate for capital gains from 75% to 66.7%. Ontario's 2000 budget announced plans to reduce the province's inclusion rate to 50%. The tax system should co-ordinate the treatment of capital gains earned by individuals and those earned by corporations. Although Alberta administers its own corporate income tax system, the federal government administers the province's personal income tax system. Financial institutions capital tax The capital tax on financial institutions (banks, trust and loan corporations and credit unions) was introduced to offset the loss of Alberta corporate income tax revenue resulting from deductibility of capital taxes paid in other provinces. It became effective April 1, 1990. The tax is calculated on taxable paid-up capital employed in Alberta by financial institutions with a permanent establishment in the province at any time in the year. In 1999, Alberta reduced the rate of tax and broadened the tax base by harmonizing with the federal large corporations capital tax base, including incorporating long term debt into the base to reflect its increasing significance in capitalizing companies. Taxable paid-up capital now includes capital stock, retained earnings, long-term debt that is not due for at least 5 years, and other reserves. The tax rate dropped from 2% of taxable capital allocated to Alberta to 0.7% on the first $400 million of taxable paid-up capital and 1.0% on the remainder. The tax payable by a credit union remains capped at $100. Insurance corporations tax All provinces impose taxes based on insurance premiums. Some form of insurance premiums tax has been in place in Alberta since 1907. Since 1987, the rate of tax has been 2% on the amount of premiums for accident, sickness and life insurance and 3% on premiums for all other insurance. The tax does not apply to annuity contracts held by life insurers, marine insurance, reinsurance premiums received by a re-insurer, or Blue Cross coverage. Fuel tax The Alberta Fuel Tax Act imposes a direct tax on individuals and businesses for the purchase in Alberta of all unmarked fuel, except where the fuel is delivered and consumed outside Alberta. Fuel used for agricultural purposes, fuel used off-road for commercial purposes, natural gas and ethanol are tax-free. The current tax rates are 9 cents a litre for gasoline and diesel and 6.5 cents a litre for propane. The rates for railway and aviation fuel are 3 cents a litre and 1.5 cents a litre respectively. Tax Exempt Fuel Use (TEFU) Alberta provides tax exemptions and rebates on fuel used off-road for commercial purposes, in order to remove the fuel tax on inputs to primary resource industries, such as forestry, mining, oil and gas, and well servicing, which use large amounts of fuel off-road. TEFU is not limited to these industries. TEFU currently provides benefits of about $120 million per year, including approximately $45 million in the form of rebates. Alberta Farm Fuel Benefit Program This two-part program reduces the cost of fuel use in farm vehicles for Alberta farmers. It provides an exemption from the fuel tax of 9 cents per litre on both diesel and gasoline and 6.5 cents per litre on propane. Under the Farm Fuel Distribution Allowance, farmers also receive a grant of 6 cents per litre on diesel fuel used for farm equipment. Alberta farmers use about 550 million litres of diesel and 400 million litres of gasoline per year. The program provides benefits of about $120 million per year. Hotel room tax The Alberta hotel room tax was introduced in 1987. It imposes a direct 5% tax on the purchase price paid by the consumer, both for business and personal use, for temporary accommodation in Alberta. It is collected and remitted by the providers of temporary accommodation. The tax does not apply to rooms occupied continuously for 28 days or more, or to establishments with fewer than 4 bedrooms for rent. Most jurisdictions impose taxes on temporary accommodations. These taxes usually take the form of a specific hotel room tax, a general sales tax, or a combination of both. The average combined federal/state or provincial/local rate of taxation on hotel accommodation in North America is about 12%. In 1998, about 46% of person nights in Alberta hotels and motels were by non-Albertans. While out of province visitors accounted for 46% of all occupied room nights, they probably accounted for 55 – 60% of the provincial hotel room tax collected in 1998 because they generally rent more expensive accommodations. Non-residential Education property taxes Property taxes have been levied in Alberta since 1905. Property taxes are an important source of funding both for municipalities and for basic education. The province requisitions municipalities for the property tax portion of basic education funding (both residential/farm and non-residential property), and provides additional education funding out of general revenues. Non-residential property owners can deduct education property taxes for corporate income tax purposes. In 1994-95, about 50% of basic education funding came from property tax. This year, less than 40% will come from property taxes, and by 2002-03, it is estimated that only 36% of basic education funding will be raised through the property taxes. There are several categories of non-residential properties. The assessment of farm and industrial properties is the subject of reviews led by Alberta Municipal Affairs. The Business Tax Review Committee will not be looking into these assessment issues. There is also a committee of Members of the Legislative Assembly considering the education property tax system. The Business Tax Review Committee focused its examination of non-residential education property tax on the general issues of competitiveness, including the relative share of property tax in the business tax mix, differences between residential and non-residential education property tax rates, and issues related to machinery and equipment taxes on linear property such as electric power and pipelines.
HOW MUCH REVENUE DO THESE TAXES RAISE? The provincial government's 2000-01 budget estimates that the range of taxes included in this review will generate a total of close to $3.2 billion. A breakdown of the specific taxes and how much money they generate is included in the following chart.
HOW MUCH IS NEEDED TO SUPPORT GOVERNMENT PROGRAMS AND SERVICES? As noted earlier, government depends on taxes as the primary way of paying for essential programs and services. In the early to mid 1990s, the Alberta government took deliberate steps to eliminate the deficit, balance the budget and pay down the debt. Since that time, pressures for increased spending have mounted. The 2000-01 budget calls for total spending in the order of $17.7 billion. That's an increase in spending of almost 16% in the four years since the budget was balanced in 1996-97. Projections are for spending to increase to just under $18 billion by 2002-03. Alberta's population is increasing and government continues to face pressures for increased spending in health, in education, for infrastructure, and for a wide range of other important programs. At the same time, the province also is taking significant steps to pay down Alberta's accumulated debt of $12.5 billion. By repaying debt over the past six years, the province has been able to free up $845 million in savings that otherwise would have gone to pay interest and now can be used to support either important spending pressures or reductions in the taxes Albertans pay. However, the province still expects to spend about $900 million this year (2000-01) to pay interest on the remaining debt. By continuing to reduce the debt, the province can save significant funds to help sustain future spending priorities and reductions in taxes. In addition to taxes, the province is also heavily dependent on oil and gas resources as a source of revenue. Non-renewable resource revenues totalled $4.65 billion in 1999-2000. The price of oil and gas is set by international markets, leaving the province vulnerable to sharp decreases in prices. A one dollar (West Texas Intermediate US$/barrel) drop in the price of oil means a loss of $150 million to the province; a ten cent (Canadian $/thousand cubic feet (mcf)) drop in the price of gas means a $154 million decrease in revenues. The flip side is that during times when prices for both oil and gas have increased considerably, the province stands to gain substantial additional revenues. Predicting future prices for oil and gas is risky at best. Analysts vary considerably in terms of their predictions about future prices, ranging from those who expect prices to remain consistently high to those who foresee a potential downturn in coming years. The provincial government's 2000-01 budget is based on oil at $19 (US) a barrel for 2000-01, dropping to $18 (US) a barrel by 2002-03. The price of gas is estimated at $2.50 Canadian/mcf for 2000-01, dropping to $2.35 Canadian/mcf by 2002-03.
Both the business community, and the province as a whole, benefit from a stable and predictable tax system. There is little value in substantially lowering business taxes then having to sharply increase them again because the province does not have sufficient resources to support essential services. At the same time, if no action is taken to maintain Alberta's competitive position, especially in the face of growing global competition for investment, the province risks getting left behind, losing out on the potential for new investment, and losing jobs and business opportunities to other jurisdictions. In making its recommendations, the Committee carefully considered the potential impact on both the future growth of Alberta's economy and on the province's overall revenue picture. That assessment is included in the last section of this report.
As part of its review, the Committee looked at a number of issues related to specific taxes. However, there are a number of important issues that cut across the entire business tax system. Consequently, the Committee considered the following questions:
ALBERTA AND OTHER CANADIAN PROVINCES Albertans have taken great pride in paying the lowest overall taxes in Canada. Changes on the personal side combined with the absence of a sales tax means that individual Albertans and families continue to pay the lowest taxes in Canada. However, with steps being taken in other provinces, states and countries, Alberta's business tax advantage is being eroded.
ü On the corporate income tax side, Alberta's general tax rate of 15.5% is lower than all provinces except Ontario, Quebec and Newfoundland. Ontario recently announced plans to reduce their corporate income tax rates from 14.5% to 8% by 2006.ü Alberta's small business tax rate of 6% is about the middle of the pack in comparison with other provinces. British Columbia has the lowest rate at 4.75% (effective July 1, 2000) followed by Nova Scotia and Newfoundland at 5%. Ontario plans to reduce its small business rate to 4% by 2006. Quebec's tax rate of 9.04% applies to all businesses, regardless of their size.ü Alberta's manufacturing and processing rate of 14.5% compares favourably with most other provinces. However, Ontario's rate is currently 12.5%, but is scheduled to drop to 8%. Saskatchewan has a manufacturing and processing rate of 17%, but reduces that rate to 10% as the share of a corporation's national manufacturing and processing income allocated to Saskatchewan increases. Five provinces do not have a separate rate for manufacturing and processing – the rates are the same as the general rate.ü Alberta is one of three provinces that does not have a general capital tax.ü Alberta's capital tax rate on financial institutions is lower than all provinces except Ontario. However, due to differences in the base between the provinces, the rates are not directly comparable.
ALBERTA AND OTHER MAJOR JURISDICTIONS
Appendix 2 provides a more detailed comparison of Alberta's corporate income tax rates with other provinces and US states. An assessment by Jack Mintz, CEO of the C.D. Howe Institute, compares Alberta's corporate income tax rates and the effective tax rate on capital investment with Ontario and leading countries including the US, United Kingdom, Germany, Sweden and Ireland. Alberta's corporate income tax rates are higher than all jurisdictions except Ontario, although the comparison does not take into account Ontario's plans for corporate income tax reductions. Although a comparison of Alberta's statutory corporate income tax rates with other jurisdictions is useful, a more revealing way of assessing Alberta's business tax competitiveness is to look at marginal effective tax rates (METRs) on corporate capital. By taxing corporate income, the corporate income tax taxes the return to capital and can thus be viewed as a tax on capital itself. The METR is a simple summary measure of the impact of the tax system on the return to investing in corporate capital. In simple terms, it measures the percentage difference between the before- and after-tax rate of return on an additional or incremental, capital project. METRs take into account not only differences in statutory income tax rates, but also differences in the tax base due to different write-off rates and deductions, differences in tax credits, and the presence of some other taxes such as direct taxes on capital levied by other provinces. The latter is particularly important for Alberta because most other provinces levy capital taxes that are deductible for purposes of calculating corporate taxable income in Alberta. A more complete description of the METR approach is provided in Appendix 3. Using the METR approach, Alberta's current effective tax rate on investment compares favourably with Ontario and Quebec, but is higher than the US (except for manufacturing) and all other countries included in the comparison. It should be noted that property taxes are not included in the METR analysis.
To provide a more detailed comparison of Alberta's taxes and cost of doing business with other leading competitors, Alberta Economic Development Authority had previously commissioned KPMG to develop a model that compares actual costs and taxes paid by specific businesses. The model examines business costs, including taxes, for new business operations in six cities in Canada (Calgary, Edmonton, Montreal, Ottawa, Toronto, and Vancouver) and seven in the United States (Boise, Boston, Colorado Springs, Minneapolis, Phoenix, San Jose and Seattle). The model examined eight different industry sectors. The analysis focuses on the competitiveness of each location based on the relative tax burden and benefit/incentive offsets that a company in each industry would face in each of the 13 cities. This analysis treats all locations as being equal in all other costs so that the differences in government taxes, charges, and fiscal and incentive programs can be examined in isolation.
Table 4 shows that the business competitive ranking for Edmonton and Calgary ranges from 4th to 8th out of the 13 cities examined. Rankings for Ottawa and Toronto are based on full implementation of Ontario's announced corporate income tax cuts and show the impact of those reductions on their competitive position. Montreal consistently ranks ahead of Edmonton and Calgary due to Quebec's lower income tax rate and the extensive use of tax incentives such as research and development tax credits. US cities such as Seattle, Colorado Springs and Minneapolis rank ahead of Edmonton and Calgary for the computer software industry.
CANADA IN COMPARISON WITH OTHER JURISDICTIONS
An assessment by Nesbitt Burns of the tax changes announced in the federal government's February 2000 budget indicates that Canada's combined general federal/provincial corporate income tax rate is almost 45% - the highest of any major industrialized country. The average corporate income tax rate for OECD countries is 35% (based on current rates and not including plans in many countries to lower rates). They suggest that "tax-cut fever appears to be intensifying" all over the world.1 Nesbitt Burns also reported the following changes in corporate income tax rates in leading industrialized countries: ü Britain - reduced to 30%ü Germany's – to be cut from 52% to 35%ü Japan – cut from 46% to 42%ü Australia – reduced to 30%ü Switzerland – reduced to 25%ü Sweden – reduced to 28%ü Ireland – to be reduced from 24% to 12.5% by 2003.In comparison, France's corporate income tax rate is 37%, the US is at 40% and Italy is at 41%. With changes announced in the most recent federal government budget, Canada's combined rate will drop to about 37% over the next five years. Further reductions in other countries' rates can be expected over the same period. In addition to corporate income tax rates, Nesbitt Burns also suggests that Canada is not competitive on commercial property taxes. Canada's commercial property taxes account for 18% of all business tax revenues in Canada and they are among the highest in the world. Other groups also warn of problems with Canada's competitive position in relation to other countries around the world. Economists suggest that high corporate income taxes reduce investment and income, discourage savings and have a negative impact on risk-taking.2 Reports from both the Canadian Chamber of Commerce3 and Industry Canada4 indicate that Canada's standard of living has fallen behind that of the United States. Mintz suggests that, "Without doubt, federal and provincial corporate income tax policies will create a significant barrier to economic growth in the future if they remain in place as today."5 He indicates that Canada imposes the highest effective tax rate on capital invested in service industries and one of the highest rates on manufacturing compared to major OECD countries where significant tax reforms are underway. Mintz also states that:
ü The tax system has a negative impact on entrepreneurship and risk taking. Taxes on profits and capital gains earned as a result of risky investments reduce the incentive for taking the risk.ü In terms of encouraging innovation, Canada has the most generous tax treatment of research and development in the world. But in terms of adoption of new ideas, Canada's tax system is far less encouraging compared with other jurisdictions around the world.ü Despite Canada's "low wage" environment, we have not attracted sizable new foreign direct investment and Canada's share of North American foreign direct investment has fallen.1
"Congratulations Mr. Martin – A better than expected budget",
Nesbitt Burns website, February 28, 2000
A January 1999 study by KPMG6 surveyed the corporate income tax rates of 60 countries including the 29 member countries of the OECD and most countries in the Asia Pacific and Latin American regions. The following are key findings from the KPMG study:
ü The trend toward lower corporate income tax rates is due in part to the increasing globalization of business and rapidly evolving technologies. As business and capital become more mobile, developed countries are under more pressure to keep their corporate income tax rates competitive or risk seeing businesses move their activities to lower tax jurisdictions.ü The Economic and Monetary Union in Europe is also putting downward pressure on tax rates. Since 1996, the average corporate income tax rate among European Union countries has dropped by about three percentage points.ü Developed countries are combining forces to counteract the effects of globalization. Increasingly countries are working together to keep their tax measures in sync and there is greater cooperation in tax enforcement and development of tax policies.As noted earlier, trends in developed countries point to significant reductions in corporate income tax rates. Ireland, in particular, is often considered a prime example of the positive impact of decreased corporate income tax rates on stimulating economic growth and investment. While several studies suggest that there is more to the story than just reductions of corporate income tax rates, they conclude that low taxes continue to be a significant factor in Ireland's dramatic economic growth. Professor Brendan Walsh and others suggest a combination of factors was responsible for Ireland's boom, including fiscal stabilization and pruning of public expenditures, a favourable climate for foreign investment, increased success in industrial promotion, a low cost labour supply, increased access to post-secondary education, aid from the EU, and revisions to the exchange rate policy. In terms of changes to tax policy in Ireland, Walsh concludes that, "The basic lesson seems clear. A low corporate tax rate has formed an important component of Ireland's favourable environment for corporate investment and contributed significantly to raising the country's share of the flow of FDI (foreign investment) into the EU." 7 6
KPMG Corporate Tax Rate Survey, January 1999
Electronic commerce is changing the way business is done in Alberta, across Canada and around the world. Increasingly, location of the service is no longer a factor. People can almost instantly access the goods and services they need from anywhere in the world. While the growth of e-commerce is opening up new opportunities for Alberta-based businesses, it also creates a number of challenges to the traditional ways of taxing businesses. For example, the growth of e-commerce suggests that sectors once considered to be "non-tradeable", and therefore subject only to "local" competition, such as the distribution and service sectors, are increasingly subject to international competition. This makes it no longer desirable, or even possible, to subject those sectors to higher tax burdens than traditional "tradeable" sectors such as natural resources and manufacturing. In October 1998, the Alberta Tax Review Committee released its final report and recommendations on the Future Direction for Personal Income Taxes in Alberta. The report summarized a number of challenges created by the rapid expansion of e-commerce around the world. Those challenges include: ü Establishing identity – The identity of parties to a business transaction may be difficult to determine.ü Establishing location – Individuals and entities engaging in electronic commerce are able to establish an Internet address in almost any taxing jurisdiction regardless of where they are physically located.ü Obtaining acceptable documentation of proof – With electronic transactions, getting a "paper trail" or documenting transactions in different jurisdictions will be difficult.ü Eliminating the "middle men" – As traditional banks are transformed into a large number of banking facilities operating by Internet in offshore locations, it will be difficult for tax authorities to "piggy back" on the reporting requirements the central banks have traditionally provided.ü Tax havens and off-shore banking facilities – These will become more accessible and it will be easier for the average taxpayer to use offshore financial centres.
At the international level, work on addressing tax policies related to electronic commerce continues. From the Committee's perspective, it is important for Canada and Alberta to have consistent policies with other jurisdictions around the world. Given the uncertainty of future tax policies related to e-commerce, it is important for the province to retain a mix and diversity of taxes to balance the potential impact e-commerce could have on government's ability to tax businesses in the province.
NEW APPROACHES FOR TAXING BUSINESS
Some have suggested it is time for a bold new approach to how we tax businesses in Canada. A number of alternative approaches have been proposed and deserve further consideration. Jack Mintz and Richard Bird8 suggest an alternative to the current corporate income tax system. Economists argue that taxes on capital discourage investment, especially when capital is highly mobile and will move to jurisdictions that offer lower taxes. Corporate income taxes are a tax on equity financed capital. Eliminating corporate income tax at the provincial level and replacing it with the Mintz/Bird alternative would continue to tax capital but in a more efficient way. The base would be calculated as follows: Alternative tax base = Revenues from the sales of goods and services – purchases of current inputs (except labour) – depreciation of capital expenditure – royalties paid to the Crown In the case of Alberta, a tax of 2.6% applied to this base would generate the same revenues as the existing corporate income tax. A lower rate would deliver a tax cut to Alberta businesses.
The Committee believes that this approach and other alternatives merit further investigation by the province. Given that capital is highly mobile, the province needs to create a solid competitive advantage to attract and retain capital. Other jurisdictions around the world are exploring new and innovative ways of taxing business. It is important for Alberta to keep pace with these changes and continue to seek the most effective ways of taxing business and maintaining our competitive tax advantage. 8 Bird, Richard M. and Jack M. Mintz, "Tax Assignment in Canada: A Modest Proposal", February 2000
WHAT ARE THE OBJECTIVES OF CHANGING ALBERTA'S BUSINESS TAXES?
Across Canada, other provinces are taking steps to reduce business taxes as a way of attracting and stimulating economic growth. Ontario's scheduled reductions in its business tax regime will put Alberta at a competitive disadvantage. In effect, they have "laid down the gauntlet" for the rest of Canada. The Committee also believes Alberta needs to set its sights well beyond the Canadian borders. It simply is not good enough for Alberta to compete with other provinces in Canada. In today's global economy, with highly mobile capital, Alberta needs to be able to compete with US states, particularly the Pacific Northwest, and other major trading partners and take an aggressive position in competing with leading countries around the world.
The Committee developed the following set of principles to guide its recommendations.
Go to: Report and Recommendations - part 2Go to: Appendices - part 3 Return to: 2000 Tax Review Committee Home Page |
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