Frequently Asked Questions

2006 KPMG Competitive Alternatives Study
Frequently Asked Questions (FAQs)

1. What is the purpose of the 2006 KPMG study?
2. Why are countries like Mexico, China, and India not included in the study?
3. How competitive was Canada in the overall study?
4. How would a higher value dollar impact the results of the study?
5. Although Canada retained the No. 1 rank in the G7, its cost index has gone up in relation the U.S. to 94.5 in 2006 from 91.0 in 2004. What has contributed to the increase in business costs?
6. How did Canada perform versus the United States overall?
7. How did Canada perform compared to the European countries overall?
8. How did Canada perform compared to the Asia-Pacific countries overall?
9. How did Canadian cities perform overall in the study?
10. What factors were reviewed?
11. Although 17 industries have been analyzed in the study, why have only 12 industries been considered when calculating the overall average costs?
12. Does the study consider incentive packages offered by governments for major business investments? If yes, what are they?
13. What exactly do the results of the KPMG study indicate about Canada to foreign investors?
14. What was the basis for choosing the different industry sectors?
15. How were the cities selected?
16. What is the effect of the rise in the Canadian dollar on the 2006 KPMG study results?
17. Why is the shift in relative costs lower than the shift in exchange rates?
18. How does Canada compare to other countries when it comes to R&D;?
19. How do Canada’s corporate tax rates compare to those in the United States?

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I. KPMG STUDY SCOPE AND RESULTS

A- PURPOSE OF STUDY
1. Question: What is the purpose of the 2006 KPMG study?

• The KPMG report is an authoritative guide and an essential tool for any company seeking cost advantage in locating its operations within a G7 country.
• The study compares the fundamental costs of doing business in nine industrialized countries including all of the G7, plus the Netherlands and Singapore.
• The study’s comprehensive analysis of costs is a key tool for investors and their financial advisors as they assess various global business locations.
• Importantly, it models real costs in actual business situations and presents a scorecard for international cost comparisons now, offering a historic benchmark for the future.

B-SELECTION OF COUNTRIES

2. Question: Why are countries like Mexico, China, and India not included in the study?

• The KPMG study is an analysis of business costs in nine comparable developed countries. Each of the countries included in the study can provide modern business infrastructure — such as an educated labour force, an efficient transportation infrastructure, reliable telecommunications and utilities, and educational and healthcare services.
• These factors and business inputs are not consistently available in developing countries.
• In fact, Singapore, which has a GDP per capita now on par with some western European nations, is the first newly industrialized country to be included in the 2006 Competitive Alternatives study.

C - CANADA'S RANKING
3 .Question: How competitive was Canada in the overall study?

• Canada was again found to be the most cost-competitive G7 nation.
• Singapore, which was a new inclusion in the study, placed first. France showed the best results among European nations, ranking third.
• Canada also ranked first among G7 nations in 12 out of the 17 industry sectors studied. These include: aerospace, chemicals, electronics, medical devices, pharmaceuticals, precision manufacturing, telecommunications, biotechnology, clinical trials, software design, Web and multimedia, and corporate service centres.

D - IMPACT OF EXCHANGE RATES
4. Question: How would a higher value dollar impact the results of the study?

• The exchange rate is one of the many factors impacting international business competitiveness.
• The exchange rate used in the 2006 edition of Competitive Alternatives is 85.2 Canadian cents to the U.S. dollar.
• With this rate Canada continues to hold a solid cost advantage over the United States.
• Even if the Canadian dollar were to appreciate by 10 percent relative to the U.S. dollar, Canada would still retain a small competitive cost advantage over the United States.
• To break even, the Canadian dollar will have to appreciate by approximately 13 percent, and this would bring the two currencies close to par.

E - INCREASE IN CANADA’S COST INDEX
5. Question: Although Canada retained the No. 1 rank in the G7, its cost index has gone up in relation the U.S. to 94.5 in 2006 from 91.0 in 2004. What has contributed to the increase in business costs?

• The rise in value of the Canadian dollar relative to the U.S. dollar is the most important factor impacting Canada’s business cost competitiveness since the 2004 study.
• Despite the appreciation of the Canadian dollar, Canada is still the overall cost leader in the G7 with overall business costs 5.5 percentage points below the U.S. average.

F - CANADA’S PERFORMANCE IN THE STUDY
6. Question: How did Canada perform versus the United States overall?

• Canada has a consistent and significant cost advantage over the United States in all 17 industry sectors analysed in the study.
• This is particularly notable for industries in the research and development field and for those requiring a high proportion of skilled labour.
• Canada has a 5.5 percentage points cost advantage over the United States.

7. Question: How did Canada perform compared to the European countries overall?

• Canada’s overall cost advantage over the European countries ranges from 1.1 percentage points over France to about 13 percentage points over Germany.
• Canada has significant cost advantages over the five European countries studied in 11 of the 17 industry sectors.
  

8. Question: How did Canada perform compared to the Asia-Pacific countries overall?

• Among the countries studied, Singapore has the greatest overall cost advantage of 22.3 points over the United States, which is the study baseline, and a 16.8 point advantage over Canada.
• Canada holds a considerable cost advantage over Japan. Business costs in Canada are more than 12 points lower than those in Japan.

9. Question: How did Canadian cities perform overall in the study?

• Overall, Canadian cities ranked very well in the study especially when assessed against comparable U.S. locations.
• Canadian cities are G7 cost leaders in 16 of the17 industry sectors analysed.

G - FACTORS REVIEWED IN THE STUDY
10. Question: What factors were reviewed?

• The study focussed on 17 industry sectors and measured the combined impact of all major location-sensitive cost components — such as labour, facilities, transportation, utilities, taxes and financing — on each location’s cost competitiveness.
• Canada ranked No. 1 among the G7 nations in 12 of the 17 industry sectors surveyed.

11. Question: Although 17 industries have been analyzed in the study, why have only 12 industries been considered when calculating the overall average costs?

• This decision was taken by KPMG to ensure comparability with previous study results.
• All comparisons are therefore based on the 12 industries that were carried forward from the 2002 and 2004 editions of this study.
• These 12 industries represent a good balance of different industry sectors, and include seven manufacturing and five non-manufacturing sectors.

H - GOVERNMENT INCENTIVES
12. Question: Does the study consider incentive packages offered by governments for major business investments? If yes, what are they?

• The study includes significant non-discretionary incentives with clearly defined eligibility criteria. These incentives include certain tax rates reductions, tax abatements, sales tax exemptions, investment tax credits, research and development incentives, and job tax credits available in various jurisdictions.
• The study does not include discretionary incentive packages offered by governments, such as complex financing assistance and tax abatements, since these are usually tailored to specific investment and job creation proposals.
• In general, the Government of Canada does not offer discretionary incentives.

I - WHAT THE STUDY INDICATES
13. Question: What exactly do the results of the KPMG study indicate about Canada to foreign investors?

• The study clearly indicates that Canada is very cost competitive as an investment location, especially when compared to the United States and other G7 countries.
• Canada also has several additional assets that make it an outstanding investment location: low taxes, a skilled work force, a healthy business environment, and the most generous R&D; tax incentives of all the G7 countries studied.

J - SECTOR CHOICES
14. Question: What was the basis for choosing the different industry sectors?

• The 17 industry sectors studied represent a broad mix of different industry types, including manufacturing, research and development (R&D;), software, and corporate services. They also cover a wide range of operating requirements such as labour, capital and facility requirements.
• The selected industry sectors analysed in the 2006 cost study were determined by KPMG and same as those examined in the 2004 edition.

K - CITY SELECTION
15. Question: How were the cities selected?

• Cities included in the international comparisons were selected by KPMG, based on the need to study comparable cities for the purpose of performing international and regional comparisons.
  

II. CANADA'S FISCAL AND ECONOMIC POLICIES

L - EXCHANGE RATES
16.Question: What is the effect of the rise in the Canadian dollar on the 2006 KPMG study results?

• The appreciation of the Canadian dollar since the 2004 study (75.0 Canadian cents to the U.S. dollar) has been a significant factor in the narrowing of Canada’s after-tax cost advantage to 5.5 percentage points in 2006 from 9.0 points in 2004
• Canada has retained its No. 1 position in 2006 as the overall G7 cost leader, with business costs 5.5 points below those in the United States.

17.Question: - Why is the shift in relative costs lower than the shift in exchange rates?

• The shift in relative costs is less than the shift in exchange rates are:
• (1) some costs of business will be sourced internationally in US dollars and therefore expressed in US dollars, these costs will not change with the exchange rates.
• (2) the impact of income taxes on before-tax profits dampens the impact of exchange rates on after-tax profits.

M - R&D; COSTS
18. Question: How does Canada compare to other countries when it comes to R&D;?

• Canada holds a nearly 11 percentage point cost advantage over the United States for R&D; costs.
• Canada’s R&D; tax treatment is the most generous among the G7, providing an immediate and full write-off for all expenditures in R&D; capital equipment and appreciable tax credits.
• Canada also provides a wide range of research support, technology transfer and market development, a strong capability in advanced technologies, and skilled workers.

N - CORPORATE TAX RATES - CANADA VERSUS THE UNITED STATES
19. Question: How do Canada’s corporate tax rates compare to those in the United States?

• While results vary among provincial and state jurisdictions, Canada is competitive with the United States in terms of effective tax rates.
• For the specific jurisdictions included in the international comparisons, effective corporate tax rates in Canada are on an average slightly lower than those in the United States for manufacturing and for corporate service operations.
• For R&D; operations, Canada’s effective tax rates in general are significantly lower than those in the United States. In some jurisdictions, tax credits can be greater than taxes payable.
• Furthermore fiscal measures introduced in recent federal budgets will provide Canada with a statutory tax rate advantage over the United States of 4.5 percentage points for manufacturing and 6.5 percentage points for non manufacturing by 2010.
• For small business, Canada’s corporate tax rates are significantly lower.