U.S. opposes OECD minimum tax and Canada should, too

The 15 per cent global corporate minimum tax orchestrated by the OECD and championed by U.S. Treasury Secretary Janet Yellen has been scuttled by Democratic Senator Joe Manchin. With the world’s largest economy and Canada’s fiercest competitor for business investment out of the deal, Canada should exit as well.

This has been quite a saga. In October 2021, more than 130 countries agreed to a general framework for the tax — though none actually agreed to implement it, only to consider at a later time whether or not to proceed. That time has come, and Canada should withdraw. What is really driving the OECD tax proposal is not corporate tax avoidance: it is the fact that cash-starved governments around the world need new tax revenue, and big business is always an easy political target.

With the 50-50 split in the Senate, the Biden administration needs each and every Democratic vote to implement the tax. It is not going to happen: on July 15, Joe Manchin kiboshed the deal. Speaking with a radio host, Manchin said he doesn’t support the tax because other countries have yet to enact it and he doesn’t want to put U.S. companies at a competitive disadvantage and damage the U.S. economy.

Manchin said he would be willing to reconsider the issue in September, when we know more about inflation rates and interest rate hikes. But it is unclear whether legislation can proceed so close to the U.S. midterm elections, which will likely give Republicans control of Congress. So as a practical matter the U.S. has abandoned the tax.

All 27 member countries of the European Union are a question mark as well. The EU requires unanimous agreement when changing tax laws, and Hungary is not on board. It is concerned about imposing additional costs on its businesses, particularly in light of economic difficulties resulting from Russia’s invasion of Ukraine. The new Czech president of the EU finance committee will try to convince Hungary to concede at the next committee meeting in early October: whether he will succeed is far from clear. In short, strong global support for the OECD tax has evaporated.

There are three fundamental reasons why Canada should withdraw.

First, the OECD tax has very little to do with corporate tax avoidance, which has been addressed by earlier OECD initiatives. In 2015, the OECD issued a 15-point plan to address tax avoidance, and Canada is proceeding with many of those recommendations. For example, Finance Canada issued draft legislation in February to limit interest expense deductions to a fixed ratio of tax EBITDA (“earnings before interest, tax, depreciation and amortization”). It was 26 pages long with 68 pages of explanatory notes. That was followed by further draft legislation in April to address so-called “hybrid mismatch arrangements” — 15 pages of some of the most complex legislative proposals ever seen, plus 71 pages of explanatory notes.

Second, there is a much easier way to address the few opportunities for corporate tax avoidance that remain. Notably, there is one provision in our tax code that allows multinational corporations to shift income from high-tax countries to tax havens using intra-group royalty and interest payments. This loophole was highlighted by the auditor general 30 years ago but Finance

Canada never acted. The offending provision could be repealed with the stroke of a pen — a change that would bring more cash into the federal government’s coffers than the entire 70-page package of OECD model rules.

Finally, the tax will hit large business and the Canadian economy at the worst possible time. Large businesses, those with more than 500 employees, account for more than 40 per cent of private-sector jobs in Canada, generally pay higher wages than small businesses and contribute more to innovation and productivity. We should not hamstring our job creators at the precise time when our giant competitor to the south has decided to walk away from the tax.

Some countries will implement the OECD tax. The United Kingdom, for example, has now issued a partial set of draft rules (116 pages long) with a proposed effective date of Dec. 31, 2023. Other countries will proceed as well. Let them. As for Canada, it is time for the federal government to put domestic job creation and economic growth ahead of political gesturing. Canada should withdraw from the OECD initiative.

WILL HIT LARGE BUSINESS AND THE CANADIAN ECONOMY AT THE WORST POSSIBLE TIME.