How these companies used subsidiaries to avoid taxes

Here are two Canadian companies that have legally reduced their taxes through offshore subsidiaries:

Gildan The popular T-shirt and sports apparel manufacturer has declared more than $1.3 billion (U.S.) in income over the last five years but has paid only $37.9 million in tax, according to its corporate annual reports. That is the equivalent of a 2.8 per cent annual tax rate.

By its own reckoning, the company achieves this incredibly low tax rate almost entirely due to the “effect of different tax rates on earnings of foreign subsidiaries,” which reduced its tax bill by more than $384 million over that period.

Gildan operated out of Montreal for years, but in the late 1990s it came under intense pressure to cut costs in order to compete with cheap imports, said vice-president Peter Iliopoulos in an interview.

The firm moved its manufacturing to Honduras, where labour is cheaper, and its business HQ to Barbados, where the corporate tax rate is1.5 per cent.

“A company like Gildan that wanted to remain in the industry and maintain profitable margins — where it can drive its long-term growth strategy (was) essentially required to move their operations to countries where production costs were lower,” Iliopoulos said.

While Gildan maintains its corpo- rate headquarters in Montreal, it says all day-to-day business decisions are made at its office in Bridgetown, Barbados, which employs 200 people out of a global workforce of 42,000.

“As part of that overall strategy for the company, we were looking at taking advantage of trade preference programs and trade agreements that were in place,” said Iliopoulos. “Canada has a long-standing income tax treaty with Barbados . . . The Canadian government has decided to have their foreign affiliate system function in order to provide Canadian multinationals with the best ability to compete on an international and global scale.”

It’s not clear that any of the tax Gildan does pay — $4.9 million last year — goes to Canada. The company wouldn’t provide a breakdown of where its tax is paid. Valeant Pharmaceuticals There was a moment last summer when Valeant briefly surpassed the Royal Bank of Canada to become Canada’s most valuable company, but then everything went wrong.

After allegations of fraud and price gouging, including jacking up the price of cheap drugs after acquiring their parent companies, Valeant is now under investigation in Canada and the United States and its stock price has plummeted by more than 90 per cent.

Valeant only became Canadian in 2010 after the New Jersey-based company performed a “reverse take- over” of the much smaller Quebecbased Biovail. This allowed the company to be technically based in Canada and take advantage of our tax treaties through an existing Biovail subsidiary in Barbados.

The company now lists more than 300 subsidiaries in its annual report, several of them in Canada’s TIEA partners such as the Cayman Islands, British Virgin Islands and Bermuda. By holding patents and other intellectual property in these tax havens, Valeant can stockpile profits where there is little or no tax.

The company has only recorded a profit in one of the last five years, making it difficult to calculate taxes. In 2014, when Valeant declared more than $1 billion (U.S.) in earnings, it only paid $98.7 million in tax, for a tax rate of 9.4 per cent. Of the tax paid, Valeant states that only $600,000 went to Canada.

In its 2015 annual report, Valeant notes how important Canada’s relationships with tax havens are to its business model.

Under important factors that could affect its bottom line, the company lists “our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries.”

The OECD’s proposed crackdown on these schemes to move money into tax havens “could have a significant unfavourable impact on our consolidated income tax rate,” the company states. Company spokeswoman Meghan Gavigan said the company hasn’t moved any assets out of Canada to avoid paying tax here.

“Valeant’s assets outside of Canada were acquired through combinations with other global companies, not as a result of moving operations from Canada to other countries,” Gavigan wrote in an emailed statement. Methodology: The Star and CBC used figures reported by companies in their annual reports to compare income before taxes with cash taxes paid. All firms are required to report the difference between their statutory tax rate (theoretical tax rate) and their effective taxes (what they actually pay), breaking down how they raised or lowered their taxes, including through offshore operations.