Canada Urged To Retain Interest Deductibility On Foreign Investment

by Mike Godfrey, Tax-News.com, Washington

15 August 2008

Canadian firms trying to grow their businesses internationally would be disadvantaged by a proposal to eliminate interest deductibility on offshore investment, the Conference Board Canada, a non-partisan research organisation, has argued in a new briefing, 'Provide Fair Tax Treatment for Canadian International Business.'

"Canadian firms need - at the very least - a level-playing field for investment abroad if they are to take full advantage of global value chains and foreign affiliates. This should be the key guiding principle for all reform of international business taxation," said Glen Hodgson, Senior Vice-President and Chief Economist. "Canada's share of global foreign direct investment is slipping. In our view, this is not the time to remove interest deductibility."

The briefing was submitted to the federal government's Advisory Panel on Canada's System of International Taxation, chaired by Peter Godsoe.

The Board noted that, in order to compete globally, companies are accelerating their use of global and regional value chains, and they look for the best place to locate specific activities rather than creating an entire product or service in one location.

A large and growing share of international business also takes place through foreign affiliates instead of through traditional cross-border channels of trade, the briefing observed. Outward foreign direct investment allows Canadian firms to create foreign affiliates that sell into global markets and diversify their revenue sources, and foreign affiliate sales now top $400 billion annually.

The briefing is part of the Conference Board's series "Canadian Tax Reform for Sustainable Prosperity" designed to foster public debate on tax reform.

Previous briefings in the series include: Implement Sustainable Funding for Canada's Cities; Use Green Taxes and Market Instruments to Reduce Greenhouse Gas Emissions; and Harmonize Consumption Taxes to Improve Economic Efficiency.

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