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Canada Told To Sharpen Corporate Tax Competitiveness

Tuesday, June 12, 2018

The IMF has said that the recent changes to the US tax system could make Canada a less attractive destination for investment.

The IMF has published the report from its latest Article IV mission to Canada, in which it noted that "external risks are more acute than in the recent past." According to the IMF, "economic anxiety is high due to trade tensions, uncertainty about the outcome of NAFTA negotiations, and the impact of the US Tax Cuts and Jobs Act on Canada's medium-term competitiveness."

The IMF stated that there is considerable uncertainty regarding the likely impact of US tax reform on US economic growth in the near term and the subsequent impact of these reforms on Canada. However, it did warn that "the medium-term impact of lower tax rates in the US could make Canada a less attractive destination for investment, leading to heightened uncertainty about Canada's medium-term growth prospects." It said that "the potential effects, through both real activity and profit shifting, could be substantial."

Turning to the difficulties surrounding the renegotiation of NAFTA, the IMF noted that if an agreement is not reached within a reasonable timeframe, investment and growth could face a sustained hit. The IMF estimated that were negotiations to fail and the parties to revert to tariff rates that satisfy WTO rules, long-run Canadian real GDP could be reduced by 0.4 percent relative to its baseline forecast of 2.1 percent growth in 2018.

The IMF recommended that it is now time "for a careful rethink of corporate taxation to improve efficiency and preserve Canada's position in a rapidly changing international environment."

The IMF said that a "holistic review" is necessary and is made all the more urgent by the recent US tax reforms. It suggested that the review assess the benefits and drawbacks of incremental approaches to tax reform and compare them to "more radical options, such as moving to some form of rent tax at the corporate level."

The IMF did nonetheless urge that Canada implement any changes in a fiscally responsive manner and that the Government should bear in mind that corporate taxation "is only one of several important determinants of business investment."