Canada among the top in the world for tax competitiveness
25 Sep, 2012
Toronto, Vancouver and Montréal rank top 10 of 55 major international cities studied
Canada is the second most tax competitive country among 14 major global economies, after India, and took the top spot among mature markets, according toKPMG’s Competitive Alternatives 2012: Focus on Tax(Focus on Tax) study. Canadian cities, Vancouver (2nd), Toronto (5th) and Montréal (6th) ranked in the top 10 among 55 major international cities studied. The global KPMG study assesses the general tax competitiveness of 55 major international cities in 14 countries, and for the first time, the 2012 study features four major high growth countries – Brazil, Russia, India and China (BRIC).
“The study provides an effective approach for international comparisons based on the tax results of different business scenarios,” said Elio Luongo, Canadian Managing Partner, Tax, KPMG in Canada. “Canada continues to offer a very competitive tax structure, which is crucial to attracting inbound investment, spurring innovation, and creating skilled jobs that support our families and communities in Canada.”
Focus on Tax is a supplement to KPMG’s 2012 Competitive Alternatives(March 2012), a global study comparing total business costs across 14 countries. Focus on Tax compares the total tax burden faced by companies in each country and city, including: corporate income taxes, capital taxes, sales taxes, property taxes, miscellaneous local business taxes, and statutory labour costs, resulting in a Total Tax Index (TTI) for each location based on 19 different business operations in four sectors described below.
Featured Canadian Cities fare well on global stage
While Vancouver, Toronto, and Montréal are classified as major international cities (population greater than two million), and rank in the top 10 of 55 major international cities, Focus on Tax does measure 16 featured Canadian cities, and their associated total tax costs.
All 16 featured Canadian cities ranked ahead of all US cities, and among the 16 featured Canadian cities, Saskatoon (43.8) is the most tax competitive location overall, with Edmonton (44.2), Moncton (45.1), St. John’s (45.4), and Fredericton (45.5) following.
Canada ranks first for digital operations, well ahead of India and with the lowest TTI, primarily due to targeted incentives that provide significant financial support to digital media industries. Toronto (7.9), Montréal (25.2), and Vancouver (34.5) take the top three spots, respectively, for tax competitiveness in the digital sector among the 55 major international cities studied. These three cities all exhibit very low TTIs due to the impact of digital media incentives offered by the relevant Canadian provinces.
TTI rankings of countries for R&D operations vary significantly from other sectors and overall results, primarily due to the impact of tax incentives targeted to foster R&D activity. Canada (29.0) ranks first, with India (47.0), Netherlands (57.8), United Kingdom (63.2), and Russia (63.9) following, all with particularly low TTI ratings that reflect the effects of significant R&D incentives in those countries. Montréal (20.3), Vancouver (32.9), and Toronto (37.6) take the top three spots, respectively, for tax competitiveness in the R&D sector among the 55 major international cities studied.
In March 2012, subsequent to the completion of research and analysis for this report, theGovernment of Canada announced reductions to its R&D tax credit programs to commence in 2014. For operations that are highly R&D intensive, such as the dedicated R&D facilities examined in the R&D sector of this study, it is common for operations to earn more R&D credits than they are able to use (due to low taxable income, if any). Therefore, the reduction in Canadian federal R&D tax credits announced in the March budget is not expected to have a notable impact on Canada’s rankings for the R&D sector in future editions of this study. However, for other types of operations with a lower intensity of R&D (such as a manufacturer who also conducts some ongoing R&D), the recent federal changes may increase their tax burden and impact Canada’s rankings in future editions of this study.
Consistent with the overall results, India (50.0) also has the lowest TTI ranking for corporate services while Italy (186.2) and France (244.2) have the highest TTI ratings. The TTI rankings for these countries are also consistent with their rankings for statutory labour costs, illustrating the significance of this cost category to services firms where labour represents the predominant business cost factor. Canada (68.1) sees higher TTI scores in this sector and as such, its ranking slips to fourth.
Canada and Russia both move down in the rankings for manufacturing, with Canada (69.8) ranking fourth behind India (49.3), China (51.2) and Mexico (60.0), while Russia (77.6) ranks seventh also behind the United Kingdom (74.4) and the Netherlands (76.8). In both Canada and Russia, higher costs for other corporate taxes, particularly property taxes, have a significant impact on the manufacturing sector.
In Canada, a lesser significance of incentives in this sector, relative to digital and R&D, also results in a higher income tax burden for the manufacturing sector – however, Vancouver (53.0) represents an exception, ranking ahead of Mumbai (53.2), Shanghai (58.7), Monterrey (59.4) and Mexico City (60.6), even though Canada ranks behind each of India, China, and Mexico in the national results.
High Growth Markets
The 2012 edition is the first edition of KPMG’s Competitive Alternatives: Focus on Tax study to examine the major high growth countries and compare tax competitiveness in Brazil, Russia, India, China, and Mexico.
There is significant divergence between results for Brazil relative to the other four high growth countries—India, China, Mexico, and Russia. While the latter countries all rank among the top five countries for low tax burden with costs approximately 30 to 50 percent lower than the United States, Brazil ranks 11th among the 14 countries, with a tax burden 42.6 percent higher than the United States.
It is important to note that tax policies vary more widely than most other business costs, they vary by country, and differences in how taxes are weighted and applied in each country creates complexity. The divergent results for India and Brazil highlight the fact that these issues apply equally to the newly added BRIC countries as to the mature market countries studied in previous years. As such, low labour costs in high growth countries do not necessarily mean low tax costs in those countries.