PUBLICATIONSSPP Research Paper
Volume 11:7

February 20182017 TAX COMPETITIVENESS REPORT:THE CALM BEFORE THE STORM*
Philip Bazel, Jack Mintz and Austin Thompson†
SUMMARY
Canada stands to lose a major competitive edge unless it responds to thechallenges of the 2018 U.S. tax reforms by instituting reforms of its own. At 20.9
per cent, Canada’s tax burden on new investment (measured by the marginal
effective tax rate or METR), is competitive when compared to countries in theAmericas and Asia-Oceania, and it’s the second lowest among the G7 countries.
However, the rules of the game are about to change with U.S. tax reform.
Among the reforms the U.S. is bringing in are a drop in the federal corporate
income tax rate from 35 per cent to 21 per cent, a ten-year window for full andpartial expensing machinery and equipment, and other various rules that will
incent companies to push profits into the U.S. and interest and other expenses
into foreign jurisdictions. The result of this and other reforms will be a sharp
drop in the U.S. METR by almost half – from 34. 6 per cent to 18.8 per cent. Thismeans Canada will have a higher tax burden on capital than the U.S.
Put simply, Canada and other countries will face a drop in revenue while theU.S. gains revenue. Alarm bells should be ringing among public policy-makers in
Canada and elsewhere, since research shows that taxes are a significant factor
in multinationals’ decisions on where to invest globally and how to finance it.
The dramatic U.S. reforms will put Canada at a distinct disadvantage, dragged
down further by its small market size, energy levies and regulatory burden.
This paper examines the corporate tax-rate situation in 92 countries, with many
either having reduced their rates recently or are planning to in the next few
years. In Canada, the only movement has been in several provinces, entailinga small increase in British Columbia and small decreases in Saskatchewan andQuebec. And while the average METR among OECD countries has dropped*

This research was financially supported by the Government of Canada via a partnership with Western Economic Diversification.

†

Research Associate, President’s Fellow and Master of Public Policy graduate respectively, School of Public Policy, University of Calgary
and Master of Public Policy graduate. We thank two anonymous referees and the editor, Bev Dahlby, for helpful suggestions toimprove the analysis.

http://dx.doi.org/10.11575/sppp.v11i0.43270

w w w. policyschool.ca

in the past few years, Canada’s in 2017 was approximately the same as it was in 2010,
climbing upward from a nadir in 2012 on the backs of provincial corporate tax hikes.
Reforms in the U.S. are going to make that country a much more attractive place forinvestment than Canada because of the new tax advantages. However, Canada doesn’t
have to accept this diminished status. Federal and provincial governments can do anumber of things to offset the U.S. reforms. Corporate tax rates should be reduced
so as to achieve a more neutral corporate tax structure. By doing things like scaling
back the small business deduction and accelerated depreciation, Canada can reduce its
corporate tax rate to 23 per cent, which would be just a bit below the U.S.’s combinedfederal-state figure without losing revenue. Sales taxes on capital purchases could be
eliminated in some provinces, reforms could be made to the taxation of international
income and incentives for debt financing reduced. Carbon revenues could be used toprovide an offset for higher energy taxes businesses face in Canada.
The U.S.’s tax reforms are going to affect the economies of all 92 countries studied inthis report. Global policy-makers will likely respond with lower corporate rates putting
even more pressure on Canada to respond if it wishes to continue to attract investment
and remain competitive.

PUBLICATIONSSPP Research Paper
Volume 11:7

February 2018RAPPORT 2017 SUR LA COMPÉTITIVITÉFISCALE : LE CALME AVANT LA TEMPÊTE*Philip Bazel, Jack Mintz et Austin Thompson†
RÉSUMÉ
Le Canada est sur le point de perdre un avantage compétitif majeur s’il
ne répond pas au défi posé par les réformes fiscales américaines de 2018en instituant ses propres réformes. À 20,9 pour cent, le fardeau fiscal imposé
sur les nouveaux investissements au Canada (mesuré par le taux effectif
marginal d’imposition, ou TEMI) est actuellement compétitif comparativement
aux pays des Amériques ou de l’Asie et de l’Océanie; c’est le deuxième plus
bas des pays du G7. Par contre, les règles du jeu sont sur le point de changer
avec la réforme fiscale aux États-Unis.
Avec leurs réformes, les États-Unis entendent implanter une baisse du tauxd’imposition fédéral des sociétés de 35 à 21 pour cent, la comptabilisationen charge du montant intégral ou partiel des investissements en matériel etéquipement sur une période de 10 ans et divers autres règlements qui inciteront
les sociétés à transférer leurs bénéfices aux États-Unis tout en reléguant intérêts
et dépenses en territoires étrangers. Le résultat de ceci et d’autres réformes se
traduira en une baisse marquée du TEMI aux États-Unis de 34,6 pour cent à 18,8
pour cent, soit près de la moitié. Ce qui veut dire que le Canada se
retrouvera avec un fardeau fiscal sur le capital plus élevé qu’aux États-Unis.
En termes simples, le Canada et d’autres pays feront face à une baisse derevenus tandis que les États-Unis en engrangeront. La sonnette d’alarme
devrait retentir aux oreilles des responsables politiques du Canada et d’ailleurs,d’autant que la recherche démontre que les taux d’imposition constituent unfacteur déterminant pour les multinationales quand vient le temps de décider
où investir globalement et suivant quel mode de financement.
La réforme radicale aux États-Unis placera le Canada dans une position dedésavantage manifeste, aggravé du fait de la petite taille de son marché, deses taxes sur l’énergie et de son fardeau réglementaire. Ce document examine*†

Cette recherche a été soutenue financièrement en partie par le gouvernement du Canada via Diversification de l'économie del'Ouest Canada.
Chercheur associé, boursier du président et diplômé de maîtrise en politique publique, respectivement, à l’École de politiques
publiques et au programme de politique publique de l’Université de Calgary. Nous tenons à remercier les deux examinateurs
anonymes et le rédacteur en chef, Bev Dahlby, dont les suggestions ont permis d’amélioré notre analyse.

http://dx.doi.org/10.11575/sppp.v11i0.43270

w w w. policyschool.ca

le taux d’imposition des sociétés dans 92 pays, dont plusieurs ont réduit leur tauxrécemment ou prévoient de le faire au cours des prochaines années. Au Canada, lesseules initiatives ont été constatées dans les provinces, avec une légère augmentation en
Colombie-Britannique et une légère diminution en Saskatchewan et au Québec. Tandis
que le TEMI moyen dans les pays de l’OCDE a baissé au cours des dernières années, ilétait sensiblement le même au Canada en 2017 qu’en 2010, grimpant depuis un nadir en
2012 au rythme des augmentations provinciales sur les taux d’imposition des sociétés.
Les réformes aux États-Unis feront de ce pays un marché bien plus attrayant pourl’investissement que le Canada en raison des nouveaux avantages fiscaux. Le Canada
n’a cependant pas à se résigner à un statut ainsi diminué. Les gouvernements fédéral etprovinciaux peuvent prendre un certain nombre de mesures pour contrer les réformes
américaines. Le taux d’imposition des sociétés devrait être réduit pour tendre vers une
structure d’imposition ayant un impact plus neutre. En mettant en place des mesurescomme une diminution des déductions accordées à la petite entreprise et à desamortissements accélérés, le Canada pourrait réduire le taux d’imposition aux sociétésde 23 pour cent, ce qui le placerait juste en dessous du taux américain fédéral-États
combiné, sans perte de revenus. La taxe de vente sur les investissements pourrait êtreéliminée dans certaines provinces, des réformes pourraient porter sur l’imposition desrevenus internationaux et la réduction des incitatifs sur le financement par l’emprunt.
Les revenus du carbone pourraient être utilisés pour compenser les taxes sur l’énergie
plus élevées auxquelles les entreprises font face au Canada.
Les réformes fiscales des États-Unis vont affecter les économies des 92 pays couverts parcette étude. Les décideurs politiques vont probablement y répondre par une réduction
du taux d’imposition pour les sociétés, mettant encore plus de pression sur le Canada,s’il entend continuer à attirer les investissements et rester compétitif.

In 2017, most countries continued to keep stable or reduce taxes on business capital with only
a few, including Canada, raising taxes on capital. As the year ends, however, the tax reform
storm clouds are about to burst as the United States moves ahead with its first major reformin three decades with a focus on economic growth and tax competitiveness. As a result, 2018
promises to be a challenge for many countries closely linked to the world’s biggest economy,
especially Canada whose largest trading partner is America.
In this 2017 tax competitiveness report, we highlight significant business tax changes acrosscountries and their plans for reform. We review the business tax structures of 92 countries andwe provide a regional breakdown for the first time in our report. Of note, Canada’s current
tax burden on new investment (as measured by the marginal effective tax rate (METR)1 iscompetitive at 20.9 per cent with respect to the Americas and Asia-Oceania. Canada has ahigher tax burden on capital compared to Africa, Europe and the Middle East and northern
Africa regions. Canada has the sixth highest METR on capital among the G7 countries, 14th
highest among the G20 countries and 12th highest among 33 OECD countries.
Much will change as the United States, which accounts for about one-fifth of the world economy,
implements its path-breaking tax reform for 2018. Of greatest interest are the corporate income
tax changes that will substantially affect U.S. growth and tax competitiveness. The federal
corporate income tax rate will be reduced from 35 per cent to 21 per cent (including state
corporate income taxes the 2018 U.S. average corporate income tax rate falls from 39.1 per centto 26 per cent). Expensing for machinery and equipment is introduced for five years (2018-2022)
and phased out thereafter for five years. The corporate alternative minimum tax is eliminated.
U.S. companies will be able to bring dividends from foreign affiliates back to the parent on an
exempt basis. Several important tightening measures are introduced, particularly with respect tointerest, intangible income and loss deductions. Overall, the U.S. METR will fall sharply from34.6 per cent2 to 18.8 per cent. As a result, Canada will now have a higher tax burden on capitalcompared to the United States by about a tenth.
With the sharply lower corporate income tax rate, dividend exemption system and newlimitations on deductible interest, companies operating in the United States will push debt toforeign countries to the extent possible, reducing corporate taxes elsewhere. Under the dividend
exemption system, U.S. parent companies can bring money home from abroad without paying
additional tax to the U.S. government. The funds could then be used to reduce U.S. debt if
interest expense is not deductible. Overall, the U.S. gains corporate tax revenue while foreigncountries lose revenue due to financial policy changes.
Why have countries continued to reduce corporate tax rates in the past decade? While politicalpolling often shows that the public supports higher taxes on businesses,3 governments of allpolitical stripes have, for two reasons, continued to reduce corporate income tax rates, often
accompanied by scaling back tax preferences. First, lower corporate taxes encourage greater

1

1

The METR is equal to corporate income taxes, sales taxes on capital purchases, capital taxes and transfer taxes paid as apercentage of the gross rate of return on capital for the marginal project that earns sufficient profits to cover costs to obtainfinancing from bond and stock owners. See Mintz (1995a) and Box A below for further discussion. Readers can review thetheoretical model described in an appendix provided in Bazel and Mintz (2016a) that will not be repeated in this paper.

2

The U.S. METR was to be 29.7 per cent with 2018 bonus depreciation (partial expensing for qualifying machinery andequipment) and 31.0 per cent with 2019 bonus depreciation. Beginning in 2020, bonus depreciation was to be eliminatedaltogether.

3

A recent Canadian poll suggests 68 per cent would support raising corporate taxes. https://canada.isidewith.com/
poll/360580593.

investment and job creation. Second, lower rates and base broadening counter multinational
profit shifting through transfer pricing and financing decisions to help preserve revenues(Mintz and Weichenrieder, 2010a).4
Indeed, with deregulation especially in the financial and resource sectors, U.S. tax reform andincreased U.S. protection potentially culminated by a collapse in NAFTA negotiations, the taxcompetitive outlook for Canada is no longer an advantage as we enter 2018, exposing ourselvesto disadvantages such as a small market, energy levies and regulatory burdens. Canadiangovernments will need to put competitiveness on the front burner for public policy initiatives.
This paper is divided into four parts. In the first part, we provide our assessment of global tax
policy in 2017 and its implications for Canadian competitiveness. The second part provides
a breakdown of METRs by province and industry. The third part provides our empiricalassessment as to whether tax policies matter to investment. The fourth part discusses tax
reform in light of U.S. tax reform.

TAXES AS AN INVESTMENT COSTWe focus on tax costs directly affecting capital allocation and hence economic growth andliving standards in a country. Globally, capital investment is mobile among countries with open
markets. Multinationals decide whether or not to invest in a country by gauging the tax costs
compared to those in other countries where the non-tax investment conditions are similar toeach other.
Further, corporations do not bear the burden of the taxes they pay – people do. Any taxes
on large businesses in a small open economy will be significantly borne by the less mobile
factors domestically through higher prices on consumer goods and/or lower real wages paid toworkers and rents to landowners, contributing to a less progressive tax structure. Therefore,
lower corporate tax costs allow for higher compensation to be paid to workers and allow forlower prices for consumer goods, both of which directly contribute to a higher living standard.
Reducing the tax cost to business will help increase the nation’s wellbeing in the long run.
Not all economies can be characterized as “small open economies”. Capital mobility may be
restricted due to regulations or shareholders’ reluctance to invest in foreign markets which areless known to them. Also, some economies such as the United States and China are sufficiently
large that their corporate taxes could reduce investment demand and the returns on capitalearned by global investors. In these instances, both labour and capital owners will share thecorporate tax burden. For Canada, the corporate tax on large firms falls heavily on labour inpart due to productivity losses (McKenzie and Ferede, 2017).
There is no easy moving target in ranking countries according to their tax competitivenessbecause the world is constantly changing. The word “changing” is of concern from two
perspectives.
Concerns have also been expressed that taxes do not affect business investment, even thoughmost scholarly work has concluded that reductions in effective corporate tax rates encourage
42

On average, studies estimate that a point reduction in the corporate income tax rate results in an increase in reported pre-tax
profits of 1.55 per cent (Heckemeyer and Overesch, 2013). Isolating tax-planning shifts from economic changes, the authors
suggest that a one-point reduction in the corporate income tax rate increases profits by 0.8 per cent.

more capital investment. Along with taxes, other factors such as the strength of the economy
and the quality of the workforce influence investment. Nonetheless, taxes make a difference, allelse being equal.

BOX A: MEASURING TAX COMPETITIVENESS
To evaluate tax competitiveness, a summary measure is provided that takes into account thevarious taxes that directly impact on profitability. The effective tax rate on new investment –also called the marginal effective tax rate (METR) on corporate investments – is commonly usedin public policy analysis to understand how the tax structure affects capital investment.
A business invests in capital until the return on capital net of taxes and risk costs is equal to thecost of holding capital. At the margin, the investment decision will be affected by taxes paid
on capital investments. If taxes increase, the business will earn after-tax returns that are lower
than financing costs. The business will then cut back investment, accepting only those projects
with a sufficiently high rate of return to cover both financing costs and taxes. Thus, the effective
tax rate on new investment, or tax wedge, is a good indicator of how investment is affected bytaxation – the higher the tax wedge, the lower investment will be, and vice versa.
For example, suppose companies must pay out in after-tax profits a return (net of risk andtaxes) equal to five per cent to attract financing from equity and bondholders for a newinvestment project. If the tax wedge is 50 per cent, it means that the company must earn a
10 per cent net-of-risk rate of return to cover taxes and cost of financing. If the project earns
less than 10 per cent as a pre-tax rate of return, the project will not move forward. Of course,
some projects might earn more than a 10 per cent rate of return on capital, but as long as theminimal rate of return is earned, a project will be profitable to undertake. Therefore, if the tax
wedge decreases, more investment projects become profitable since a lower rate of return is
acceptable to cover both tax and financing costs.
Briefly, the effective tax rate, or tax wedge, is the portion of capital-related taxes paid as ashare of the pre-tax rate of return on capital for marginal investments (on the assumption thatbusinesses invest in capital until the after-tax return on capital is equal to the cost of financing
capital). Included are corporate income taxes, sales taxes on capital purchases, and othercapital-related taxes such as real estate transfer taxes, financial transaction taxes and assetbased taxes. Municipal property taxes are excluded since effective tax rates are not observableby industry or across countries. To measure municipal tax effects on investment exactly, thecost of municipal services that are directly funded by property levies should also be subtracted
to arrive at the effective property tax rate.
To compare across 92 countries, this analysis includes manufacturing and service industries(services include construction, utilities, transportation, communications, trade, and otherbusiness and household services). Companies invest in structures, machinery, inventory and land
to develop their various projects. They use retained earnings, new share issues and debt to fundtheir projects. Capital structures and financial ratios are equalized across countries to isolate tax
effects. Inflation rates vary across countries to take into account their interaction with the tax
system with some countries such as Chile and Mexico indexing taxable profits for inflation.

3

THE 2018 GLOBAL TAX BURDEN ON CAPITAL INVESTMENT
In 2017, most countries made technical changes to their corporate tax rates with few major
reforms in the offing. Eleven of the 92 countries we surveyed have reduced corporate income
tax rates in 2017. Most have done so by a point (Israel, Norway, Pakistan, Peru, Slovak
Republic, and the United Kingdom). Luxembourg reduced its corporate income tax rate by two
points and Italy by 2.9 percentage points in its federal and regional tax. Two countries raised
corporate income tax rates (one point in Chile and two points in Slovenia).
Several countries have also announced further rate reductions after 2017. The United Kingdom
plans to reduce its corporate income tax rate to 17 per cent by 2020, Luxembourg to 18 per centby 2018 and Norway to 22 per cent by 2018. Pakistan will also be reducing its corporate rate in2018 to 30 per cent. France plans a five-point reduction in its corporate income tax rate but thisis slated for after 2019.
In Canada, the corporate income tax rate was changed only at the provincial level – a one-point
increase in British Columbia slated for 2018, a one-point reduction in Saskatchewan staged over2017 and 2018, and a 0.1-point reduction to 11.8 per cent in Quebec as part of its five-year plan
to reduce the corporate income tax rate to 11.5 per cent by 2020.
Several countries did adjust their tax bases by, for example, changing the rules governing
depreciation; tax credits, especially in relation to energy investments; international income andprofit-insensitive taxes on capital. The most significant reform took place in Georgia, which
has adopted the Estonian system of exempting retained earnings (corporate taxes apply to
distributions paid to residents and non-residents).
Thus, “all is quiet on the Western front” to quote the German book describing the rather illfated life of a soldier during the First World War. That is about to change as the United Statesembarks on implementing its tax reform in 2018, which will be reviewed below.

HOW DOES CANADA GLOBALLY PLACE IN 2017?
Since 2012, Canada’s METR on capital has been increasing due to provincial corporate income
tax hikes, some reduction in tax preferences and British Columbia’s re-adoption of a retail sales
tax with its substantial tax on capital purchases. The 2017 METR on capital in Canada is 20.9
per cent, about the same as 2010 (after reaching a lowest point in 2012).
Canada’s record in the past seven years has gone somewhat against the grain around the world,
although it still remains in the middle of the pack. The simple average METR among OECD
countries has dropped from 20.0 per cent in 2010 to 19.1 per cent in 2017 (or 31.1 per cent to29.2 per cent on a GDP-weighted average basis). For the 92 countries considered in this study,
the METR on a simple average basis has changed little – 20.6 per cent in 2010 and 20.7 per centin 2017. On a GDP-weighted average basis, it has fallen from 30.4 per cent to 28.8 per cent.
We also provide a comparison to G7, BRIC (Brazil, Russia, India and China) and G20 (seeAppendix) and among various regions in the world for 2017 (Figure 1). Canada’s METR iscompetitive relative to other G7 countries except Italy, which has a lower METR, especially
due to its nominal deduction for new equity financing costs.

4

FIGURE 1	MARGINAL EFFECTIVE TAX RATES FOR 2010 AND 2017:
CANADA IN COMPARISON WITH VARIOUS SUB-GROUPS

Note: * refers to a simple average and w refers to GDP-weighted average. MENA refers to the Middle East and North
Africa region.

Generally, most European countries levy lower taxes on capital compared to Canada (ona GDP-weighted average basis, Europe’s METR is higher than Canada’s given the size of
the French and German economies, which have higher tax burdens on capital compared to
Canada). METRs in countries located in the African, Middle East and northern African regions
are on average lower than Canada’s. On the other hand, Canada’s METR is below the average
METR in the Americas and Asia-Pacific, at least on average. Further regional analysis isprovided below.
On a country-by-country analysis, Canada’s METR on capital is in the middle of the pack asshown in Figure 2. Canada now has the 12th highest METR among 34 OECD countries in 2017
compared to 14th highest in 2010. Among 92 countries, Canada has the 38th highest METR
on capital in 2017 (37th highest in 2010). Many of the largest economies, including the UnitedStates, Brazil, France, Germany, India and the United Kingdom have METRs that are higher
than Canada’s. On the other hand, smaller countries including Denmark, Finland, Ireland,
Mexico, Singapore, Spain, Switzerland and Sweden tax capital less heavily than Canada, andseveral of them attracted significant foreign direct investment inflows as a share of their GDP
in past years (Mintz and Weichenrieder, 2010b).

5

FIGURE 2

6

MARGINAL EFFECTIVE TAX RATES ON CAPITAL BY COUNTRY FOR 2010 AND 2017

Source: Authors’ calculations.

One of the reasons countries vary in terms of tax burden on capital investment is the statutory
corporate income tax rate on profits, including surtaxes, subnational statutory tax rates anddeductibility (Figure 3). In our analysis of 92 countries, we find that the correlation between
the METR and statutory corporate income tax rates is 47 per cent. Statutory tax rates are notthe only source of variation of METRs across countries. Some countries have a high sales tax
on capital purchases (such as Brazil) or high real estate transfer taxes (China abolished oneof its three transfer taxes in 2016). Some countries have high taxes on corporate distributions
to resident and non-resident shareholders (e.g., India). Others provide a deduction for the costof equity financing (Brazil, Belgium and Italy), an exemption for taxes on retained earnings(Estonia and Georgia), or accelerated depreciation and other cost deductions that result in lower
METRs (e.g., Slovenia).
Statutory corporate income tax rates can therefore be misleading as a barometer of tax burdens.
Chile has a 25 per cent corporate income tax rate, has relatively fast write-offs for machineryand indexes profits for inflation. With two-fifths of capital financed by debt, the METR on
capital is only 8.2 per cent since interest payments are deductible and therefore it shelters
profits from corporate income taxation.
As shown in Figure 3, most countries have reduced or kept the same corporate income tax rates
since 2010. Some important exceptions include Colombia, which now has the highest corporate
income tax rate in the world at 40 per cent, along with Chad. In 2017, the United States follows
with a combined federal-state corporate income tax rate of 39.1 per cent – but that is now“trumped” by the 2018 reform to be discussed more fully later. France has also increased
its corporate income tax since 2010 from 36.2 per cent to 38.5 per cent in 2017, although the
Macron government has proposed reducing the corporate rate by five points in 2020.5 Canada’s
corporate income tax rate has fallen about 2.8 percentage points since 2010, although it hasslightly risen by a half point since 2012.

57

http://www.cfe-eutax.org/sites/default/files/FRper cent20Nationalper cent20Reportper cent20Marchper cent202017.pdf.

FIGURE 3

8

CENTRAL SUB-NATIONAL CORPORATE INCOME TAX RATES BY COUNTRY 2010 AND 2017

Source: OECD, KPMG, EY, PWC and other sources used to estimate combined central and sub-national corporate income
tax rates.
Tax rates presented above include sur-taxes which effectively increase the income tax burden.

REGIONAL ANALYSISCountries within a region are more likely to mimic the tax policies of their neighbours dueto their proximity as well as having similar economies and historical backgrounds. Below,
we provide a review of Canada’s competitiveness with regions in the global economy. Tax
competitiveness is especially relevant to trading relationships as businesses export goods andservices or invest in other countries to develop markets. Detailed computations of METR bycountry and region for manufacturing and services are provided in Appendix A.
Canada has a regional trade agreement in North America (the North American Free Trade
Agreement with the United States and Mexico) and Europe (Canada-Europe Free Trade
Association with Iceland, Norway, Liechtenstein and Switzerland and the Comprehensive
Economic and Trade Agreement with the European Union). It also has several bilateral trade
agreements including with Latin American countries (Chile, Colombia, Costa Rica, Honduras,
Panama and Peru), the Middle East and northern Africa (Israel and Jordan) and Ukraine.
Thirty-seven foreign investment agreements have been developed. Several other trade andinvestment agreements have been in negotiation for some time. Canada also has 97 bilateral tax
treaties with countries throughout the world.

9

THE AMERICAS
The Americas represent an historical relationship among countries in the Western hemisphereconquered by British, French, Spanish and Portuguese colonial powers largely since the 16th
century. Today, trade and investment link the Americas even though the countries’ tax systems
differ in accordance with their colonial influence. Latin American countries have levied
corporate income taxes sometimes with rates varying between distributed and undistributed
profits (e.g., Mexico and Chile). Some have used minimum or presumptive taxes based on asset
value to ensure taxes are collected (e.g., Colombia). Historically, Latin American countries haveencountered bouts of high inflation – Chile, Mexico, Uruguay and Venezuela, for example,
have indexed profits for inflations for tax purposes.
Countries with high taxes on capital include Brazil at 42.6 per cent (over half due to high nonrefundable VAT rates on capital purchases), Argentina at 38.9 per cent (due to a significant
capital tax) and Jamaica at 34.7 per cent in part due to a real estate transfer tax and capitaltax (Figure 4). On the other hand, Paraguay has the lowest METR at 7.8 per cent, supported
by its low corporate income tax rate of 10 per cent. Chile has the second lowest METR at 8.2
per cent, largely in part due to some accelerated cost recoveries for machinery and inflationindexed provisions as mentioned above.
FIGURE 4

METRS BY COUNTRY IN THE AMERICAS REGION 2017

Canada’s METR is the sixth lowest in the Americas (with U.S. tax reform, it will be seventh
lowest in 2018 as discussed later). Without provincial land transfer taxes and retail sales taxes
in the western provinces (except Alberta), the Canadian METR would be 18.7 per cent insteadof 20.9 per cent. Its tax burden on capital is somewhat above its NAFTA partner, Mexico,
which has a METR of 19.7 per cent. Mexico’s corporate income tax rate is 30 per cent, about103.3 points higher than Canada’s, but it indexes profits for inflation, which provides some tax
relief. Both Mexico and Canada have a 2017 METR well below their most important trading
partner, the United States, but that is dramatically changing in 2018.

ASIA-OCEANIA
The largest populated region of the world is Asia-Oceania, which includes China, India andother countries in South and Southeast Asia, as well as Australia and New Zealand. While mostcountries keep their corporate income tax rates below 30 per cent and some provide investment
incentives for capital (such as Indonesia, Korea and Japan) or tax holidays (e.g., Malaysia andVietnam), they also tend to levy other taxes on businesses that increase the METR on capital(Figure 5).
FIGURE 5

METRS BY COUNTRY IN THE ASIA-OCEANIA REGION 2017

India has the highest global METR of 52.1 per cent in large part due to a relatively highcorporate income tax rate of 34.6 per cent, a capital tax, a real estate transfer tax and a generaldividend distribution tax (included in the corporate income tax burden).6 Nonetheless, this is asignificant reduction of 8.1 points from 2016 as a result of the VAT reform that enabled taxes
paid on input purchases to be refundable. Uzbekistan follows with the second highest METR, at
49.4 per cent, resulting from a significant tax on assets despite having a relatively low corporate
tax burden (the corporate income tax rate is 14.9 per cent).

6

11

Ghosh and Mintz (2017) find lower METR on capital for India based on public corporate financial statements. Using these
data, the METR in their analysis is lower primarily due to the use of higher leverage assumptions (close to 60 per cent) a
higher weight of manufacturing, and lower economic depreciation rates in Indian financial accounts.

Japan imposes a tax on fixed assets resulting in a tax burden of capital of 40.9 per cent insteadof 25.9 per cent, if only corporate income taxes are considered. China has a METR that isroughly in the middle of the pack at 23.2 per cent. Two significant non-profit levies include realestate transfer taxes (one of three was cancelled in 2016) and some non-refundable sales taxes
on capital purchases.
The lowest METRs on capital are in Hong Kong at 5.5 per cent (of which stamp duties astransfer taxes have the most important impact), Vietnam at 10.4 per cent and Singapore at
11.5 per cent. All three have low corporate income tax rates: Hong Kong (16.5 per cent),
Singapore (17 per cent) and Vietnam (20 per cent). Singapore and Hong Kong direct their tax
policies toward making their jurisdictions regional financial and headquarters centres. Vietnam
provides investment incentives to attract capital that would otherwise go to other Asian
countries, including China.
Canada is quite competitive in 2017 relative to the Asia-Oceania region. Canada’s tax burden
cuts just above New Zealand and is well below the major economies including China, India,
Indonesia, Korea and Japan.

EUROPE AND RUSSIA
The most disparate region is comprised of 31 countries in Europe and ex-Communist countries
with widely different cultural and historical backgrounds (Figure 6). Their corporate tax
systems differ in important ways as countries experiment with innovative systems.
The largest economies tend to tax capital most – France (38.5 per cent), Russia (27.9 per cent),
Germany (26.7 per cent), the United Kingdom (24 per cent) and Spain (20.0 per cent) withconventional corporate tax structures. As a large European country, Italy is an important
exception with a METR of only six per cent, one of the lowest in the world due to its deduction
for the imputed cost of new equity financing. Russia has a relatively low corporate income
tax burden on investment due to a low corporate income tax rate of 20 per cent, but it has asignificant tax on fixed assets.
Although not a general rule, smaller countries tend to have lower METRs on capital. A significant
factor is an ultra-low corporate income tax rate including in Bulgaria (10 per cent), Ireland (12.5
per cent), Latvia (15 per cent), Estonia (16 per cent) and Romania (16 per cent). Some countries,
such as Slovenia and Romania, have investment allowances that reduce the METR.
A unique corporate income tax is found in Estonia (and was recently adopted by Georgia), which
only applies to distributed profits and exempts reinvested profits. The Scandinavian countries
have adopted dual income taxes that result in a low flat tax on capital and corporate income
compared to the much higher personal income taxes on labour earnings. The corporate income
tax rates have been reduced to 22 per cent in Denmark, 20 per cent in Finland, 24 per cent in
Norway and 22 per cent in Sweden.

12

FIGURE 6

METRS BY COUNTRY IN EUROPE AND RUSSIA REGION 2017

Relative to Europe, Canada’s tax burden on capital would be near the top quartile of European
countries and Russia. Most of the large countries tax capital more heavily than Canada except
for Italy, and all the Scandinavian countries levy a lower tax on new capital investments
compared to Canada. As the free trade agreement moves ahead with the European Union,
corporate taxes, which increase the cost of doing business, provide tax advantages to many
European economies compared to Canada.

AFRICA
Africa has some of the fastest growing populations, but also some of the poorest with low per
capita incomes especially in the sub-Saharan area. Along with the VAT, the corporate tax is
an important source of revenue in many African countries since governments cannot easily
administer broad personal taxes to fund public services.
The highest METR on capital is Chad (34 per cent), reflecting its corporate income tax rate at
40 per cent, the highest among the 92 countries in this study along with Colombia. Chad also
imposes a significant real estate transfer tax. Lesotho follows with the second highest METR
in Africa at 24.6 per cent. The lowest tax burdens on capital are in Ghana (10 per cent), Nigeria(14.1 per cent) and South Africa (14.3 per cent), largely due to investment incentives. The twolargest countries, Nigeria and South Africa, have corporate income tax rates above the globaland African averages.
Real estate transfer taxes are quite common in African countries with 11 of the 15 countries
having them. As will be discussed below, these pernicious taxes impose quite large economic
costs for the revenue earned.

13

FIGURE 7

METR BY COUNTRY IN THE AFRICAN REGION 2017

MIDDLE EAST AND NORTHERN AFRICA (MENA)The MENA countries are dominant in resource production, which distinguishes them as an
economic region (besides having common historical and cultural roots). The importance of thepetroleum industry in particular has led to some countries levying high corporate income tax
rates to collect resource rents instead of levying separate resource taxes. Lower tax burdens
often apply to manufacturing and service industries to encourage diversification. For example,
Saudi Arabia levies a corporate income tax rate of 85 per cent on companies engaged in oil
extraction (and high rates on natural gas producers), with a rate of only 20 per cent applying toother industries.

14

FIGURE 8

METR BY COUNTRY IN THE MIDDLE EAST AND NORTHERN AFRICAN REGION

Egypt has the highest METR on capital at 35 per cent, not as a result of its corporate income
tax burden, but largely due to a significant tax on capital purchases. Georgia follows with a
METR on capital of 23.2 per cent, of which over half of the METR is due to a capital tax.
Transfer taxes are also common in the MENA region including in Israel, Jordan, Iran, Morocco
and Turkey. The lowest METR on capital is in Qatar with its low corporate income tax rate of
10 per cent (petroleum companies are taxed much more heavily through production-sharing
agreements).

HOW ARE CANADIAN PROVINCES DOING?
In 2017, only a few changes occurred in business taxation across the provinces. The federal
government focused its efforts on raising taxes on private corporations, which is not a focusof this study. Little changed otherwise in the taxation of investments except in the oil and gas
sector (see Crisan and Mintz, 2017a).
As shown below, British Columbia has the highest tax burden on capital due to its re-adoptionof the retail sales tax and a hike to its corporate income tax rate from 11 per cent to 12 per centeffective Jan. 1, 2018. Saskatchewan is lowering its corporate income tax rate from 12 per centto 11 per cent (via half-point reductions in 2017 and 2019), but raising its provincial retail sales
tax rate from five per cent to six per cent as well as expanding the sales tax base to include,for example, construction services. Quebec is slowly reducing its corporate income tax rate by
0.1 per cent each year – 11.8 per cent in 2017, falling to 11.5 per cent by 2020. These changes,
anticipated by investors, are incorporated in our estimates of effective tax rates.
The biggest taxation changes in 2017 are with respect to energy taxes that can feed throughhigher costs including capital good prices. Alberta has introduced a carbon tax at $20 per tonne15

in 2017 that will increase to $30 per tonne in 2018. British Columbia is increasing its carbon
tax rate by $5 per tonne beginning in 2018 from $30 per tonne in 2017. Ontario has joined
Quebec and California in entering into a cap-and-trade market beginning in 2017. A number ofprovinces have imposed regulations such as coal phase-outs and renewable energy standards.
Similar to fuel excise, carbon taxes and regulations raise energy costs that indirectly affectbusiness production costs, including the construction of capital. To incorporate carbon policy
impacts, a broader cost competitiveness study is needed to estimate the “marginal effective
tax rate on costs” to incorporate various policies on capital, labour and energy costs (seeMcKenzie, Mintz and Scharf, 1997 for a further explanation).
Tables 1 and 2 provide the 2017 METRs by province, industry and asset, including agriculture
and forest sectors (oil and gas and mining are analyzed in Crisan and Mintz, 2017b and Mintz,
Bazel, Chen and Crisan, 2017a). These calculations do not include transfer taxes to provide a
historical series (see Appendix A). Thus, the average METR for Canada is 20.3 per cent for2017 (somewhat less than the 20.9 per cent estimated for manufacturing and services withtransfer taxes).
Due to the retail sales tax on capital purchases, British Columbia (27.7 per cent), followed by
Manitoba (26.1 per cent) and Saskatchewan (24.2 per cent), have the highest METRs on capital,
which would be roughly on par with Australia, Russia and Germany. On the other hand, theAtlantic Provinces have the lowest METRs due to the 10 per cent federal Atlantic Investment
Tax Credit for qualifying primary and manufacturing investment. Overall, the Canadian tax
structure is biased against services and investments in structures and inventory compared toother business investments.
TABLE 1

16

METR BY PROVINCE AND INDUSTRY 2017 (EXCLUDES TRANSFER TAXES)

TABLE 2

METR BY PROVINCE AND ASSET CATEGORY 2017 (EXCLUDES TRANSFER TAXES)
ory
ent
Inv

at e
reg
Agg

gs
ldin
Bui

E
M&

Canada*

22.7%

19.5%

10.9%

24.8%

20.3%

Newfoundland

15.0%

-5.2%

12.5%

27.8%

11.4%

2017

d
Lan

Prince Edward Island

20.4%

-6.7%

13.0%

28.6%

13.9%

Nova Scotia

22.3%

11.8%

13.0%

28.7%

18.7%

New Brunswick

17.0%

-0.3%

12.0%

27.0%

12.9%

Quebec

21.8%

13.6%

10.9%

24.9%

18.2%

Ontario

21.4%

17.3%

10.6%

24.1%

19.0%

Manitoba

23.9%

32.5%

11.0%

24.9%

26.1%

Saskatchewan

24.3%

27.9%

10.6%

23.9%

24.2%

Alberta

22.7%

16.5%

11.0%

25.0%

19.1%

British Columbia

27.8%

33.7%

11.0%

25.1%

27.7%

* Candian model is distinct from average

DO THESE METRS EXPLAIN VARIATIONS IN INVESTMENT?
So far, we have reported differences across countries with respect to tax burdens on capital,
as measured by our marginal effective tax rates. A crucial question is whether they explain
investment patterns at all.
A useful Canadian study examining the corporate tax reductions from 2001 to 2004 foundthat a 10 per cent reduction in the user cost of capital adjusted for taxes (as done with METR
calculations) led to a seven per cent increase in the capital stock (Parsons, 2008). A more recent
survey on the relationship between effective tax rates and foreign direct investment estimatedthat a one-point reduction in the corporate income tax rate results in an increase in foreign
direct investment by 2.49 per cent (Feld and Heckemeyer, 2011).
Our estimates vary from others in the literature, notably by incorporating other taxes besides
the corporate income tax as well as our explicit characterization of international markets
whereby multinationals raise capital from international marginal investors reflected by G7 tax
rates.7 An earlier marginal effective tax rate series was used in a study that showed that foreign
direct investment was significantly deterred by corporate taxes (Krzepkowski, 2013).8

U.S. TAX REFORM
The hallmark of U.S. tax reform is with respect to the corporate income tax. The U.S. Tax
Cuts and Jobs Act includes a large number of amendments to the U.S. tax code that will havea profound impact on the U.S. and global economy. The changes will cause a significant shift,especially in international tax planning, that is highlighted below.

17

7

For example, in the seminal work by Devereux and Griffiths (1998), estimates are made of both effective average andmarginal corporate income tax rates (average tax rates are based on a value of economic rent or the rate of return to capitalin excess of the marginal rate of return on capital. Calculating average rates of return across 92 countries, correcting for
risk, is not possible and would only be pure guesswork. Even if there are fixed costs involved, companies can vary the sizeof projects with the marginal investment project determining the aggregate size from an industry-wide perspective (Mintz,
1995b).

8

We have begun some preliminary analysis of investment by OECD country and its sensitivity to our estimates of METRs
for manufacturing and services. So far, we find that our estimates of METRs explain investment intensity across countries
along with other variables such as growth in demand, the business cycle and risk.

2017

2016

20

The key elements of the tax reform are the following:i)A reduction in the federal corporate income tax rate from 35 per cent to 21 per cent(39.1 per cent to 26.6 per cent including state income taxes, and deductibility of federal
income taxes from state income taxes) beginning Jan. 1, 2018.

ii)

A reduction in percentage deductions for dividends received from other corporations.
The general exemption for dividends received from other corporations is being reduced
from 70 per cent to 50 per cent. For subsidiaries with at least 20 per cent ownership,
the exemption is being reduced from 80 per cent to 65 per cent. Dividends remain fully
exempt if the affiliate is part of the group of companies.

iii) Expensing of investment in assets with a recovery of less than 20 years (primarily
machinery and equipment) except companies not subject to the interest limitation rule(construction, real estate and regulated public utilities). This is effectively an increasein bonus depreciation that was being phased out by 2020 (40 per cent in 2018 and 30
per cent in 2019). Expensing is to be phased out after 2022 by a fifth each year (andtherefore no longer available after Jan. 1, 2027). Unlike bonus depreciation, expensing
also applies to used property.
iv) Research and development expenditures incurred in tax years after 2025 will beamortized over a five-year period (15 years for expenditures attributable to research
conducted outside the United States).
v)

A general limitation on the deductibility of interest expense to be no more than 30 per
cent of adjusted profits (regulated public utilities and finance would be largely exempt).
The act limits, until Jan. 1, 2022, the deduction of net interest expense to 30 per cent of
the business’s adjusted taxable income, not taking into account interest, depreciation,amortization, depletion or net operating losses. After 2022, the limit will be based on
30 per cent of the business’s adjusted taxable income, not taking into account any itemof income, gain, deduction or loss which is not properly allocable to a trade or business,business interest expense or income, the deduction for certain pass-through income andnet operating losses (disallowed amounts may be carried forward indefinitely).

vi) Limitation in the use of non-operating losses deductions taken after 2017 to be no morethan 80 per cent of profits.
vii) The elimination of the corporate minimum tax as of Jan. 1, 2018.
viii) An exemption for dividends received from foreign affiliates with at least 10 per centownership by the U.S. parent according to value (voting shares shall no longer be
relevant in determining the ownership test). New anti-abuse rules are introduced.
ix) As a transitional measure, existing foreign earnings accumulated abroad since 1986
would be subject to a mandatory toll (transitional tax) payable over eight years – 15.5
per cent for earnings held in cash and eight per cent for the remainder.
x)

18

The introduction of a tax on accrued intangible income earned by U.S. multinational inforeign affiliates as well as a concessionary tax rate on exported intangible income forproperty used outside of the United States.

Investment
Taking into account the corporate rate and expensing provisions9, the impact of the U.S. tax
reform is to sharply reduce the tax burden on domestic-owned investment in the United Statesby almost a half with METR on capital falling from 34.6 per cent10 to 18.8 per cent.11 This
reduction in taxation of capital in United States is both good and bad news for other trading
partners including Canada.
The corporate income tax reform in the Tax Cuts and Jobs Act will result in higher GDP
and wages in the United States. Using our global METR calculations, Benzell, Kotlikoff and
LaGarda (2017) model the impact of U.S. tax reform using a dynamic model that includes
capital flows across 17 regions of the world over 90 years. They predict that U.S. GDP willrise 4.0 per cent and real wages by 5.2 per cent (low-skilled) and six per cent (high-skilled) by2025, estimates that are larger than those provided by the Joint Committee on Taxation (2017),
which uses a closed economy model. They also estimate that the average American working
household will benefit by $3,500 annually. The growth in incomes in the United States should
spill over into higher demand for foreign products.
On the other hand, the U.S. tax reform will make it more attractive for businesses to invest in
the United States rather than in Canada to serve the North American market. Canada will lose
its business tax advantage as a result of the U.S. tax reform, since the U.S. METR declines
from three-quarters above the Canadian METR of 20.9 per cent to about a tenth below.12 For
some sectors the differences will be even greater, especially in construction, transportation andcommunications, although Canada will have some advantage in the “other services” and oil
and gas sectors.
Taking national averages, however, masks some of the differences in tax burdens by provinceand states. The U.S. tax reform will provide a larger business tax advantage for U.S. stateswith corporate tax rates below the average U.S. rate and less so for states with relatively highcorporate income tax rates. For example, Ontario’s federal-provincial corporate income tax
rate is 26.5 per cent – this is lower than the combined federal-state corporate income tax rates
in 39 U.S. states with a top corporate income tax rate above 6.33 per cent (e.g., California,
Pennsylvania and New York), but higher than 11 other states with lower corporate tax rates(e.g., Michigan and Washington), five of which have no corporate income tax at all (e.g., Ohioand Texas). Thus, Ontario’s corporate income tax rate would be less competitive compared to,for example, Michigan and Ohio, but more competitive than New York.

19

9

We assume in these calculations that state governments do not adopt the federal base changes nor change their tax laws.
This is obviously not the case since some states conform to the federal base although they may possible negate federalchanges if they choose to do so. In 2018, many states will likely revise the corporate income tax rates and bases, dependingon which features of the federal law are adopted.

10

Taking the 2018 bonus depreciation into account that was being phased out after 2019, the METR falls from 29.7 per cent to18.8 per cent, which is still a significant reduction.

11

We have recently made some adjustments to the U.S. model in light of some new data. These changes offset each other,resulting in a U.S. tax reform METR of 18.9 per cent. Note that new provisions related to intangible income and baseerosion are not included in these estimates as they are specific to investments by foreign companies in the U.S. or
investments by U.S. companies made abroad.

12

As we use a debt-asset ratio of 40 per cent for international comparisons, the new interest limitations based on earnings
before depreciation, amortization and depletion would not be binding, based on aggregate data. Further work would be
required to analyze the overall impact by examining firm-level data with variations in leverage.

FIGURE 9	IMPACT OF U.S. TAX REFORM ON METRS ON CAPITAL FOR U.S. AND CANADA BY INDUSTRYAS OF 2018

*Oil and gas is not included in the aggregated METR.

The U.S. reform reverses the investment tax advantage that otherwise favoured Canada since2007 (see 2005-2017 METR historical comparisons without transfer taxes in Appendix A).
However, due to Senate budgetary rules that require balanced budgets after a decade, several
amendments are limited in time such as in the case of expensing provisions. Further, as
mentioned above, bonus depreciation was to be phased out by 2020.13 In Figure 10, we showthat the U.S. tax reform results in a roller coaster effect whereby the METR first declines in2018 and then eventually rises to 26.7 per cent by 2028, which is about eight points lower had
the previous system continued as legislated.
FIGURE 10	METR BY YEAR IN THE UNITED STATES ACCOUNTING FOR SHIFTS IN EXPENSING PROVISIONS: CURRENT AND TAX CUTS AND JOBS ACT

13

20

Bonus depreciation allows for the expensing of capital in the first year with the undepreciated capital based subject toannual depreciation allowances in following years.

It is far too difficult to predict expensing provisions in the United States that Congress iswilling to change frequently. Bonus depreciation began in 2002 at 30 per cent of qualifying
expenditures and was eliminated in 2004-2007 when the economy was doing well. It was
reintroduced at 50 per cent in the 2008 recession, raised to full expensing in 2010, reduced to
50 per cent in 2012 and 40 per cent in 2018, 30 per cent in 2019 and eliminated altogether in
2020. Expensing under the Tax Cuts and Jobs Act replaced bonus depreciation but is phased out
beginning in 2022. Canada regains its business tax advantage by 2024, although it would not be
possible to predict corporate tax changes by 2026 either in the U.S. or Canada – eight years is along time in politics!
Corporate tax base erosion in Canada
Also problematical for Canada is the possibility of corporate tax base erosion as companies
operating in North America move profits to the United States from foreign jurisdictions byrestructuring their financing and transfer prices. Canada, as well as other countries, may face aloss in corporate tax revenues even if workers and fixed assets do not move across boundaries.
Debt placement
The sharp reduction of 14 points in the corporate income tax rate in the United States willencourage companies to put less debt in the United States to fund their investment. This will
also be the case for many companies with U.S. operations who wish to avoid the new interestand loss limitation rules that could bite over time.
The interest limitation is an earnings-stripping rule whereby interest deductions in excess of 30
per cent for adjusted earnings will not be deductible in the current year. While companies withstable incomes and low leverage will not be affected, many companies with cyclical profits andhigher debt loads will face the possibility of losing the tax value of their interest deductions
even if written off in future years.
The new U.S. law will also limit post-2017 loss deductions to 80 per cent of profits earned ina year. This will encourage companies located in the U.S. to shift costs, including interest,
to foreign related parties to make better use of loss deductions. Countries with a more liberal
treatment of losses are likely to bear these costs.
As U.S. parents will be able to repatriate dividends without additional payment of tax, they will
be able to use foreign profits to retire U.S. debt. In a recent poll, 65 per cent of companies listed
debt reduction as a priority for repatriated profits.14 However, to replace undistributed foreign
profits in other countries, multinationals could have their affiliates take on more debt from theparent or third parties, subject to the effectiveness of thin-capitalization rules in the foreign
jurisdiction. In other words, foreign governments could lose corporate tax revenues to the U.S.
government with new financial structures.
Other provisions in U.S. tax reform will impact Canada-U.S. financing structures, such as theuse of hybrids or tower structures to achieve double-dip interest deductions for investments by
Canadian companies in the United States (see Mintz and Weichenrieder, 2010c). As discussed
14

21

https://www.cnbc.com/2017/07/13/companies-have-big-plans-foroverseas-cash--if-tax-reform-ever-happens.html.

below, debt will also be discouraged to the extent that new anti-abuse rules are effective in
discouraging debt placement in the United States.
Base erosion and anti-abuse rules
New anti-abuse rules shall limit deductions or imposed additional taxes for certain payments(e.g. interest, royalties and management fees) to related foreign parties when companies havegross receipts in excess of $500 million of the U.S. taxpayer. The intent of these rules is tomake it more difficult for companies to shift profits to low-tax countries by using techniquessuch as licensing arrangements with Irish subsidiaries.
The base erosion and anti-abuse tax (BEAT) applies to certain base erosion deductions15 whenhigher than three per cent of total deductions. The cost of goods sold and certain service cost
deductions (such as those subject to no mark-up values) are not included as a deduction. The
BEAT is a minimum tax of 10 per cent (5 per cent in 2018), later to be increased to 12.5 percent beginning Jan. 1, 2026 on taxable income gross of base erosion payments (a one point
higher tax rate applies to registered security dealers).
The BEAT is paid if the amount is greater than the regular corporate income tax paid at the rateof 21 per cent on income paid by the U.S. subsidiary (tax liabilities gross of tax credits and 80
per cent of Section 38 business tax credits). This will arise if the tax value of denied deductions
is large enough. Let Y be regular taxable income, u the corporate income tax rate, X businesstax credits, t the BEAT rate and B equal base erosion payments. The BEAT is paid if:t(Y+B) > (uY -.8X) or tB>(u-t)Y -.8X.
Ignoring business tax credits, many of which are targeted to energy, a corporate income
tax rate of 21 per cent and the BEAT tax of 10 per cent would result in the BEAT being
paid when B>1.1Y. At a BEAT tax of 12.5 per cent from 2026 onwards, the BEAT is paid if.125(Y+B)>.21Y or B>.68Y.
Potentially, the BEAT would impact Canadian-U.S. cross-border investments and technology
transfers, ultimately resulting in lower reported profits in Canada to avoid the BEAT. The
BEAT may be avoided in certain circumstances if structuring transactions as profit-sharing
contracts or being related to the cost of goods sold.
Intangible Income
The other important provisions are related to mobile and passive income as mentioned above.
The intent of these rules is to discourage multinationals from shifting mobile income to foreign
low-taxed jurisdictions, such as in the case of intellectual property and marketing. A U.S.
parent of a controlled-foreign corporation will include GILTI in the parent’s income similar
to (Sub-Part F) passive income. GILTI is the excess of income over a deemed tangible income
return, the latter measured as a 10 per cent return on tangible assets and does not include
passive income, foreign oil and gas income and certain related party payments. GILTI is taxed
at a rate of 10.5 per cent until Jan. 1, 2026 when it becomes 13.125 per cent thereafter. A tax
15

22

The new rules do not apply to a regulated corporation or a real estate investment trust. See Explanation of the Tax Act andJobs Act, p. 532.

credit is given for 80 per cent of foreign taxes without a carry-back or forward to other years.
A U.S. multinational could be liable for tax on intangible income in Canada if 80 per cent of
Canadian taxes are less than 10 per cent of GILTI, which could arise in the case of Canada’s
research and development tax credits.
Further, the new U.S. tax provides domestic corporations a reduced tax rate on foreign-derived
intangible income (FDII) by providing a deduction equal to 37.5 per cent of FDII prior to Jan.
1, 2026 and 21.875 per cent thereafter. The effective tax rates on FDII will therefore be equal
to 13.125 per cent prior to Jan. 1, 2026 and 16.406 per cent thereafter.16 This provision provides
a concessionary rate of tax on intangible income for property sold to any unrelated foreign
person for foreign use or services provided for use outside of the United States. Intangible
income is measured by taking the difference between eligible income and 10 per cent ofqualified business assets.
Under the previous system, a U.S. multinational would not be taxed on intangible income solong as the income was not repatriated to the United States. The GILTI tax, on the other hand,is an accrual tax that will claw back incentives in foreign jurisdictions, whether income isrepatriated or not, similar to passive income rules. A U.S. multinational would be liable for tax
on intangible income in a foreign jurisdiction if 80 per cent of foreign taxes were less than 10.5
per cent (or 13.125 per cent after 2025) of GILTI, which could arise in the case with researchand development tax credits or marketing expenses.
While much of the impact of the GILTI tax will be on intangible income from intellectual
property, it will also affect intangible income from foreign mining investment (oil and gas is
exempt). It is really quite hard to understand differential taxation in this case.
The GILTI will also encourage U.S. companies to hold depreciable assets in foreign
jurisdictions. Indeed, for each dollar invested in tangible assets, the U.S. company earns apresent value of exempt intangible income equal to the exempt rate of return divided by thenominal discount rate plus the (declining balance) economic depreciation rate on the asset.
Thus, for example, a dollar of investment in machinery with a 10 per cent declining-balance
depreciation rate and a five per cent nominal discount rate generates a present value of
deductions relief of two-thirds of the expenditure (.1/(.10+.05)). As I have noted in earlier workon resource companies, exempt return can result in a negative METR for investments due tocapital base broadening (Mintz, 2016a).
Further, the new U.S. tax provides domestic corporations with a reduced tax rate on foreignderived intangible income (FDII) by providing a deduction equal to 37.5 per cent of FDII prior
to Jan. 1, 2026 and 21.875 per cent thereafter. The effective tax rates on FDII will therefore beequal to 13.125 per cent prior to Jan. 1, 2026 and 16.406 per cent thereafter.17 This provision
provides a concessionary rate of tax on intangible income for property sold to unrelated foreign
persons for foreign use or services provided for use outside of the United States based on theshare of foreign-derived income to domestic and foreign-derived income. Intangible income
is measured by taking the difference between eligible income and 10 per cent of qualified

23

16

FDII does not include Sub-Part F income, GILTI, financial services income, dividends received from a controlled-foreign
corporation, domestic oil and gas extraction income from a domestic corporation and foreign branch income. See theExplanation of the Tax Cuts and Jobs Act, page 495.

17

FDII does not include Sub-Part F income, GILTI, financial services income, dividends received from a controlled-foreign
corporation, domestic oil and gas extraction income from a domestic corporation and foreign branch income. See theExplanation of the Tax Cuts and Jobs Act, page 495.

business assets. FDII also excludes oil and gas income but not mining (therefore providing an
incentive for mining investments in the United States to the extent output is exported).
The FDII could be challenged as an export subsidy given that its concessionary rate is only
provided for foreign-derived income. Opposite to the GILTI tax, companies will also have an
incentive to invest less in tangible property in the United States to increase the concessionaryrate for exported intangible income.
The U.S. corporate tax reform will lead to fundamental reshaping of tax planning bycorporations with U.S. operations. Instead of keeping profits out of the United States, as in
the past, the goal will be to move profits there. Overall, U.S. tax reform will not only affectinvestment decisions but also the distribution of corporate profits and taxes between Canada
and the United States.

PROSPECTS FOR CORPORATE TAX REFORM IN CANADA
Without U.S. tax reform, we would argue that further corporate tax reform would beappropriate for Canada. Specifically, in our last report (Bazel and Mintz, 2016b), we suggested:
Canada’s corporate tax system could be further reformed to improve competitiveness andneutrality. Some substantial reforms have been suggested, such as moving the corporate
income tax to a rent-based tax, although there are difficult challenges with this, especiallyfrom an international perspective as well as with regard to ensuring consistency with thepersonal income tax system. Other levies could be considered to replace the corporate
income tax, such as introducing transfer and capital taxes, but these would make thebusiness tax system worse rather than better.
The Economic Advisory Council (2017a) reporting to the federal minister of finance inDecember 2017 also argued that tax reform should be one of the priorities for the government
to improve Canada’s lacklustre private sector performance.
The government must review Canada’s tax system to ensure it spurs investment andcompetitiveness. When the country last conducted such reform decades ago, investments
in physical assets were more important and global trade less so than they are today. Our
tax system must be updated for the modern economic era— to safeguard Canada’s status
as a globally competitive tax jurisdiction and to ensure that it incentivizes investments ininnovative technologies and intellectual capital.
With U.S. tax reform, Canadian tax reform has become even more imperative to ensure
economic growth. The Canadian economy is strengthened when resources are put aside
to purchase capital embodies with the latest technology to generate goods and services inlater years. While federal, provincial and municipal governments have rightly put moreemphasis on public infrastructure spending especially since the 2008 recession, it is private
sector investment that accounts for almost two-thirds of 2017 non-residential expenditure on
machinery, equipment and structures in Canada.18 Three particularly important trends areworth noting.

1824

http://www.statcan.gc.ca/daily-quotidien/170228/t001c-eng.htm.

First, Canada’s private investment performance has slowed down since 2011 after an investment
boom from 2000-2011. As we noted in an early Australian report, Canada’s investment
performance is especially low in the service sector compared to other OECD countries (Mintz,
Bazel, Chen and Crisan, 2017b). The Economic Advisory Council (2017b) also notes that
Canadian businesses have not performed well with respect to investments in innovation andtechnology adoption of which service industries would be the majority component.
Canada’s private non-residential investment is now lower in 2017 at $195.7 billion compared to$207.9 billion in 2011 (in 2014 it peaked at $235.7). This contrasts with the 2000-2011 period
when private investment grew by 46.5 per cent from $141.9 to $207.9 billion. In contrast, U.S.
private investment grew by only 20 per cent from $1.510 trillion in 2000 to $1.802 billion
in 2011 but more strongly by 28 per cent to $2.3116 trillion by 2017.19 While the decline inresource sector investment after 2014 partly explains Canada’s worsening performance, we notethat Canada shifted from reducing the corporate tax burden to raising it after 2012.
Second, the U.S. 2018 reform is dramatically reducing taxes on both corporate and noncorporate forms, resulting in a lower tax burden on capital compared to Canada. With aview that Canada is raising rather than reducing taxes, Canada is viewed as less attractive
for business investment (see also the survey by the Economic Advisory Council, 2017c). The
potential withdrawal from the North American Free Trade Agreement will also increase
political risk, should it happen.
Third, our corporate income tax rate is now somewhat higher, not vastly lower, than the U.S.
corporate income tax rate beginning in 2018. Combined with the anti-avoidance measures in
the United States surveyed above, it can be expected that Canada will experience base erosion
as multinationals operating in North America shift profits to the United States.
In 2018, Canadian federal and provincial government should focus on tax reform. The aim
should be to put a priority on taxes that create the most harm to the economy: corporate andtransfer taxes having the highest cost.
Corporate income taxes are especially harmful to the economy since they discourage private
sector investment, tend to distort the allocation of capital across industries and assets and resultin loss of tax revenues as companies shift profits to other jurisdictions even if they do not makechange-location decisions for investment. The highest economic cost of taxation is associatedwith corporate income taxation. Dahlby (2012) estimates the marginal cost of raising a dollarof corporate revenues, including economic distortionary costs, to be $1.45 for the federal
government. For the provinces, the marginal cost of taxation is even higher because provincial
tax increases cause much bigger losses in the provincial tax base: $4.72, $5.29 and $3.54 forcorporate taxation; $1.77, $6.76 and $3.05 for personal taxes in Alberta, Ontario and Quebec
respectively; and $1.69 and $1.31 for sales taxes in Quebec and Ontario.20

25

19

http://stats.oecd.org/index.aspx?queryid=61366#.

20

Updated calculations, based on 2017 tax rates, of the marginal cost of public funds using Dahlby and Ferede (forthcoming)
estimates of the tax sensitivities of provincial tax bases.

Transfer taxes, especially on commercial property, can also impose high financial costs on an
economy by increasing the cost of supplying infrastructure, housing and other urban projects.21
They encourage a lock-in effect whereby owners are less willing to sell their property to avoid
triggering additional transfer taxes. Even the mobility of labour and capital in an urban centre
can be affected if businesses and households are less willing to move for economic reasons.
Moreover, transfer taxes on the resale of commercial property are highly distortionary since
it is not easy to identify a change in ownership given the joint ownership of property throughcorporations, trusts and partnerships and the ability of companies to avoid the tax altogether.
Given low business investment performance and a more competitive U.S. tax system, Canada
should reduce taxes on capital without creating new distortions. While U.S. tax reform has
resulted in a lower tax burden on capital, some provisions are potentially distortionary,such as expensing capital targeted for machinery and investment. Federal and provincial
authorities might succumb to introducing more accelerated depreciation and investment tax
credits to respond to U.S. reform. While investment incentives limit revenue cost to increases
in investment, they distort the allocation of capital in the economy by favouring asset
expenditures with shorter lives compared to others and encourage capital suppliers to raise
prices. Investment incentives also have less effect when companies are unable to use themwhen incurring losses.
Corporate rate reductions are more neutral across business activities as they reduce inter-asset
and inter-industry distortions as well as the differential tax burdens between large, medium
and small businesses. On the other hand, they have higher revenue costs since owners of oldcapital benefit from a windfall reduction in corporate taxes (this can be ameliorated somewhat
by staging rate reductions over time). If anything, Canadian business investment has been
particularly poor in service sectors compared to other countries – and these sectors tend to bear
the brunt of tax burdens. Corporate rate reductions also counter potential base erosion arisingfrom U.S. tax reform as discussed above.
We would suggest that Canada’s best corporate tax response would incorporate three features:
reduce corporate income tax rates, improve neutrality by base-broadening measures, reducethe incentive for debt finance and improve the taxation of international income to protect the
Canadian tax base while ensuring that Canadian businesses are more competitive.
Provinces should also examine the competitiveness of their business tax structures. British
Columbia, Manitoba and Saskatchewan should aim to eliminate sales taxes on capitalpurchases (such as harmonization with the federal GST or rebating taxes on business inputs).
Provinces should also use carbon revenues to provide an offset for higher energy taxes faced bybusinesses by reducing corporate income and commercial land transfer taxes.
In Bazel and Mintz (2016c), we have estimated that base-broadening measures, including
scaling back investment incentives and the small business deduction (the latter unfortunately
raised by the federal and some provincial governments), would enable Canada to reduce its
21

26

Some recent international studies have suggested that the transfer tax (stamp duties and real estate transfer taxes) have higheconomic costs, almost as much as the corporate income tax although none examines real estate impacts on commercial
property. For example, Buettner (2017) estimates the welfare cost to be EU$1.67 in Germany. An Australian Treasury (2015)
study estimates stamp duties to have a welfare cost of AU$1.72, even higher than the Australian corporate income tax.
Dachis, Durantan and Turner (2012) estimate a marginal cost of the Toronto land transfer tax to be $1.29, more than for aproperty tax increase.

corporate tax rate to 23 per cent, slightly below the U.S. combined federal-state rate. Other
reform measures should be contemplated such as stronger limitations on the deductibility ofdebt to finance capital expansion.

CONCLUSIONSThis 2017 tax competitiveness report reviews the business tax structures of 92 countries.
Canada’s existing tax burden on new investment, as measured by the marginal effective tax rate
(METR), is competitive at 20.9 per cent with respect to Africa, the Americas and Asia-Oceania.
Canada has a higher tax burden on capital compared to Africa, Europe and the Middle East andnorthern Africa regions. Canada has the sixth lowest METR on capital among the G7 countries,
14th lowest among the G20 countries and 12th lowest among 33 OECD countries.
Much will change as the United States adopts its path-breaking tax reform for 2018. Of mostinterest are the corporate tax changes that will substantially affect U.S. tax competitiveness. The
federal corporate income tax rate will fall by 14 points as of Jan. 1, 2018. Taking into accountother provisions, the U.S. METR will fall sharply from 34.6 per cent to 18.8 per cent. Canada
will now have a higher tax burden on capital compared to the United States by about a fifth.
With the sharply lower corporate income dividend exemption system and a new limitation
on deductible interest and losses, companies operating in the United States will push debt
and other costs to foreign countries, reducing corporate taxes elsewhere. Under the dividend
exemption system, a U.S. parent can bring money home from abroad to retire debt without
paying additional tax to the U.S. government. Overall, the U.S. gains corporate tax revenue
while foreign countries lose revenue due to financial policy changes. This alone could sparkreforms in other countries in order to protect both competitiveness and their tax bases.
Given that the U.S. is Canada’s most important trading partner, corporate tax reform in Canada
is now more urgent. The goal should be some reduction in corporate rates while achievinga more neutral corporate tax structure. Provinces should ensure other business tax burdens,
including sales taxes on input purchases and commercial land transfer taxes, are also reformed
to ensure competitiveness in the wake of U.S. tax reform.

27

REFERENCES
Australia Treasury. 2015. Cao, L., A. Hosking, M. Kouparitsas, D. Mullaly, X. Rimmer, Q. Shi,
W. Stark, and S. Wende, Understanding the Economy-Wide Efficiency and Incidence of Major
Australian Taxes, Treasury Working Paper, April.
Bazel P. and J. Mintz. 2016. “2015 Tax Competitiveness Report: Canada is Losing its
Attractiveness,” SPP Research Papers, 9(37), School of Public Policy, University of Calgary.
Benzell, S. G., L. J. Kotlikoff, and G. LaGarda. 2017. “Stimulating the Republican ‘Unified
Framework’ Tax Plan,” Oct. 16. Unpublished.
Buettner, T. 2017. “Welfare Cost of the Real Estate Transfer Tax,” CESifo Working Paper No. 6321,
Munich, Germany.
Crisan, D. and J. Mintz. 2017. “A 2017 Update of Taxation of Oil Investments: How U.S. Tax
Reform Could Affect Competitiveness,” SPP Research Papers, 10(21), School of Public Policy,
University of Calgary.
Dachis, B., G. Durantan, and M. Turner. 2012. “The Effects of Land Transfer Taxes on Real Estate
Markets: Evidence from a Natural Experiment in Toronto,” Journal of Economic Geography12(2), 327-354.
Economic Advisory Council. 2017. “Investing in a Resilient Canadian Economy,” Finance Canada,
Ottawa. https://www.budget.gc.ca/aceg-ccce/pdf/investing-in-a-resilient-canadian-economy-eng.pdf.
Feld, L. P. and J. H. Heckemeyer. 2011. “FDI and Taxation: A Meta-Study,” Journal of Economic
Surveys, 25(2) 233-272.
Ghosh, G. and J. Mintz. 2017. Investment and the Indian Tax Regime: Measuring Tax Impacts on the
Incentive to Invest in India, Bangalore: EY.
Heckemeyer, J. and M. Overesch. 2013. “Multinational’s Profit Response to Tax Differentials:
Effect Size and Shifting Channels,” Discussion Paper 13-045, ZEW Center for European
Economic Research.
Krzepkowski, Matt. 2013. “Marginal versus Average Effective Tax Rates and Foreign Direct
Investment,” in Three Essays on Investment and Taxation, Calgary: University of Calgary,
Chapter 1.
McKenzie, K. J. and E. Ferede. 2017. “Who Pays the Corporate Income Tax? Insights from the
Literature and Evidence for Canadian Provinces,” SPP Research Papers, 10(6), School of Public
Policy, University of Calgary.
McKenzie, K., J. Mintz, and K. Scharf. 1997. “Measuring Effective Tax Rates in the Presence ofMultiple Inputs: A Production Based Approach,” International Tax and Public Finance, 4(3),337-359.
Mintz, J. 1995. “The Corporation Tax: A Survey,” Fiscal Studies, vol. 16. no. 4, 23-68.
Mintz, J. 2016. “Taxes, Royalties and Cross-Border Investments,” in International Taxation andthe Extractive Industries, eds. P. Daniel et al., Washington, D.C.: International Monetary Fund,
Routledge, New York and London.
28

Mintz, J., P. Bazel, D. Chen, and D. Crisan. 2017. “With Global Company Tax Reform in the Air,
Will Australia Finally Respond?” Minerals Council of Australia, Melbourne, Australia, March.
Mintz, J. and V. B. Venkatachalam. 2017. “Small Business Tax Cut Not Enough: U.S. Tax Reform
Will Make U.S. More Attractive for Start-ups,” Tax Policy Trends, School of Public Policy,
University of Calgary, October.
Mintz J. and A. Weichenrieder. 2010. The Indirect Side of Direct Investment, (MIT Press).
Parsons, M. 2008. “The Effect of Corporate Taxes on Canadian Investment: An EmpiricalInvestigation,” Finance Canada, Working Paper 2008-01, Ottawa.

29

APPENDIX A: CORPORATE INCOME TAX RATES AND METRS BY COUNTRY AND TIMETABLE A.1

30

CORPORATE INCOME TAX RATES BY COUNTRY 2005-2017.

31

TABLE A.2

32M ARGINAL EFFECTIVE TAX RATES BY COUNTRY FOR MANUFACTURING AND SERVICES FOR 2010, 2015,2016 AND 2017

33

TABLE A.3

34

MARGINAL EFFECTIVE TAX RATES BY COUNTRY 2005-2017(EXCLUDES TRANSFER TAXES)

35

36

APPENDIX B: DATA PARAMETERS
Effective CIT
Rate
2017 201037

Inflation
2017

Tax Depreciation
Range

Inventory
Acounting2017

Australia
Austria
Belgium
CanadaChile
Czech Republic
Denmark
Estonia
FinlandFranceGermany
GreeceHungary
Iceland
IrelandIsraelItaly
Japan
Korea S.
Luxembourg
MexicoNetherlands
New Zealand
NorwayPolandPortugal
Slovak Republic
Slovenia
Spain
SwedenSwitzerland
TurkeyUnited Kingdom
United States

30.0
25.0
34.0
26.6
25.0
19.0
22.0
16.0
20.0
38.0
29.7
29.0
19.0
20.0
12.5
24.0
28.5
30.9
24.2
26.2
30.0
25.0
28.0
24.0
19.0
29.5
21.6
19.0
25.0
22.0
17.9
20.0
19.0
39.1

30.0
25.0
34.0
29.4
17.0
19.0
25.0
21.0
26.0
34.4
30.2
24.0
19.0
18.0
12.5
25.0
31.3
39.5
24.2
28.6
30.0
25.5
30.0
28.0
19.0
29.0
21.0
20.0
30.0
26.3
21.2
20.0
28.0
39.2

2.3%
2.1%
1.7%
2.0%
3.4%
1.5%
1.4%
2.2%
1.7%
1.1%
1.3%
0.2%
2.2%
3.3%
0.9%
1.3%
1.5%
0.7%
1.9%
1.8%
3.6%
1.8%
1.5%
1.7%
1.6%
1.4%
1.7%
1.2%
1.3%
0.7%
-0.4%
7.9%
2.3%
2.0%

2.6% - 22.1%
3.1% - 10.6%
7.0% - 32.9%
4.0% - 55.0%
7.5% - 39.7%
3.1% - 20.8%
5.1% - 22.7%
9.9% - 21.6%
8.2% - 28.7%
3.1% - 26.5%
3.1% - 14.4%
5.3% - 39.2%
3.3% - 48.1%
3.3% - 30.5%
2.0% - 12.4%
4.2% - 29.8%
5.1% - 15.3%
2.0% - 21.3%
2.6% - 20.1%
4.1% - 21.0%
5.1% - 15.4%
2.9% - 20.9%
6.5% - 22.1%
3.6% - 24.5%
2.6% - 25.8%
2.2% - 19.8%
5.0% - 17.3%
3.5% - 21.6%
2.1% - 29.2%
3.2% - 19.5%
5.7% - 31.9%
12.5% - 48.8%
1.4% - 17.7%
4.0% - 55.0%

Optional
Optional
LIFO
FIFO
LIFO
Optional
FIFO
LIFO
FIFO
Optional
LIFO
LIFO
Optional
FIFO
FIFO
Optional
LIFO
Optional
LIFO
Optional
LIFO
Optional
Optional
FIFO
LIFO
Optional
Optional
Optional
Optional
FIFO
LIFO
Optional
FIFO
Optional

BrazilChina
India
Russia

34.0
25.0
34.6
20.0

34.0
25.0
33.2
20.0

6.7%
2.8%
8.3%
8.7%

4.1%
7.0%
5.1%
3.1%

-

11.7%
14.6%
35.0%
20.8%

Optional
Optional
Optional
Optional

Argentina
Bolivia
Botswana
Bulgaria
Chad
Colombia
Costa Rica
Croatia
Dominican Republic
Ecuador
Egypt
EthiopiaFiji
Georgia
Ghana
GuyanaHong Kong
Indonesia
Iran
Jamaica
JordanKazakhstan
Kenya
KuwaitLatviaLesothoMadagascar
Malaysia

35.0
25.0
22.0
10.0
40.0
40.0
30.0
30.0
27.0
12.0
17.4
30.0
20.0
15.0
25.0
39.0
16.5
25.0
25.0
27.9
19.1
32.0
30.0
17.0
15.0
22.5
20.0
24.0

35.0
25.0
24.1
10.0
40.0
33.0
30.0
22.0
25.0
15.0
20.0
30.0
28.0
15.0
25.0
39.0
16.5
25.0
25.0
33.3
14.9
32.0
30.0
15.0
15.0
22.5
23.0
25.0

17.2%
6.0%
5.9%
1.3%
2.4%
3.3%
4.0%
1.4%
4.2%
4.0%
9.4%
16.3%
3.1%
2.8%
12.4%
2.0%
4.2%
5.8%
23.6%
7.1%
3.3%
5.2%
8.5%
3.4%
1.5%
4.9%
7.0%
2.4%

4.1% 2.6% 2.5% 4.0% 5.1% 5.0% 2.1% 5.0% 6.8% 5.0% 5.1% 5.0% 5.0% 7.0% 10.0% 2.8% 3.6% 5.1% 5.0% 3.8% 4.0% 10.0% 2.5% 4.2% 10.0% 5.0% 5.0% 2.8% -

11.7%
16.9%
24.5%
30.2%
16.2%
19.4%
14.0%
29.8%
17.7%
15.0%
26.8%
21.0%
17.8%
21.8%
29.6%
35.1%
92.9%
14.0%
10.4%
12.8%
23.9%
26.0%
28.5%
20.4%
40.8%
20.0%
16.5%
16.7%

LIFO
FIFO
Optional
Optional
Optional
LIFO
LIFO
Optional
LIFO
LIFO
Optional
Optional
FIFO
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
FIFO
Optional
FIFO

r
le
Sa
fer
sfe
ns
ut
an
a
p
T
r
l
In
T
ica
al
al
t
an
se
pit
pit
As
Ca
Ca
Fin
Model Parameters - Average Tax Rates

5.6%
4.6%
1.5%
4.0%
0.6%
4.0%
5.1%
5.1%

1.6%
2.0%
10.0%
1.6%
3.5%
7.0%
3.5%
6.0%
2.5%
7.3%

1.1%
4.3%

4.0%
12.5%
1.0%
0.6%
1.3%

4.0%
4.0%
6.0%

0.3%
3.0%
5.0%
1.6%
10.0%

0.2%
0.7%

1.5%
5.0%
3.0%
4.0%

0.5%
0.1%
10.0%

1.0%
0.6%
0.5%

2.0%

5.0%
5.3%
10.0%
9.0%
9.0%

1.5%
4.8%
1.5%

2.0%
5.0%
2.0%

38

Botswana
Bulgaria
Chad
Colombia
Costa Rica
Croatia
Dominican Republic
Ecuador
Egypt
EthiopiaFiji
Georgia
Ghana
GuyanaHong Kong
Australia
Indonesia
Austria
Iran
Belgium
Jamaica
CanadaJordanChile
Kazakhstan
Czech
Republic
Kenya
Denmark
KuwaitEstonia
LatviaFinland
LesothoFranceMadagascar
Germany
Malaysia
GreeceMoroccoHungary
Nigeria
IcelandPakistan
IrelandPanamaIsraelParaguay
Italy
Peru
Japan
Philippines
Korea
S.
Qatar
Luxembourg
Romania
MexicoRwandaNetherlands
SaudiZealand
ArabiaNew
SerbiaNorwaySierra Leone
PolandSingapore
Portugal
South Africa
SlovakRepublic
Tanzania
Slovenia
ThailandSpain
Trinidad and Tobago
SwedenTunisia
Switzerland
UgandaTurkeyUkraineKingdom
UnitedUruguay
UnitedStatesUzbekistan
BrazilVenezuela
China
Vietnam
India
ZambiaRussiaG7*
Argentina
G7 w
Bolivia
BRIC*
Botswana
BRIC w
Bulgaria
G20*
Chad
G20 w
Colombia
OECD*
Costa
OECD Ricaw
Croatia
Africa *Dominican
Africa w Republic
Americas*
EcuadorAmericas w
Egypt
Asia Oceana*
Ethiopia
Asia Oceana w
Fiji
Europe *Georgia
Europe w
Ghana
MENA*
GuyanaMENA wHong Kong
Indonesia
92 Country*
92 Country W
Iran
Jamaica* Simple average
JordanW Weighted average
Kazakhstan
Kenya
KuwaitLatviaLesothoMadagascar
Malaysia
MoroccoNigeria22.0 24.1
10.0 10.0
40.0 40.0
40.0 33.0
30.0 30.0
30.0 22.0
27.0 25.0
12.0 15.0
17.4 20.0
30.0 30.0
Effective CIT
20.0Rate28.0
15.0 15.0
25.0 201025.0
2017
39.0 39.0
16.5 30.0
16.5
30.0
25.0 25.0
25.0
25.0
25.0 34.0
25.0
34.0
27.9 29.4
33.3
26.6
19.1 17.0
14.9
25.0
32.0 19.0
32.0
19.0
30.0 25.0
30.0
22.0
17.0 21.0
15.0
16.0
15.0 26.0
15.0
20.0
22.5 34.4
22.5
38.0
20.0 30.2
23.0
29.7
24.0 24.0
25.0
29.0
31.0 19.0
30.0
19.0
32.0 18.0
32.0
20.0
31.0 12.5
35.0
12.5
25.0 25.0
27.5
24.0
10.0 31.3
10.0
28.5
27.2 39.5
30.0
30.9
30.0 24.2
30.0
24.2
10.0 28.6
10.0
26.2
16.0 30.0
16.0
30.0
30.0 25.5
30.0
25.0
20.0 30.0
20.0
28.0
15.0 28.0
10.0
24.0
30.0 19.0
35.0
19.0
17.0 29.0
17.0
29.5
28.0 21.0
28.0
21.6
30.0 20.0
30.0
19.0
20.0 30.0
30.0
25.0
25.0 26.3
25.0
22.0
26.2 21.2
30.0
17.9
30.0 20.0
30.0
20.0
18.0 28.0
25.0
19.0
25.0 39.2
25.0
39.1
14.9 16.3
34.0
34.5 34.0
34.0
25.0
20.0 25.0
25.0
34.6
35.0 33.2
35.0
20.0 20.0
30.2 33.1
35.0
33.9 35.0
36.2
25.0
28.4 25.0
28.1
22.0
27.1 24.1
26.9
10.0
28.3 10.0
29.3
40.0
31.9 40.0
33.5
40.0
24.7 33.0
25.9
30.0
31.7 30.0
33.7
30.0
28.7 22.0
29.6
27.0
29.5 25.0
29.8
28.3 15.0
28.2
12.0
37.2 20.0
37.3
17.4
24.9 30.0
27.2
30.0
29.1 28.0
31.5
20.0
22.1 23.0
15.0 15.0
26.1 28.2
25.0 25.0
19.8 19.5
39.0
20.8 39.0
20.9
16.5 16.5
25.0
24.7 25.0
25.6
30.4 25.0
32.0
25.0
27.9 33.3
19.1 14.9
32.0 32.0
30.0 30.0
17.0 15.0
15.0 15.0
22.5 22.5
20.0 23.0
24.0 25.0
31.0 30.0
32.0 32.0

5.9%
1.3%
2.4%
3.3%
4.0%
1.4%
4.2%
4.0%
9.4%
16.3%
Inflation
3.1%
2.8%
12.4%
2017
2.0%
4.2%
2.3%
5.8%
2.1%
23.6%
1.7%
7.1%
2.0%
3.3%
3.4%
5.2%
1.5%
8.5%
1.4%
3.4%
2.2%
1.5%
1.7%
4.9%
1.1%
7.0%
1.3%
2.4%
0.2%
1.2%
2.2%
9.7%
3.3%
7.8%
0.9%
3.7%
1.3%
4.6%
1.5%
3.3%
0.7%
3.3%
1.9%
2.4%
1.8%
2.7%
3.6%
4.8%
1.8%
3.4%
1.5%
5.9%
1.7%
10.9%
1.6%
2.5%
1.4%
5.4%
1.7%
9.7%
1.2%
2.0%
1.3%
6.0%
0.7%
4.9%
-0.4%
9.5%
7.9%
13.8%
2.3%
8.5%
2.0%
3.7%
6.7%
54.3%
2.8%
7.8%
8.3%
7.6%
8.7%
17.2%
6.0%
5.9%
1.3%
2.4%
3.3%
4.0%
1.4%
4.2%
4.0%
9.4%
16.3%
3.1%
2.8%
12.4%
2.0%
4.2%
5.8%
23.6%
7.1%
3.3%
5.2%
8.5%
3.4%
1.5%
4.9%
7.0%
2.4%
1.2%
9.7%

2.5% - 24.5%
4.0% - 30.2%
5.1% - 16.2%
5.0% - 19.4%
2.1% - 14.0%
5.0% - 29.8%
6.8% - 17.7%
5.0% - 15.0%
5.1% - 26.8%
5.0% - 21.0%
Tax Depreciation
5.0%Range- 17.8%
7.0% - 21.8%
10.0%
2017 - 29.6%
2.8% - 35.1%
3.6% -- 22.1%
92.9%
2.6%
5.1% -- 10.6%
14.0%
3.1%
5.0% -- 32.9%
10.4%
7.0%
3.8% -- 55.0%
12.8%
4.0%
4.0% -- 39.7%
23.9%
7.5%
10.0%
26.0%
3.1% -- 20.8%
2.5% -- 22.7%
28.5%
5.1%
4.2% -- 21.6%
20.4%
9.9%
10.0%
40.8%
8.2% -- 28.7%
5.0% -- 26.5%
20.0%
3.1%
5.0% -- 14.4%
16.5%
3.1%
2.8% -- 39.2%
16.7%
5.3%
7.6% -- 48.1%
33.1%
3.3%
10.0%
24.8%
3.3% -- 30.5%
10.0%
25.2%
2.0% -- 12.4%
6.5% -- 29.8%
22.1%
4.2%
3.3% -- 15.3%
15.9%
5.1%
4.6% -- 21.3%
20.0%
2.0%
6.5% -- 20.1%
22.1%
2.6%
5.0% -- 21.0%
19.4%
4.1%
3.4% -- 15.4%
24.7%
5.1%
4.1% -- 20.9%
19.7%
2.9%
5.0% -- 22.1%
24.3%
6.5%
2.5% -- 24.5%
14.8%
3.6%
11.0%
37.1%
2.6% -- 25.8%
3.1% -- 19.8%
24.6%
2.2%
5.0% -- 17.3%
25.0%
5.0%
5.0% -- 21.6%
25.3%
3.5%
5.0% -- 29.2%
21.0%
2.1%
10.0%
24.9%
3.2% -- 19.5%
5.0% -- 31.9%
20.3%
5.7%
5.0% -- 48.8%
29.7%
12.5%
8.0% -- 17.7%
37.2%
1.4%
2.8% -- 55.0%
10.0%
4.0%
5.0% - 18.7%
4.1%
6.5% -- 11.7%
22.1%
7.0%
3.4% -- 14.6%
25.1%
5.1%
5.1% -- 35.0%
47.3%
3.1% - 20.8%

Optional
Optional
Optional
LIFO
LIFO
Optional
LIFO
LIFO
Optional
Optional
Inventory
FIFOAcounting
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
LIFO
Optional
FIFO
Optional
LIFO
Optional
Optional
Optional
FIFO
Optional
LIFO
Optional
FIFO
FIFO
Optional
Optional
LIFO
FIFO
LIFO
Optional
Optional
FIFO
FIFO
Optional
FIFO
LIFO
Optional
Optional
LIFO
Optional
Optional
Optional
LIFO
Optional
Optional
LIFO
LIFO
Optional
Optional
Optional
Optional
Optional
FIFO
Optional
LIFO
FIFO
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
FIFO
Optional
LIFO
Optional
Optional
Optional
FIFO
LIFO
Optional
Optional
Optional
LIFO
Optional
Optional
Optional
Optional
Optional

4.1% 2.6% 2.5% 4.0% 5.1% 5.0% 2.1% 5.0% 6.8% 5.0% 5.1% 5.0% 5.0% 7.0% 10.0% 2.8% 3.6% 5.1% 5.0% 3.8% 4.0% 10.0% 2.5% 4.2% 10.0% 5.0% 5.0% 2.8% 7.6% 10.0% -

LIFO
FIFO
Optional
Optional
Optional
LIFO
LIFO
Optional
LIFO
LIFO
Optional
Optional
FIFO
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
Optional
FIFO
Optional
FIFO
Optional
FIFO

11.7%
16.9%
24.5%
30.2%
16.2%
19.4%
14.0%
29.8%
17.7%
15.0%
26.8%
21.0%
17.8%
21.8%
29.6%
35.1%
92.9%
14.0%
10.4%
12.8%
23.9%
26.0%
28.5%
20.4%
40.8%
20.0%
16.5%
16.7%
33.1%
24.8%

5.0%
1.6%
10.0%

0.2%
0.7%

1.5%
5.0%
3.0%
4.0%

0.5%
0.1%
10.0%

r
le
r
Sa
sfe
sfe
ut
an
p
ran
lT
n
I
T
a
ic
al
al
t
an
pit
pit
se
1.0%
As
Ca
Ca
Fin
Model Parameters - Average0.6%
Tax Rates
0.5%
5.0%
5.6%
5.3%
4.6%
10.0%
2.0%
9.0%
1.5%
9.0%
1.5%
4.0%
4.8%
0.6%

1.5%

2.0%
4.0%
5.1%
5.0%
5.1%
2.0%
3.5%
1.6%
2.5%
2.0%
2.0%
10.0%

1.5%

3.0%

1.6%

3.5%
7.0%
3.5%
6.0%

2.5%
2.5%
3.0%
7.3%

0.3%
4.0%

1.1%
7.0%
4.3%
5.0%
1.0%
1.0%
4.0%
4.0%
12.5%
1.0%

0.6%
1.3%

4.0%
4.0%
0.5%
6.0%
5.0%

0.3%
3.0%
5.0%
1.6%
10.0%

0.2%
0.7%

1.5%
5.0%
3.0%
4.0%

0.5%
0.1%
10.0%

1.0%
0.6%
0.5%

2.0%

5.0%
5.3%
10.0%
9.0%
9.0%

1.5%
4.8%
1.5%

2.0%
5.0%
2.0%
3.5%

About the Authors
Philip Bazel is a Research Associate at The School of Public Policy at the University of Calgary. In addition to
publishing through The School of Public Policy, Philip has also played a role in a number of projects consulting forboth governments and private organisations in the area of taxation and public finance.

Jack Mintz became the President’s Fellow of The School of Public Policy at the University of Calgary on July 1, 2015,
after serving as the founding Director and Palmer Chair in Public Policy since January 2008. He serves on the boardsof Imperial Oil Limited and Morneau Shepell, and is Chair and Vice-President of the Social Sciences and Humanities
Research Council of Canada. He also serves as an Associate Editor of International Tax and Public Finance and theCanadian Tax Journal, and is a Research Fellow of CESifo, Munich, Germany, and the Centre for Business Taxation
Institute, Oxford University.
Dr. Mintz has consulted widely with the World Bank, the International Monetary Fund, the Organization for Economic
Co-operation and Development, federal and provincial governments in Canada, and various businesses and nonprofit organizations. Dr. Mintz became a member of the Order of Canada in 2015 in addition to receiving the Queen
Elizabeth Diamond Jubilee Medal in 2012. Widely published in the field of public economics, he was touted in a
2004 U.K. magazine publication as one of the world’s most influential tax experts. The Financial Post named him
one of the five most influential Canadians in regulation in 2012. In the 2015 Who’s Who Legal, he was named one of
the top experts in the world and the Public Policy Forum honored him for his contribution to public policy in 2015at its annual dinner.

Austin Thompson is a recent 2017 graduate of the Master of Public Policy Program at the University of Calgary andcurrently works at the federal Department of Finance.

39

ABOUT THE SCHOOL OF PUBLIC POLICYThe School of Public Policy has become the flagship school of its kind in Canada by providing a practical, global andfocused perspective on public policy analysis and practice in areas of energy and environmental policy, international policy
and economic and social policy that is unique in Canada.
The mission of The School of Public Policy is to strengthen Canada’s public service, institutions and economic performancefor the betterment of our families, communities and country. We do this by:• Building capacity in Government through the formal training of public servants in degree and non-degree programs,
giving the people charged with making public policy work for Canada the hands-on expertise to represent our vitalinterests both here and abroad;• Improving Public Policy Discourse outside Government through executive and strategic assessment programs, building
a stronger understanding of what makes public policy work for those outside of the public sector and helps everyday
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outreach programs, bringing global best practices to bear on Canadian public policy, resulting in decisions that benefit
all people for the long term, not a few people for the short term.
The School of Public Policy relies on industry experts and practitioners, as well as academics, to conduct research in theirareas of expertise. Using experts and practitioners is what makes our research especially relevant and applicable. Authors
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DISTRIBUTION
Our publications are available online at www.policyschool.ca.

DATE OF ISSUE
February 2018DISCLAIMER
The opinions expressed in these publications are the authors' alone andtherefore do not necessarily reflect the opinions of the supporters, staff,
or boards of The School of Public Policy.

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Our web site, www.policyschool.ca, contains more information about
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Copyright © Bazel, Mintz and Thompson 2018. This is an open-accesspaper distributed under the terms of the Creative Commons license
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40

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