Corporate tax: the bigger picture

Canadian companies pay more taxes than their income statements show.

In Canada as in other countries, there has been a growing controversy about the taxes paid — or not paid — by large corporations. The concern is understandable. Particularly in times of weak economic growth, citizens deserve to know that the burden of taxation is fairly shared. But it is noteworthy that much of the media coverage of this issue focuses on the activities of a relatively small number of large international corporations that in recent years have paid little or no tax. Indeed, the same few companies seem to pop up in almost every news story and opinion piece that is critical of corporate tax practices.

Is it true, as some advocacy groups have suggested, that Canadian companies routinely employ controversial tax-reduction strategies? To improve public understanding of this issue, the Canadian Council of Chief Executives (CCCE) and PricewaterhouseCoopers LLP (PwC) recently conducted a survey of 63 leading Canadian corporations, drawn from the ranks of the CCCE’s 150 member companies (to read the CCCE Total Tax Contribution Survey, please go to item/large-companies-pay-more-than-50-different-kinds- of-taxes-study-says, or Collectively, these 63 companies employ 760,000 Canadians. The results of the study shed light on the corporate tax practices of Canada’s largest private and public companies and their domestic business operations.

The survey made use of PwC’s Total Tax Contribution framework, which captures all major types of taxes paid by a corporation, including taxes that are not visible in a corporation’s income statement. These include payroll taxes, property taxes and sales or value-added taxes that companies pay to the federal, provincial and municipal levels of government regardless of corporate income profitability — sometimes referred to as fixed taxes.

Altogether, the 63 companies contributed $40.6 billion to Canadian federal, provincial and municipal finances in 2012. Roughly half of that amount, $19 billion, consisted of taxes borne directly by the companies; the rest, $21.6 billion, consisted of taxes collected and remitted to government. The firms that took part in the survey collectively paid $6 billion in federal corporate income tax in 2012, representing 17% of total federal corporate tax revenue that year.

The survey also found that companies are subject to more than 50 different kinds of taxes and pay, on average, a total tax rate of 33.4% (total taxes paid divided by accounting profit before taxes). Fixed taxes (not income-based) account for a substantial portion of that. For every dollar of corporate income tax paid, the businesses surveyed paid an additional 94¢ in other fixed business taxes and 59¢ in other payments to government.

Is this too much or too little? Opinions vary, but it is important to note that government was the largest beneficiary of value distributed by the 63 companies surveyed. For every $100 generated by these firms, $38 flowed directly or indirectly into government coffers. Another $29 went to employees. The rest, $33, was either reinvested in the company, used to repay debt or distributed to shareholders.

It is a point worth underscoring that during a time of weak economic growth, the public sector collected the largest share of value distributed by the surveyed companies. Given this, we question whether it is fair to accuse Canadian corporations of pervasive inappropriate corporate tax practices.

Critics also suggest that, over time, the tax burden in Canada has shifted from corporations to individuals. The numbers, however, show otherwise. Since the early 1980s — when the statutory corporate tax rate was much higher than it is now — the business share of total federal tax revenue has increased gradually despite fluctuations in the business cycle. As Canada returns to stronger economic growth, it can be expected that corporate tax revenues as a share of GDP will continue to grow.

Like any other expense facing a company, corporate taxes need to be appropriately managed. Corporate board members and executives are well aware of their duty to shareholders to maximize returns by controlling costs while maintaining a sustainable and profitable business that behaves responsibly toward its employees, the wider community, government and the environment. PwC’s Total Tax Contribution framework provides a mechanism by which a corporation can measure and demonstrate the full range of its financial contributions to federal, provincial and municipal governments.

For the most part, the recent debate about corporate tax behaviour has focused on profit-based taxes. In our view, this approach is too narrow, since it ignores the many factors that influence profit and tax calculations in any given year, including losses sustained previously or bona fide government incentives such as accelerated tax depreciation on new assets purchased to grow and sustain the business. Investments made today reduce profit-based taxes to help companies expand, ultimately increasing future tax revenues.

Going forward, the CCCE and PwC will continue to survey leading Canadian companies with the aim of improving participation in future studies. Smart tax policy requires a strong evidence base and the CCCE, PwC and others are working to ensure a more comprehensive understanding of the tax contributions of Canadian companies.

Brian Kingston is senior associate with the Canadian Council of Chief Executives in Ottawa. Lincoln Schreiner is a tax services partner with PricewaterhouseCoopers in Vancouver.