Canada is the most tax competitive country for businesses in the world: KPMG

Canada has quietly become the most tax competitive country for businesses globally in all sectors including digital services, research and development, corporate services and manufacturing, according to a study by international tax firm KPMG.

Citing the country’s low corporate tax rates, moderate statutory labour costs and low goods and services tax/harmonized sales tax, the biennial study Competitive Alternatives 2016: Focus on Tax put Canada in the lead of 10 OECD countries, followed by the United Kingdom and the Netherlands.

City-wise, we also churned out the frontrunners including Toronto, Vancouver and Montreal in first, second and fourth, respectively, of the top 51 major international cities with a population of two million or more. Manchester in the U.K. placed third.

According KPMG, the 10 countries and 111 cities are compared based on the Total Tax Index (TTI), a “measure of the total taxes paid by companies in a particular location, expressed as a percentage of total taxes paid by similar firms in the US.”

As the benchmark country, the U.S. TTI sits at 100. Canada, on the other hand measures 52.4, a significant gap says Tony Frost, an associate professor of international business at the University of Western Ontario’s Ivey Business School.

“Most people are totally blown away about that because our natural stance for thinking about Canada is we’re the Sweden of North America… highly taxed,” he told Yahoo Canada Finance adding that when you take a step back, that usually refers to personal taxes. Corporate taxes are a different story; with the Harper government quietly adjusting the regime to woo foreign investment over nearly a decade as Prime Minister.

“It was definitely a part of the strategy for Harper to move Canada into a very competitive (place) and now it looks like we’re there with respect to corporate tax,” says Frost. “Canada has been in stealth mode… we gradually ratcheted down (corporate taxes).”

Even with provincial tax rates, which vary from 10 to 15 per cent, the country’s overall federal corporate income tax rate of 15 percent is more attractive than the U.S. federal corporate income tax rate, which sits around 34 per cent.

In fact, according to the study, all 17 Canadian cities on the list have lower total effective tax costs compared to the U.S. cities that made the cut. St. John’s, NFLD leads the pack at 36.4 TTI, and is a leap from fourth place where it sat in 2014.

“The introduction of a new tax credit in 2015 for digital media activities in Newfoundland & Labrador boosted the city’s placement,” says the study.

Of the larger cities, Toronto’s first place spot was attributed to the Ontario Digital Media tax credit, which ranges between 35 to 40 per cent. Vancouver received props for both British Columbia ’s research and development tax credit at 10 per cent and the digital media tax credit at 17.5 per cent.

While Canada’s tax competitiveness doesn’t benefit any industry in particular, Frost points out that the largest, more mobile multinationals are likely to draw the most benefits from our tax regime.

“(They) have the most leverage to add onto that already low tax environment with specific incentives and subsidies the government is willing to negotiate in order to drive the big, chunky, high-visibility, sometimes high-job-investment blocks,” he says.

But despite Canada’s high ranking it’s worth noting that firms look at total cost, not just tax.

“I would call it a ‘middle of the pack’ important variable,” says Frost. “Canada generally plays ‘uphill’ in the foreign direct investment competition game due to a variety of factors, most importantly our small market… in some jurisdictions, and for some kinds of investments, tax benefits are swamped by (for example) energy costs or, obviously, labour costs relative to countries like Mexico – so don’t lose sight of that, we’re not going to be the Shangri-La.”