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Profit shifting by corporations costs Canada $4 billion a year: study

Complex tax schemes used by corporations to reduce their tax burdens cost Canada $4 billion a year in lost government revenue.
Complex tax schemes used by corporations to reduce their tax burdens cost Canada $4 billion a year in lost government revenue. Adrien Veczan/The Canadian Press

Canada is losing $4.4 billion a year due to corporate profit shifting, shows a new study from the United Nations University World Institute for Development Economics Research (UNU-WIDER) in Helsinki, Finland.

The research, which applies a methodology developed by the International Monetary Fund to a new global tax dataset, estimated worldwide losses due to corporate tax avoidance at $500 billion annually. The paper also offers a rare look at how much single countries are losing in government revenue when corporations resort to creative techniques to minimize their tax burden.

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Profit shifting, which is often legal, is the process of moving company profits from the country in which the business activity took place to jurisdictions with lower corporate tax rates.

The practice has become the focus of global attention after journalistic investigations such as the Luxembourg Leaks and Panama Papers revealed how multinational and international accounting firms regularly resort to aggressive tax avoidance schemes.

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In Canada, losses due to profit shifting amount to the equivalent of nearly 0.2 per cent of GDP and almost 7 per cent of corporate tax revenue, according to a dataset accompanying the UNU-WIDER study.

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How Canada stacks up against other countries

Canada is suffering sizable losses but ranks rather well compared to other countries, including advanced economies.

The U.S., for example, is hemorrhaging roughly $245 billion a year due to profit shifting, by far the largest revenue loss of any country reviewed in the study. That’s the equivalent of 1.13 per cent of America’s GDP and a whopping 49 per cent of its corporate tax revenues.

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China was the country with the second-largest loss in dollar terms, estimated at nearly $87 billion, or 0.75 per cent of GDP. The study did not provide numbers for China’s loss as a share of its tax revenue.

When countries are ordered according to the size of their corporate tax revenue loss as a share of GDP from smallest to largest, Canada ranks 12th out of 102 nations. Sweden tops the chart, with losses smaller than 0.01 of GDP. The U.S. is in the middle of the pack, at 51.

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The data also highlighted a divide between rich and lower-income countries, with the latter seeing smaller losses in terms of dollar amounts but significantly larger shares of their GDP lost to profit shifting. In the Central African republic of Chad, the estimated losses surpassed the country’s total tax revenue, excluding those tied to the resource sector. Pakistan is missing out on the equivalent of 40 per cent of its current revenues.

What Canada is doing to combat profit shifting

Budget 2017 allocates $523.9 million over five years to prevent tax evasion and crack down on tax dodging. The money, which comes on top of $185.8 million pledged last year, will serve to hire additional Canada Revenue Agency auditors and beef up the agency’s data analysis and investigative capabilities, among other things.

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In December, Canada also enacted legislation that will require multinationals to file so-called country-by-country reports, which will allow the CRA to get a better picture of how the companies operate globally and help it spot profit shifting. The initiative is part of efforts led by the Organisation for Economic Co-operation and Development to improved international co-ordination to stomp out corporate tax avoidance.

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