As readers of any of my sites know, I was a very big supporter of the Harper government’s decision in late 2007 to reduce the federal corporate income tax to 15% in 2012; it is currently 18% in 2010; and will be 16.5% in 2011. It was 21% from 2008 and 22.12% in 2007.
First, you had Tim Hortons moving its corporate headquarters back to Canada, where they will realize a substantial cost savings in taxes vs. their US operation.
Today, you have Biovail and Valeant merging together (note that long-time investors would know Valeant formerly as ICN Pharmaceuticals), but the key paragraph is the following:
Following completion of the merger, the new Valeant will be headquartered in Mississauga, Ontario and will remain a Canadian domiciled corporation, listed on both the Toronto and New York Stock Exchanges. In addition, the combined company will retain Biovail’s existing principal operating subsidiary in Barbados, which will continue to own, manage, control and develop intellectual property for the combined company. The location of the combined company’s U.S. headquarters will be determined after the close of the transaction.
This is purely for tax reasons. In Valeant’s California headquarters, they are subject to corporate income taxes of approximately 40% – 35% federal and about 8% state (which is deductible from federal taxes).
In Ontario, the current tax rate is 18% federal and 14% provincial; the provincial component will be reduced to 12% on July 1, 2010, for a combined rate of 31% in 2010. In mid-2011 and mid-2012, Ontario’s provincial rate goes down half a percent, and in mid-2013 it goes down to 10%. So the company will face the following effective corporate tax rates:
Calendar year 2010: 31%
Calendar year 2011: 28.25%
Calendar year 2012: 26.25%
Calendar year 2013: 25.5%
Calendar year 2014 and beyond: 25.0%
Corporations moving to British Columbia currently face a 10.5% provincial corporate tax rate, which will be reduced to 10% in 2011.
For Valeant, they reported $217 million in pre-tax income in the past 12 months. A 15% tax cut on this amount amounts to a yearly savings of about $33 million or nearly 40 cents a share. Also, any synergy benefits in the merger would also realize a 75% after-tax savings, as opposed to 60% if they had remained in California.
It is this huge 15% tax advantage that will cause more businesses to escape the USA and get into Canada. The US is going to be forced to cut corporate tax rates, otherwise they will continue to see investment leak out of the country like a thin helium balloon. As long as Canada doesn’t reverse this decision (which the opposition Liberal party has attacked the Conservatives on this very issue of corporate tax cuts) we will continue to be the beneficiaries of what is a very sound corporate taxation policy.