Shopping the world for the best deal on taxes

Waterloo prof studies why some companies pay more taxes than seems necessary.

By Dave Pink

Communications and Public Affairs

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It shouldn’t come as any surprise that many of the world’s largest multinational corporations shop around from country to country for the best deal they can get on taxes.

Professor Ken Klassen, School of Accounting and Finance, University of WaterlooProfessor Ken Klassen, School of Accounting and Finance, University of Waterloo

“There’s pretty strong evidence that’s true,” says Ken Klassen, a professor in the School of Accounting and Finance.  He adds that, among corporations, “the tendency is to engage in income shifting; the moving of profits to where the tax regime allows a company to be more profitable.”

It’s all perfectly legal. The larger question could be: Why don’t all corporations do it?

“There are companies that feel they have an obligation to pay their share of taxes in each country,” says Klassen, who is also a director of the Deloitte Centre for Tax Education and Research and the Robert Harding Research Leadership Fellow. “Part of what we’re trying to understand is what drives differences across companies. That’s the big challenge.”

Publicly traded corporations are wedged between shareholder demands for profit, and the public relations virtue of being seen as a good corporate citizen, he says.

Then there’s the issue of intellectual property. How and where should that be taxed?

Klassen earned his BA and MAcc at Waterloo then moved on to Stanford University, where he studied under renowned accounting and finance expert Mark Wolfson, to complete an MS in statistics and his PhD in accounting. His academic mission is a fuller understanding of how strongly companies respond to tax incentives.

Corporate tax rates have been reduced throughout the developed world in recent years. The United States has been the most stubborn in reducing those rates, says Klassen, while in Germany the tax rates have plunged. In Canada we have allowed the corporate tax scale to dip slowly downward.

“Canada has dropped its tax rate and that’s had some positive impact on retaining investment,” he says. “The U.S. has struggled.

“You can put up fences, but there have to be gates in those fences. This is a global economy,” says Klassen.  “Canada should continue to follow the general global trend. It has no choice.”