Deloitte's comments - B.C. HST vote
March 4, 2011
BC Ministry of Finance
Dear Independent Panel,
Subject: Information submission on HST initiative vote options
Further to the call for information submissions that the Independent Panel (hereinafter referred to as the “Panel”) requested in an Information Bulletin issued on February 11, 2011, please accept this letter as a formal submission by Deloitte & Touche LLP (“Deloitte”) advocating our support for the Harmonized Sales Tax (“HST”) option and outlining our reasoning for taking such a position. We have framed our views in accordance with the terms of reference established by the Panel and, to the extent possible, included facts or data gathered and made available to date.
Summary position: Deloitte is in favour of retaining the HST
Importance of productivity and the role of tax policy
The rate of Canada's productivity growth has been slowing relative to major developed economies, such as the United States, and this has serious implications on Canadian living standards. Further, it is anticipated that productivity growth will become increasingly important as an economic driver, given that labour force growth is expected to decline significantly, in Canada and in BC, because of our aging population and the retirement of the baby-boom generation.
It is Deloitte’s view that the introduction of the HST is one of the most important and positive tax policies recently introduced in the province, and it is in line with other tax initiatives implemented by both BC and the federal governments to encourage investment, productivity, and the global and/or inter-provincial competitiveness of our businesses. BC initiatives include: credits for expenditures related to Scientific Research & Experimental Development (“SRED”), digital media credits, so-called green credits, incentives under the International Business Activity Act (which provides incentives for both individuals and businesses), and the so-called “angel tax credit” for venture capital investors. Furthermore, the general corporate tax rate has been reduced to 10%, and the small business corporate rate will be reduced to 0% by April of 2012. These initiatives are important tools to assist the government in generating increases to BC’s GDP and raising the standard of living for British Columbians.
Maintaining BC’s competitiveness
As Canada continues to move toward a national sales tax regime based on value-added taxes, it is imperative that BC is at the forefront of such a movement to ensure our competitiveness with other Canadian provinces and our ability to attract new investment. In conjunction with additional reforms that have been advocated by Deloitte, such as enhancements to the SRED program to universally extend access to refundable credits and further reductions to personal income tax rates combined with a focused immigration program, it is our view that BC’s tax policies can significantly contribute to the province’s ability to increase productivity, emerge successfully from the global recession, and achieve sustainable growth.
A value-added tax regime (or “VAT”), such as the HST, represents good tax policy and is a modernized sales tax framework, in comparison to single-stage consumption taxes, such as the Social Services Tax (or “PST”). BC currently has the lowest rate of all Canadian harmonized provinces, and that rate is significantly lower than the rates in many other VAT jurisdictions, some of which represent major trading partners and/or have been targeted for free trade negotiations under Canada’s ambitious trade agenda. The effectiveness of policies designed to enhance the competitiveness of the province will, to a certain extent, be dependent on the number of initiatives enacted in support of achieving that goal and, to a larger extent, on ensuring that certain tax policies do not directly contradict or undo the benefits achieved by other policies. Reverting to a PST system would directly contradict efforts to ensure that our province has a competitive advantage vis-à-vis other Canadian provinces and other jurisdictions, as it will eliminate the benefits that sales tax harmonization can bring.
While BC’s 2010/2011 Budget stated that the sales tax reform was designed to be neutral in its budgetary impact, as businesses take advantage of the reduced tax burden associated with capital expenditures and invest in new technologies, productivity will be enhanced, more jobs will be created, salaries will rise, and the combined effect of this increased economic activity in the province will result in an increase to provincial revenues through higher taxes collected in all streams, despite the fact that corporate income tax rates have been decreasing.
Implications of unwinding the HST in favour of re-instating the PST
To unwind the HST system in BC would result in lost opportunities to stimulate investment and create new jobs, which have previously been estimated to be $11.5B and 113,000, respectively, by 2020. This, in conjunction with the requirement to repay $1.6B in HST assistance from the federal government, of which more than $1B has already been received, and the administrative costs to government and businesses in re-instating the PST regime, is concerning, particularly in view of the fact that the 2011/12 budget has been prepared under the assumption that the HST will remain intact. A decision to unwind the HST would severely impair an otherwise sound fiscal plan and would likely erode the ability of the province to eliminate the deficit by 2013/14 as currently planned.
The importance of public education and other recommendations
We recommend that the province commit to a robust education campaign to ensure that the general public is adequately informed of the benefits of the HST and the cost of unwinding the HST system in favour of re-instating the Goods and Services Tax (“GST”) and PST. For instance, it may not be well understood that the PST is a hidden tax that has been eliminated with the HST. While certain items are not taxable for PST purposes, the tax on inputs used in the production of those items are included in the cost to the producer(s), such that the final consumer bears those costs in the form of higher prices. There is also a cascading of tax when there are multiple producers in the chain, such that the hidden tax burden is intensified. With HST, the hidden taxes are virtually eliminated, which has contributed to the fact that, although increases to consumer prices have been predicted as a result of the HST, recent studies show that the impact on the Consumer Price Index (“CPI”) owing to HST is minimal (0.6 of one percent) and that the HST actually results in some savings to low income earners.
To the extent that any further initiatives can be undertaken to simplify the administration of the HST regime and/or provide additional rebates for items that were not previously subject to tax under the PST regime but which became taxable under HST, such initiatives should, in conjunction with the education campaign, help the province in gaining support for a referendum vote favouring retention of the HST.
Lastly, it is our view that additional consideration should be given to the wording of the referendum question, and consultations should be sought with respect to the same. In the present climate, we believe that the current framing of the referendum question may well impact the final outcome. By positioning the re-instatement of PST and GST first, voters may be more inclined to consider the costs of each option in a more balanced fashion.
In view of the above summary of Deloitte’s views, the following represents our comments in respect of each of the specific terms of reference outlined by the Panel.
The consumer impacts to individuals/families of each option
While abolishment of the HST in favour of PST may, based on the recent SFU study, seemingly result in an immediate cost of living decrease of 0.6 of one percent, the BC HST credit for lower income households would be eliminated and consumers will only be entitled to a GST credit, despite the fact that many of their purchases will continue to be taxable at 12% under the GST/PST regime. Additionally, increased costs to government and businesses for reinstating the PST regime would undoubtedly be passed on, at least in part, to consumers in the form of higher prices, thereby, offsetting any real or perceived gain.
Further, in order to meet anticipated government spending needs and the goal of eliminating the deficit, increased costs associated with unwinding the HST regime, or even to raise enough funds to repay the HST assistance payments to the federal government, it may result in an increase in other taxes incurred by individuals and families (e.g., personal income taxes, motor fuel taxes, MSP premiums, etc.).
Lastly, a return to the PST system does not result in an absolute 7% tax saving on HST taxable goods and services that were exempt under PST, given that the PST system, by its very nature, results in embedded sales tax throughout the production and sales cycles. In other words, goods and services that are not taxable for PST purposes generally have embedded tax costs, given that PST incurred by producers in providing the good or service represent actual costs to be recovered when determining the selling price of those goods or services. The most transparent example relates to the PST that was previously embedded in the cost of new homes; specifically, when the provincial government introduced a new housing rebate to offset some of the increased tax cost associated with buying a new home, the rebate rate was set at 71.43% of the provincial component of HST (and subject to a maximum of $26,250). Rather than calculating a rebate at 100% of the provincial component, the rebate was determined using a factor of 5/7, or 71.43%, to reflect the fact that approximately 2% of the purchase price of a new home represented the embedded PST cost. For many consumers, the information published by the government on the determination of the rebate rate may have been their first real understanding of, or exposure to, the amount of embedded tax in “exempt” or “non-taxable” items.
Retaining the HST is beneficial to consumers, given that increased investment by businesses in the province, fuelled by the reduced tax burden associated with capital investment, will result in greater productivity, more jobs, greater demand for BC products, higher wages, and increased consumer spending. In a competitive economy, studies have shown that the move to a value-added tax system will result in tax savings to businesses and that such savings will eventually be passed on to the consumers in the form of reduced prices, a result which has seemingly been evidenced during the early stages of July-December 2010, as per the findings of the recent SFU study.
Further, the government has taken several initiatives to mitigate the impact of HST on consumers, including point-of-sale and new housing rebates, as well as the BC HST credit to low income households, no doubt contributing to a CPI impact that was less than anticipated. Specifically, by introducing a BC HST credit of up to $230 per person and rebates for such items as children’s clothing, children’s footwear, and residential energy, the regressive nature of the HST has been subdued and, for the lowest levels of income, has even resulted in a net gain to consumers. As per the SFU study, lower income households tend to spend a greater proportion of their income on expenditures that did not experience an increase in taxation under HST, including rent, utilities, basic groceries, and children’s clothing/footwear, while higher income households tend to spend more of their income on items that attract more tax under HST, such as relatively higher priced new housing, restaurant meals, recreational activities (such as gym memberships), and certain services (such as spa services).
The expected impact of each option to BC businesses and BC’s economic competitiveness
Factors in support of retaining HST
The provincial government has undertaken many positive steps in ensuring BC’s economic competiveness, including the reduction of corporate income tax rates. Implementation of a VAT system complements these initiatives, which are designed to attract investment in the province, by lowering the cost of capital. Investment in upgraded machinery and equipment and new technologies enhances the productivity of our businesses, which has been lagging in recent years, thus, contributing to our ability to effectively compete in domestic and international markets. The federal government has also committed to encouraging business investment in capital equipment, as outlined in the Economic Action Plan of Budget 2009, and demonstrated this, in part, through the elimination of tariffs on manufacturing machinery and equipment.
The reduced costs associated with a simplified administration, comprised of regulatory audits by one taxing authority, single registration and reporting requirements, and following one set of legislative requirements also represents a significant cost saving to businesses, which, according to information on the BC Ministry of Finance website, is estimated at $150M annually. BC businesses invested a significant amount of financial, human, technological, and other resources in converting to the HST regime. The economic inefficiencies associated with trying to reverse the implementation will undoubtedly harm our businesses and may drive some businesses out of the province.
Given that our neighbouring province, Alberta, has no sales tax and a provincial corporate tax rate which mirrors BC’s, that Ontario is retaining their HST system, that the Atlantic provinces have been harmonized since 1997, and that Quebec is quasi-harmonized, it is apparent that Canada is moving toward a national sales tax. It is imperative that BC be at the forefront of the movement, if we want to ensure that we are able to attract new investment. It would be a shame to see significant efforts made in other areas designed to encourage investment rendered less effective as a result of a decision to re-instate a more complex, costly, and business-unfriendly sales tax system, as compared to other Canadian and foreign jurisdictions, not to mention the potential reputational risk associated with positioning BC as an unstable or uncertain economy in which to invest.
The fiscal implications of each option to the provincial budget in both the short- and long-term
Implications of abolishing HST
One of the most significant fiscal implications associated with repealing the HST is the potential obligation to repay the $1.6B in assistance provided by the federal government, of which more than $1B has already been received. Further, the increased economic activity that is projected under an HST regime would be lost, resulting in a slower growth in provincial revenues.
As per Finance Minister Colin Hansen in the 2011/2012 Budget, the fiscal plan has been established on the assumption that HST will remain in effect. The anticipated costs associated with unwinding the HST and re-instating the PST would have a significant impact on the fiscal plan. Annual savings related to PST administration, estimated by the Finance Minster at $30M, would be lost, resulting in an added cost to the province and not just a lost saving. Additional costs of $50M per year would also be incurred for vendor compensation. Further, complex legislative amendments, extensive negotiations with the federal government, re-negotiation of employee transfers, and the cost of re-hiring, as necessary, would all have a negative fiscal impact in the relatively short-term. While these are considerations that the government will undoubtedly have to face under a move to re-instate the PST, they do not contemplate the impact to the fiscal plan associated with other, currently undeterminable, risks.
Over the longer term, the fiscal implications associated with abolishing the HST will be correlated to lost opportunities for growing the level of economic activity in the province. If productivity, or GDP, does not grow at the anticipated level due, in large part, to unwinding sales tax harmonization, employment and standard of living will similarly grow at a slower pace, thus, having a direct impact on the amount of provincial revenues collected from all tax streams. The success of other tax strategies focused on reducing tax rates is dependent on the ability to attract additional investment in the province and enhance the overall level of economic activity to be taxed.
Relevant information and analyses from other jurisdictions
Within the Canadian taxation system, there have been examples to date, and studies conducted, to show that movement to a value-added tax system results in increased investment in machinery and equipment; small net increases, or even slight decreases, in consumer prices; and a substantial pass-through of savings by businesses to consumers.
The following is a summary of the indirect tax rates in Canada:
|Canadian province||GST/HST rate||PST rate||Total|
|Prince Edward Island||5%||10%||15%|
In the study prepared by Jack Mintz, the impact of sales tax harmonization and other tax measures on BC’s “marginal effective tax rate on capital”, or METR, is estimated to be a reduction from 29.5% in 2009 to 17.9% in 2018. A METR of 17.9% in 2018 is projected to be lower than all Canadian provinces, except the three Atlantic Provinces that have been harmonized since 1997. Due to the relative size of capital investment related to forestry and manufacturing in BC, the projected METR for BC is even lower than that of our neighbouring province, Alberta, despite the fact that Alberta does not have a sales tax and has a similar corporate tax rate to the rate in BC.
As discussed throughout this submission, the HST results in reduced operating costs (in terms of PST savings on business inputs), reduced investment costs (by removing the tax burden on capital expenditures), and reduced administration costs (by having to contend with only a single registration, return, audit, etc. and by reducing complexities associated with differences in inter-provincial requirements). If the HST is not retained, BC businesses would be at a competitive disadvantage in terms of attracting investment, reducing costs, increasing investment in capital equipment, and enhancing productivity, as compared to other Canadian provinces and, particularly, with respect to the other harmonized provinces, as well as Alberta.
The federal government has pursued an aggressive free trade agenda since 2006, recognizing that free trade is an essential contributor to Canada’s productivity, growth, and prosperity and aides in ensuring the competitiveness of our country in external markets. In this regard, Canada has recently initiated trade negotiations with the European Union, as well as certain Asian jurisdictions, such as Japan, South Korea, and India, all of which are trading partners with the BC economy. Many of these jurisdictions have a value-added tax system, and in many cases, such as the EU, the VAT rates are significantly higher than those in BC or other Canadian provinces. It is particularly noteworthy that 18 of the G20 economies, and 29 of 30 OECD countries, have instituted a VAT regime.
The following represents a summary of BC’s major export trading activity, according to 2010 statistics published by the provincial government at www.bcstats.gov.bc.ca, together with the VAT rates for each trade partner (as per previously referenced Deloitte source):
Top 10 Destination Countries for BC Exports (2010)
|Destination Country||Value of Exports (Cdn)||Standard VAT Rate|
|Mainland China||4,027,068,081||17% (VAT/Business Tax)|
|Brazil||382,441,840||17% (State Average)|
BC’s largest trading partner, by far, is the U.S., which does not have a VAT but has a comprehensive system of state and local sales and use taxes. As stated above, BC’s METR is expected to decline to 17.9% by 2018 (compared to an estimate of approximately 26% for the US), and approximately 80% of the reduction in the METR between 2009 and 2018 is attributable to sales tax harmonization.
Trade with European countries is important to the BC economy and is anticipated to rise in the event that negotiations on the Comprehensive Economic and Trade Agreement with the European Union are successfully concluded. Generally, European businesses would be more amenable to investing in, and doing business with, a province that has a VAT regime, given that such a system would be more familiar and less complex. The fact that the combined HST rate in BC is significantly lower than the VAT rates in most of the European countries also aides in ensuring that BC exports are more competitive in those markets.
With respect to the Asian countries that represent BC’s major trading partners, some of the foreign VAT rates are lower than the HST rate prevailing in the province. Reducing costs for our domestic businesses, encouraging capital investment, boosting productivity, and lowering the METR on capital will be critical factors for ensuring that our province emerges successfully when competing in these markets.
The statistics published at the abovementioned website also provide that the top BC exports, in terms of commodities are:
Commodity Cdn (Millions)
|1. Coal and solid fuels manufactured from coal||
|3. Chemical wood pulp, soda or sulphate, other than dissolving grades||
|4. Liquefied petroleum or hydrocarbon gases (including natural gas)||
|5. Copper ores and concentrates||
While implementation of a value-added tax system is generally expected to enhance BC’s competitiveness, BC’s exports are heavily based in the resource industries, and where prices for exports are fixed in world markets (e.g., international commodity markets for lumber or copper ore), the benefits arising from HST in terms of lower costs on business inputs will lead to increased profitability, which in turn, should further stimulate investment and employment growth.
Based on the reasoning outlined herein, Deloitte is strongly in favour of retaining the HST. Specifically:
- Sales tax harmonization is an important tax policy that works in conjunction with other important policies implemented by the province that are designed to encourage investment, productivity, competitiveness, and the standard of living in the province.
- A value-added tax regime represents good tax policy and is a modernized sales tax framework, compared to single-stage consumption stages, such as the PST. It is no coincidence that 29 out of 30 OECD countries and 18 of the G20 economies have implemented a value-added tax regime. Retention of the HST in BC will enhance our province’s ability to compete, both domestically and in the global marketplace.
- The cost of un-winding the HST and reinstating a GST/PST regime will be exorbitant to government and to businesses and will have a significant and negative impact on the fiscal plan, as well as our ability to meet the Budget 2011/12 goal of eliminating the deficit by 2013/14.
- Consumer prices have not been significantly impacted under HST and are expected to decline over time. Measures introduced by the government, including certain rebates and the BC HST credit, have contributed to lessening the burden of HST on consumers and offsetting the regressive nature of the tax, such that the lowest income households have experienced a net gain as a result of HST. The elimination of hidden taxes that were embedded in product prices under the PST/GST regime, as well as the fact that only a relatively low proportion of average consumer expenditures actually resulted in an increased tax rate under HST, have mitigated the effect of HST on consumers.
Further, it is our recommendation that the Province:
- Commit to a robust education campaign to ensure that the general public is adequately informed of the benefits of the HST and the costs associated with unwinding the HST regime, as well as reverting back to a GST/PST system;
- Explore avenues to simplify the administration of the HST regime and/or provide additional rebates for items that were not previously subject to tax under the PST regime but which became taxable under HST; and
- Give additional consideration to the wording of the referendum question and seek consultations with respect to the same.
We sincerely hope that the Panel will consider the views put forward in this letter in preparing a report on the implications of each referendum voting option. We would be pleased to meet with the Panel to further discuss our views.
Deloitte & Touche LLP
Janice Roper, CA Étienne Bruson, CA Alberta Baker, FCA
Partner, Indirect Tax Partner, Tax Tax Policy Leader
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