BC’s tax competitiveness is seriously undermined by the antiquated Provincial Sale Tax. As a small, open trading jurisdiction this cannot be left unaddressed if BC wishes to advance itself as a competitive jurisdiction.

Background

The move to a HST was greeted with wide support from the business community and virtually unanimous support from academics.  This support was based on a recognition that the HST would result in increased competitiveness; increased productivity; harmonisation with most of the Canadian and global economy; stable government revenue and a reduction in paperwork for business.

A value added tax is common throughout the world and highly relevant to goods and services taxes and should be considered as important aspects of our future economy, particularly competitive advantage and productivity.

Since 2001, the provincial government has maintained a sustained effort of tax reductions for both individuals and business, which has placed BC as a leader in many taxation categories.

Table 1 – Interprovincial Comparisons of Business Tax Rates

 BC  ABSKMBONQCNBNSPENL
General Rate12a12121211.511.614161615
-Manufacturing121210121011.614161615
-Small Business222Nil3.582.533.53
Small Business Threshold (000s)500500600450500500500500500500
Corp. Capital Tax          
– Financial (Small Financial)NilNil4 (0.7)6Nil1.255 (4)456
Payroll Tax (%)1.95NilNil2.151.954.26NilNilNil2
Sales taxb7Nil6889.9810101010

a BC’s Corporate tax was 10% prior to the 2013 Provincial Election.

b On April 1, 2013 BC joined Saskatchewan and Manitoba as the only provinces who levy sales tax on business that is not offset by tax credits

As shown in Table 1, BC is still competitive today in a Canadian context across a range of key business tax rates.  It must be noted, however, that these rates are focused on established businesses generating revenue or making sales (except for sales tax, which in BC, Manitoba and Saskatchewan is paid on business inputs).  Future economic growth in BC will depend upon our ability to attract investments and new economic activity.  If investment and new economic activity are the goal, BC’s tax picture looks very different.

To understand BC’s taxation landscape, as it relates to new investment, it is necessary to review BC’s Marginal Effective Tax Rate (METR).[1]

Table 2 – METR Rates by Province 2012, 2014[2] & 2017[3]

 201220142017
BC17.827.527.7
Canada17.419.020.3
Alberta17.017.019.1
Ontario18.218.219.0
Quebec15.215.918.2
Saskatchewan24.324.324.2
Manitoba26.227.926.1
Newfoundland10.710.711.4
Nova Scotia13.413.418.7
New Brunswick2.84.812.9
PEI28.111.413.9


In 2012, BC was the 6th most competitive jurisdiction in Canada and well-placed against our western neighbours and in relation to Ontario – in short, against our competing jurisdictions.  By contrast in 2014, we saw BC drop to the bottom of the Canadian ranking. This difference is due to the fact that British Columbia – like Saskatchewan and Manitoba – “continues to levy the retail sales tax, which results in a significant tax on capital investments (other provinces have harmonized their sales tax with the federal GST, and Alberta has no sales tax, so capital taxation is less severe).”[4] In 2017, BC’s METR declined a little further, which – combined with an improvement of Manitoba’s METR – has resulted in BC being last among all the provinces.

It’s worth noting, the above METR calculations do not capture the full impact of the PST on BC’s competitiveness. This measurement only takes into account the PST on capital investment. The PST also applies to non-capital inputs that are used in business operations. In fact, the PST paid on non-capital inputs is four to five times the amount levied on capital inputs.

The other aspect of competitiveness is in regard to BC’s critical export industries.  As a jurisdiction, BC has a smaller export base to most other provinces, as such it is critical that attention is paid to any tax changes that will negatively impact BC exporters’ ability to compete in other markets.  The PST is a significant barrier in this regard.

As a small, open trading jurisdiction, BC exporters compete with producers from across the globe, the majority of whom do not have a sales tax structure that embeds costs at every stage of production as does the PST.  Indeed, if we look at jurisdictions that levy a PST system, we see that BC stands relatively alone as one of only 3 jurisdictions in Canada that do not have a value-added sales tax in place. This makes BC the exception to the more than 130 countries worldwide that do have a value added tax. As such, these global producers have a significant competitive advantage over BC producers who endeavour to remain competitive by building these costs into their price. A VAT would also make BC producers more competitive against foreign competition who are selling in the domestic market for the same reason.

This is also an issue for many of BC’s resource industries that are the foundation of economic prosperity for communities across the province.  Commodity-based exporters are price-takers in the global market context.  PST represents a significant cost for the extraction and production of resources and in turn reduces profits and, therefore, the ability of these companies to further invest in innovation and job creation.

The Productivity Imperative

The single biggest determinant of our per capita income and our ability to raise wages and living standards is our productivity – in short, how efficient is our economy?  Countries that are innovative and able to adapt to shifts in the global economy will see higher productivity and thus a higher standard of living.

While there are a variety of factors that contribute to enhancing productivity, it is recognized that improvements will require investment in equipment and technology, particularly investments in information and computer technology. While BC’s productivity performance is reason enough for government to find ways to boost investment in technology and equipment, the Chamber believes the ongoing demographic shift must make this one of the highest of priorities for government.

We know that the baby boomer generation is transitioning to retirement.  While older workers are more encouraged to remain in the workforce, we can anticipate 615,000 workers will need replacements due to retirement between 2018-2028.  During this same period, BC can expect to create 288,000 new job openings through economic growth while there will only be 454,000 new entrants to the workforce to help fill these positions.[5]  This represents a shortfall of 449,000 positions that will need workers to fill them.

While interprovincial migration and immigration will go a long way to make up that shortfall, we need to ensure this challenge does not impact the BC economy. To do so, we must ensure improve our productivity levels, which means a VAT is key.

The Importance to Small Business

While many of the arguments in favour of a value added tax focused on its broad provincial impact, this is an issue of particular importance for small businesses given the strength of BC’s small and medium sized businesses for our economic prosperity.

BC’s small business sector is critical to wealth generation and our capacity to grow and innovate.  Employing over one million British Columbians, small business is responsible for 54% of all private sector employment in the province.[6]

While the concentration of small businesses largely reflects the economy at large with a significant focus on service sector industries, small businesses are significant economic generators.  Small businesses shipped approximately $18 billion worth of goods to international destinations in 2016, comprising over 43 per cent of the total value of goods exported from the province. In addition, small businesses are driving BC’s innovation industries with 10,105 small businesses in British Columbia’s high-tech sector in 2017, which represents about 96 per cent of all high technology businesses.[7]

This places small business as one of the key beneficiaries of a VAT.  In fact, one of the largest productivity challenges facing BC is the difficulty small businesses face in accessing capital to invest in innovation or productivity enhancements.  As such, the current PST has a disproportionate impact on these small businesses compared to larger firms in terms of addressing productivity.

The Solution

The competitiveness and productivity issues outlined above have long been an issue.  Indeed, so many business organizations supported the introduction of a VAT because it addressed many of these issues.

Reform is needed.  As we have demonstrated, the PST has a significant impact on BC’s competitiveness and productivity.  The Chamber realizes there might be little desire for significant reform to our sales tax system. Over the long term, though, government should engage in a meaningful consultation with British Columbians on our competitiveness and productivity and the role taxation plays. A key component of this dialogue must be the role taxation plays in enhancing our competitiveness and productivity.

The Chamber believes that the most damaging aspect of the PST and the aspect that therefore requires the most immediate attention is that the PST will be levied on investment in machinery and equipment.  This is not to suggest that the PST will see an increase in cost on all machinery and equipment.  The PST already exempts certain machinery and processing equipment used in manufacturing and agriculture.  Reform needs to widen these scope of sectors that can access these savings to reduce complexity but also to reduce BC’s METR.

Indeed, the Expert Panel on Tax estimates that offering an Input Tax Credit on the acquisition of machinery and equipment would cut BC’s METR to 19%, significantly improving BC position in the Canadian context[8]  

The Chamber recognises that this is not a measure that can be introduced immediately.  The Expert panel on Tax estimates that this measure alone would result in a reduction in revenue to government in the order of $489 million in 2014/15 rising to $511 million in 2015/16 and to $534 million in 2016/17[9]

Over the long term, government must engage in a meaningful consultation with British Columbians on our competitiveness and productivity and the role taxation plays, a key component of this dialogue must be the role taxation plays in enhancing our competitiveness and productivity.

The PST represents a cost of $1.5 billion, while BC businesses are also facing rising costs on a number of additional fronts. Business is facing higher payroll taxes (including the new EHT) and WorkSafe BC premiums, an increasing carbon tax that is no longer revenue neutral, increases in the minimum wage, and uncompetitive municipal property taxes. This direct hit on companies’ revenue is amplified by the ongoing permitting issues that continue to impede investment in our critical resource sector and the ongoing regulatory impediments facing business at every level.

The Chamber Recommends

That the Provincial Government:

  1. Provide a fully refundable investment tax credit claimed on businesses’ income tax returns equal to the PST paid on all acquisitions of machinery and equipment (including computers and software) but excluding buildings and structures with a capital cost allowance rate of 5 per cent or less;
  2. Continue to work with the chamber of commerce and others to find ways to reduce the administrative burden of the PST; and
  3. Commit to a dialogue with British Columbians on the development of a made-in-BC Value Added Sales Tax system to enhance BC’s competitiveness and productivity.

[1]  METR is a measure used to compare the total tax burden on new investment by industry, type of investment, and size of firm.  To do this, METR includes the effect of corporate tax rates, sales tax on business inputs, investment tax credits and other incentives, capital cost allowances, capital taxes and the ability to deduct interest costs.

[2] 2014 Annual Global Tax Competitiveness Ranking, Duanjie Chen and Jack Mintz, pages 12 & 13.  http://www.policyschool.ca/wp-content/uploads/2016/03/Tax-Competitiveness-Chen-Mintz.pdf

[3] 2017 Tax Competitiveness Report: The Calm Before the Storm, Philip Bazel, Jack Mintz, and Austin Thompson, page 16. https://www.policyschool.ca/wp-content/uploads/2018/02/2017-Tax-Competitiveness-Bazel-Mintz-Thompson-final.pdf

[4]  2014 Annual Global Tax Competitiveness Ranking, Duanjie Chen and Jack Mintz, pages 11.  http://www.policyschool.ucalgary.ca/files/research/tax-competitiveness-chen-mintz.pdf

[5] https://www.workbc.ca/getmedia/1dce90f9-f2f9-4eca-b9e5-c19de9598f32/BC_Labour_Market_Outlook_2018_English.pdf.aspx pg. 12

[6]  2018 Small Business Profile, BC Stats pg. 1

[7] 2018 Small Business Profile, BC Stats pg. 3 and 50.

[8]  Expert Panel on Tax Report, Table 7

[9]  The Panel does estimates that this would be offset by higher economic growth that would increase revenue by $12, $50 and $115 million in the period 2014-2017