May 1, 2007 / 10:14 PM / 12 years ago

Canada's Flaherty unswayed on tax haven plan

OTTAWA, May 1 (Reuters) - Canadian Finance Minister Jim Flaherty rejected opposition demands on Tuesday that he hold consultations with industry before moving ahead with a controversial plan to tighten rules on the use of offshore tax havens.

Flaherty is working on a bill, to be introduced to Parliament shortly, that will no longer allow companies to deduct the interest payments on borrowed money used to acquire shares of foreign affiliates. He says the current system is abused by some firms via tax havens, mainly Barbados.

The opposition Liberal Party and some chief executives argue that his plan will handicap Canadian firms versus their foreign rivals when bidding on other companies.

They say other forms of rule-tightening would be more effective and that consultations with industry are required.

But Flaherty flatly rejected those ideas in remarks to reporters in Ottawa, saying his proposal would be contained in a bill to be presented to the House of Commons within the next few days.

“We have to focus on the tax havens. That’s the tax avoidance vehicle and so we have to make sure the legislation we do bring in focuses on that,” he said.

Flaherty has said he is willing to be flexible on the length of the phase-in period for the new restrictions.

New information coming from firms suggests that the tax avoidance by this method is bigger than the government originally thought, he said.

“There’s a lack of transparency, which is to be expected in this area because people don’t report to the government of Canada that they’re double-dipping using a tax haven,” he said.

“So we hear more now from them ... we get comments that this is a bigger part of our business than perhaps you think.”

John McCallum, the Liberal finance critic, said that business deals such as the possible takeover of the Chrysler division of DaimlerChrysler DCXGn.DE by Canadian auto parts group Magna International MGa.TO could be jeopardized by Flaherty’s move.

“Just because of this rule, assuming it is financed 50-50 debt and equity., a U.S. company would be able to pay a 37 percent higher price than Magna would be able to,” said McCallum.

“This puts our companies at a huge disadvantage relative to other companies in overseas acquisitions,” he said.

Bank of Canada Governor David Dodge defended Flaherty’s decision to end the tax haven option on Tuesday but agreed that the issue was technically difficult to tackle without “throwing the baby out with the bathwater.”

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