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15 Mar

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Canada’s overly complex tariff system carries high burden for low return

March 15, 2016 | By |

Eliminating majority of import tariffs would boost productivity for relatively low cost.

For relatively minimal cost in lost tax revenue, much of Canada’s complex tariff code system could be eliminated and save businesses almost $800 million per year, argues a new report from the Mowat Centre.

“Import tariffs can serve important goals such as protecting strategic industries and raising significant revenues for governments,” argues the Mowat Centre’s Mike Moffatt. “But when your tariff code is a 1569-page tome containing over 15,000 tariff items and the majority of them bring in little revenue, something isn’t working.”

Part of this complexity is the result of Canada’s many different free trade agreements, which mean that import duties on the same product could differ, depending on their country of origin. Another reason for this complexity is the fact that oftentimes new technologies don’t neatly fit existing definition, and therefore may fit more than one tariff item or fall under a not-so-obvious item. The report notes, for example, that under Canada’s tariff system an electric toothbrush is not correctly classified as a “tooth brush” but as an “electro-mechanical domestic appliance”, which reduces the import duty assessed on it.

“In recent years, importers and Canadian authorities have been reduced to arguing over whether espresso is the same thing as coffee, or whether a toddler would smile and laugh if seated in a bouncer seat,” says Moffatt. “Is this really how we want the government and companies to spend their time?”

Moffatt analyzed how much revenue Canada collected in 2013 from each of the international subcategories Canada uses to arrange its 15,000+ tariff items. He found that Canada collected revenue from 1578 subcategories, totalling $4.235 billion, but a mere 17 per cent of these subcategories accounted for 80 per cent ($3.4 billion) of the total revenues, while over 72 per cent of these subcategories combined for less than 6 per cent ($233 million) of the total revenues.

“It takes a lot of effort for businesses, especially small businesses that don’t have in-house tax expertise, to navigate our tariff system and figure out what is the right duty on the product they are importing.” Notes Moffatt. “If so many of our tariffs bring in so little revenue is it really worth our while to place this burden on the businesses we want employing our workers and growing our economy?”

Moffatt proposes nullifying the duties imposed on at least 50 per cent, and up to 90 per cent, of tariff subcategories, effectively eliminating these duties. He lauds the Harper government for conducting several rounds of tariff-elimination, and especially for instituting an effective process for soliciting input from businesses and stakeholders to inform its tariff-elimination decisions. He calls on the current federal government to continue both processes.

Moffatt cautions that not all tariffs should be eliminated. He proposes keeping tariffs that meet one of three criteria: that they protect an economically strategic Canadian sector or industry, that they bring in significant government revenues, or that they can be used as bargaining chips in future free-trade negotiations. “Even if we only eliminate tariffs that don’t fall under any of these criteria,” concludes Moffatt, “my calculations show that we will have gotten rid of almost 90 per cent of our tariffs, saving more than $800 million and a lot of productive work time for our businesses.”

View the report

 

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