You’d expect to run into transfer pricing issues if did that, unless you’d already structured your company avoid those problems. This problem here, and many others like it stem from the fact that corporate tax is a stupid concept. It doesn’t generate any additional tax revenue, because any tax that is paid as corporate tax will simply be used to offset taxes that would otherwise be paid as income tax. It also simply preferences operating models which are more accessible to large companies, disadvantaging SMEs. Any company can theoretically choose to not be profitable, by reinvesting all of its profits, and investors typically don’t care if their value is returned via growth or dividends. But many SME operators do, and the accounting and compliance costs associated with that place a higher burden on SMEs. But the whole debate around the topic is muddied by people who intentionally misrepresent how these systems work for their political gain, and their followers who don’t understand how these systems work (until some stupid change like this affects them, and the stupidity of the system is made clear).
"Any company can theoretically choose to not be profitable, by reinvesting all of its profits, and investors typically don’t care if their value is returned via growth or dividends. " - the Amazon model for its first 20 years :).
In Canada, qualifying R&D spending generates a tax credit that can be worth 60% of engineers’ salaries. In other words, a company that spends $1M on engineers in Canada not only writes off the $1M in spending, but also gets a credit of $600,000.
Fine print: this is only available to Canadian-controlled entities. Foreign-controlled entities can claim R&D tax credits as well, but the rate is far less generous.
Wow, this is amazing. Do you have any links with more details on this?
It sounds like Canada is trying to make it as easy as possible for companies to set up shop in Canada.
Personally, even incorporating in Canada is so much easier. A federal corporation just costs $100 to make, and even less to maintain annually. (In contrast, in the United States, an LLC set up through Stripe Atlas costs $500, and you have an annual recurring fee $300 owed to Delaware + registered agent fees.)
Google Scientific Research and Experimental Development. Personally I am not a fan of this system because I believe it distorts incentives and crowds out private investment. On the other hand, it is a pragmatic solution that relatively efficiently shifts investment activity to R&D and away from the Canadian traditions of shifting rocks and oil and trees around.
Does anyone know what the situation is in other countries (in particular, in Canada) for the same situation as above?
One option companies have, if this isn't fixed, might be to re-incorporate, or relocate their company to Canada[1].
[1] Assuming Canada taxes sensibly (and allows R&D or developer salaries to be deducted).