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Notes Michigan Single Business Tax Constitutes Double Taxation on Canadian Firms, Study Says

A study by Toronto and Detroit-based tax consultants, Deloitte & Touche (D&T), has confirmed trucking industry claims that imposition of the Michigan Single Business Tax (SBT) on Canadian trucking companies is a form of double taxation, putting Canadian motor carriers at a competitive disadvantage.

The study was jointly commissioned by the federal departments of transport, finance, and international trade; the Ontario ministries of transportation, finance, and economic development and trade; and the Ontario Trucking Association (OTA), the Quebec Trucking Association (QTA), and the Canadian Trucking Alliance (CTA).

Usually, relief from double taxation is achieved through one, or a combination of three mechanisms: apportionment, treaty relief, and foreign tax credits. Unfortunately for Canadian carriers, the D&T study concludes that none of these mechanisms will be available to eliminate double taxation when the SBT is applied to the Canadian trucking industry Jan 1, 2000:

* The apportionment formula used by Michigan-based on revenue miles-protects US carriers from double taxation, but imposes a "unilateral burden on Canadian motor carriers."

* Canadian carriers do not have tax, treaty, or legal protection from the SBT. Under Article VII of the Canada-US Income Tax Treaty, some states have indirectly accepted certain provisions of the treaty by referencing their state statutes to the Internal Revenue Code, indirectly creating a treaty benefit at the state level. Michigan is not such a state.

* Also in the US courts, the SBT has been deemed a Value Added Tax (VAT). As a result, Revenue Canada does not consider the SBT to be an income tax. Therefore, the SBT paid is not eligible for foreign tax credit treatment under Section 126 of the Canadian Income Tax Act.

D&T also identified several outstanding issues presently under examination by the Michigan Department of Treasury-the outcomes of which could have a considerable impact on the SBT tax burden to be visited upon Canadian carriers:

* Will transit miles attract the tax?

* Will Canadian carriers be able to use total (Canada and US) miles in the apportionment formula, rather than just US miles? (D&T provided a scenario showing how a Canadian carrier's SBT liability could be reduced from $116,000 per year to $16,000 if Canadian miles are included).

* Will Michigan require carriers to include full-day wages from drivers who have been in the state for as little as two hours?

* Will Michigan be prepared to consider imposing the SBT only on transactions that involve shipments originating in that state?

OTA and QTA, in conjunction with CTA, have engaged a Michigan-based legal firm to assist in lobbying the state government. The Canadian consulate in Detroit along with federal and provincial officials also has agreed to cooperate with the trucking associations.

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