(Ottawa) The federal government may have to pay Volkswagen an additional $2.8 billion — or $16.3 billion in all — over the next decade to offset the taxes the German automaker will have to pay on the aid government for battery production in the plant that will open in St. Thomas, Ontario.
This additional amount will be needed if Ottawa wants to match the offer that was made to the company under the Inflation Reduction Act passed by the United States, as the Trudeau government has indicated on several occasions in the past, according to the calculations of the Parliamentary Budget Officer (PBO), Yves Giroux.
In the United States, the offer submitted to Volkswagen was not taxable, noted the DPB in an analysis published Wednesday morning.
Last month, Prime Minister Justin Trudeau and the Minister of Innovation, Science and Industry, François-Philippe Champagne, lifted the veil on the agreement that had been reached with Volkswagen to convince the German giant to automotive to set up its new electric vehicle battery production plant in Canada. The company had also been strongly courted by a few American states, but it finally decided to open this first plant of its kind outside European borders in Canada.
In all, the Trudeau government announced production assistance of $13.2 billion in addition to a $700 million subsidy for the construction of the plant. In its report, however, the DPD estimates the financial contribution to the production of batteries at 12.8 billion dollars, and not 13.2 billion.
But according to PBO research, an additional cost not factored into those numbers is additional federal funds to offset the taxes Volkswagen will have to pay on federal production assistance.
Mr. Giroux noted that the advanced manufacturing credit provided by US law is provided in the form of a tax credit. Result: it is not taxable.
“The Canadian government has not released details of the specific mechanism for its production support. However, the Income Tax Act of Canada states that any money received by a business from a government in the form of a contribution, gift or grant is included in computing income (if this sum has not been deducted from the capital cost of assets acquired with assistance) and is therefore subject to corporate income tax,” the PBO wrote in its report. .
“With this in mind, the government should offer a tax adjustment to match the after-tax relief offered under the IRA, as it has stated publicly on numerous occasions.”
Mr. Giroux and his team estimate that the federal government could have to pay an additional $2.8 billion to the company, bringing the total assistance to $16.3 billion during the period covered by the agreement.
According to the PBO, the construction of the Volkswagen plant will increase the number of jobs by 1,400 positions by the end of 2027. It also expects that the increase in budgetary revenues arising from economic activities related to this project will offset the increase debt charges resulting from public debt. Because the federal government will essentially have to borrow to finance the financial contribution to Volkswagen.