Canada's Flaherty Backtracks on Plan to End Corporate Tax Break

Canadian Finance Minister Jim Flaherty, pressured by companies such as Alcan Inc., backtracked on plans to scrap a corporate tax break valued at as much as C$2 billion ($1.81 billion) a year.

Flaherty told the Globe and Mail newspaper in an interview yesterday he'll narrow the scope of a pledge made in his 2007 budget to end companies' ability to deduct interest on debt that they incur to finance operations abroad.

Only companies investing through ``tax havens'' or limited- liability business structures will lose the deduction, Flaherty said, according to a transcript of the interview provided separately by the finance department. ``Most'' foreign transactions, including Thomson Corp.'s efforts to acquire Reuters Group Plc, won't be affected, he said.

``Clearly, they've addressed some important improvements,'' said Mike Murphy, executive vice president for policy at the Canadian Chamber of Commerce. The group wrote to Flaherty last month saying the tax change would cost businesses about C$2 billion annually.

Businesses said losing the right to deduct interest expenses would make it more costly to expand overseas, at a time when corporate Canada is facing a barrage of takeovers by foreign competitors. The initial proposal, part of what Flaherty says is a strategy to make corporations pay their ``fair'' share of taxes, also sparked the second clash in six months between his minority Conservative Party government and key supporters.

Overshadowed

In October, the government announced plans to tax the nation's income trusts, causing the popular, high-yield investments' value to plummet.

``This Conservative government has to make sure it doesn't convey an image that it's not pro-business,'' said Nikita Nanos, a pollster with SES Research in Ottawa. ``It undermines part of the core franchise,'' he said. ``It's going to make people question, `What's going on?'''

Flaherty, 57, also told the Globe and Mail he will extend a planned two-year grace period to five years and appoint a panel that will look at international tax issues for Canadian businesses for future budgets. Details of the plan will be released Monday in a speech to the Toronto Board of Trade.

Boost Its Fortunes

The controversy overshadowed a budget designed to boost the Conservative Party's fortunes -- ahead of a possible election later this year -- through tax breaks for families and more funding for the French-speaking province of Quebec. The party's support hasn't moved much since Flaherty released his fiscal plan on March 19, with recent polls showing Prime Minister Stephen Harper's government still wouldn't win a majority of parliamentary seats.

Opposition parties' attacks on the measure got new life this week when Alcoa Inc. said it will make a $26.9 billion takeover bid for Montreal-based Alcan, Canada's 10th-largest public company and biggest metals producer. The offer came less than two weeks after Alcan Chief Executive Officer Dick Evans told the Globe and Mail newspaper that Flaherty's tax proposal would make the company easier for foreign rivals to acquire.

The main opposition Liberal Party introduced a motion on May 10 calling on the government to repeal the tax measure.

The last significant budget reversal by a Canadian finance minister came in 2004, when Ralph Goodale repealed a decision to limit investments by pension funds in investment trusts.

To contact the reporter on this story: Theophilos Argitis in Ottawa at
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Softbank Default Swaps May Drop, Morgan Stanley Says (Update2)

Investors may make more bets on the
improving finances of Softbank Corp., Japan's third-largest
mobile-phone company, by selling credit-default swaps, Morgan
Stanley Japan Securities Co. said.

Sellers of the derivatives, which provide buyers with
protection from a firm's inability to repay debt, are attracted
by a price that overstates the chance Softbank will fail to meet
its obligations, said Hidetoshi Ohashi, a Morgan Stanley credit
analyst in Tokyo. The extra yield investors demand to hold
Softbank bonds over Japanese swap rates has halved in the past
year. Spreads on Softbank credit-default swaps fell by a quarter.

Softbank said on May 8 its fourth-quarter operating profit
more than doubled, helping allay concern that it would be unable
to repay loans that funded its 1.66 trillion yen ($13.8 billion)
acquisition of Vodafone Group Plc's Japanese mobile-phone unit.
The purchase in April last year extended billionaire Masayoshi
Son's challenge to market leaders NTT DoCoMo Inc. and KDDI Corp.

``The company's earnings showed the mobile phone businesses
are doing better than anticipated,'' said Ohashi, the third-
highest-ranked credit analyst in Japan, according to a survey by
Nikkei Bonds and Financial Weekly. ``Investors are selling
Softbank CDS to earn income because cash bonds are expensive
relative to the CDS premium.''

Narrowing Spreads

Credit-default swaps based on 1 billion yen of Softbank debt
closed in Japan at 25.8 million yen from 26.3 million yen
yesterday, according to prices from JPMorgan Chase & Co. Trading
volume today between dealers was about 8 billion yen, more than
five times the normal daily amount, said Mana Nakazora, chief
credit analyst at JPMorgan Securities Japan in Tokyo.

The cost of the contracts was as much as 39.6 million yen
in March 2006, the highest since Bloomberg began tracking the
contracts in February 2005. Sellers of the five-year contracts
receive quarterly payments because they agree to pay buyers the
face value of the notes in a default in exchange for the
underlying securities.

The cost of the five-year contracts is equivalent to 258
basis points, or 2.58 percent of the amount protected. The cost
may fall below 200 basis points in the next six to 12 months,
Morgan Stanley's Ohashi said.

The yield spread between the company's 40 billion yen in
1.98 percent bonds due in September 2010 and similar-maturity
swap rates narrowed to 166 basis points yesterday, from 333 basis
points a year earlier, according to data compiled by Bloomberg.

Operating profit rose to 73.8 billion yen in the three
months ended March 31 from 34.4 billion yen, and sales more than
doubled to 721.9 billion yen, Tokyo-based Softbank said on May 8.

BBB Rating

Softbank's debt carries a BBB ranking from Japan Credit
Rating Agency, the second-lowest investment grade. Moody's
Investors Service and Standard & Poor's assign the company high-
risk, high-yield ratings of Ba2 and BB-, respectively.

``The earnings showed that Softbank's risk is equivalent to
a BBB rating,'' Ohashi said. ``People paid too much of a premium
to compensate for Softbank's risk.''

Shares of Softbank yesterday fell the most in almost two
months as UBS Securities Japan Ltd. recommended selling the stock
after fourth-quarter net income slid 83 percent. The shares,
which declined 3.2 percent yesterday, dropped another 0.8 percent
today to 2,595 yen.

Excluding gains from the former Vodafone subsidiary,
operating profit would have declined, UBS analysts Makio Inui and
Kei Takahashi wrote in the May 8 report. The focus on the mobile-
phone unit ``led to some stagnation'' in other businesses such as
fixed lines, the analysts said.

Softbank has the worst financial health in Japan among 129
companies tracked by Morgan Stanley, credit-default swaps show.
The company said it booked taxes of 60.4 billion yen, partly
because of goodwill relating to the Vodafone purchase.

`Good Overall'

The telecommunications group is betting it can add to its 17
percent share of Japan's $75 billion mobile-phone market by
offering lower subscription fees than rivals. Growth in the
number of subscribers, which rose a net 163,600 to 16.1 million
in April, may help the company offset declines in per-user
revenue.

The chance of Softbank failing to meet its debt obligations
within the next five years has declined to 21 percent from 28
percent last year, based on a JPMorgan Chase & Co. valuation
model that takes into account swap prices.

``Softbank's earnings looked good overall,'' said Kiyotoshi
Yasuda, chief risk manager of the credit trading department at
JPMorgan Securities Japan Co. in Tokyo. ``Softbank credit-default
swaps showed little reaction to the announcement because the
market has already priced in an increase in sales.''

Credit-default swaps are the fastest-growing part of the
$370 trillion global derivatives market. They allow investors to
speculate on shifts in a company's credit quality without paying
money up front, as would be required when buying bonds.

To contact the reporters on this story:
Keiko Ujikane in Tokyo at

Oliver Biggadike in Tokyo at
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Alma tourism committee tables proposed lodging tax

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A proposed 5 percent lodging tax on bed and breakfast and motel rooms in Alma was tabled after business owners opposed it.But the Alma Parks and Recreation Committee said the business community needed to work together with the city council to help the city attract tourists.A room tax was viewed as a method of raising revenue from tourists to help pay for upkeep of parks and public recreation services.The city council says it is spending too much compared to other small cities. Most of the money comes from property taxes.Peggy Jost, owner of the Hillcrest Motel in Alma, said she received a “mixed response” from business owners she approached about giving donations to the city as an alternative to the tax.Jost said a room tax would drive away visitors. She said guests would look for lodging elsewhere.She said several people told her it is the city’s obligation to have money set aside for maintenance of parks and recreation.Some suggested Alma charge a citywide sales tax, but City Administrator Linda Torgerson said Wisconsin law doesn’t allow a small city to impose a municipal sales tax.The only alternative tax available to the city for raising revenue to help support tourism is a room tax.The law provides that a majority of room tax revenue must be used for tourism-related promotions, Torgerson said.Alma Mayor Lois Balk and city Alderman Larry Farl, a local business owner, said a change in mindset would be necessary if the city and businesses were going to do a better job of working together to solve funding problems.Farl said the Alma Chamber of Commerce and businesses might have to do more to improve fundraising activities in cooperation with the city to help fund local tourism.Balk recommended the community talk about tourism and come up with new ideas for raising revenue.
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