March 13, 2009 - Chrysler Canada and The Minister of National Revenue, Ottawa Canada

Tax fight imperils Chrysler's survival

A $1-billion tax dispute between Ottawa and Chrysler LLC is threatening to derail a global deal that is the centrepiece of Chrysler's survival strategy, sources close to the situation said Friday.

Tax fight imperils Chrysler's survival

A $1-billion tax dispute between Ottawa and Chrysler LLC is threatening to derail a global deal that is the centrepiece of Chrysler's survival strategy, sources close to the situation said Friday.

The tax fight has put in jeopardy a plan by Italian auto giant Fiat to take a 35-per-cent stake in Chrysler that the Detroit auto maker is touting in negotiations with Washington and the Canadian government as the key to its future.

A Chrysler collapse would wipe out about 60,000 jobs in North America – 9,400 of them in Canada at three factories and a head office – and cause a cascading collapse of parts suppliers throughout the continent, wiping out thousands more jobs.

Sources revealed for the first time Friday how thorny a problem the dispute has become as Chrysler and its parent, Cerberus Capital Partners, negotiate new loans with the governments and a debt-for-equity swap to try to keep the beleaguered auto maker from collapsing into bankruptcy protection. Fiat is proposing to trade its small car and engine technology for a 35-per-cent stake and management control of the third-largest Detroit car company.

Daimler AG retained a 19.9-per-cent stake in Chrysler when it sold the auto maker to Cerberus in 2007. It is proposing to transfer that stake to Cerberus as part of the debt-for-equity swap.

That transfer can't be done, however, unless the tax issue is settled, the sources said.

“The deal is getting Daimler out of the way so Fiat has a clear lane,” said one source close to the situation. “Daimler and Cerberus, the whole package deal can't be concluded until this tax issue is resolved.”

Putting that issue aside for now is one of three critical agreements Chrysler needs in order to maintain its operations and 9,400 employees in Canada, Chrysler president Tom LaSorda told a House of Commons committee earlier this week in statements that were widely interpreted as a threat to pull out of the country unless the company's demands are met.

But the sources said Friday they understand Mr. LaSorda was simply trying to make sure the governments and the Canadian Auto Workers union were aware of the facts as they negotiate toward a March 31 deadline to meet the terms Ottawa and Ontario are demanding in return loans.

Ottawa has slapped a $500-million lien against Chrysler's plant in Brampton, Ont., and required it to post cash collateral of $335-million while the tax dispute is examined.

Chrysler needs a letter from the Canada Revenue Agency simply stating that it will not be required to provide any more cash, the sources said.

Negotiations are under way to draft the letter and settle the issue quickly.

The Minister of National Revenue has wide discretion in determining how to handle a specific tax case, said Lorraine Eden, a transfer pricing specialist at the business school of Texas A&M University and a former professor at Carleton University in Ottawa.

“In this financial climate, my guess is that keeping the firm afloat and providing jobs will be more important to the Canadian government – and to Canadians – than any tax liability,” Prof. Eden said.

“When there are the conflicting goals of the different branches of government – CRA wanting tax revenues and Ontario Treasury/Industry Canada wanting jobs and investment, the raising tax revenue goals always come second to jobs and investment.”

Chrysler also wants Ottawa and Ontario to provide $2.3-billion (U.S.) in loans and the CAW to agree to trim hourly labour costs by about $20 (Canadian) an hour from their current level of $76.

The deal the CAW approved with General Motors of Canada Ltd., earlier this week does not cut labour costs by that much and thus doesn't work for Chrysler, Mr. LaSorda said on Wednesday.

The cuts are worth between $7 and $7.30 an hour, sources familiar with the GM agreement said Friday.

Chrysler needs the $20 cut to match concessions its workers in the United States are making, sources said, and they add that the lower value of the Canadian dollar versus the U.S. dollar should not be factored into the equation as it appears to be in the GM deal.

The GM agreement extends the current contract and its wage freeze one year to 2012, eliminates one week of paid time off, diverts $1,700 in annual bonuses from workers' pockets to retiree health care and freezes cost of living adjustments for retired workers.

Costs could come down if another week of paid time off is eliminated, break times at Chrysler plants in Windsor, Ont. and Brampton, Ont., plants are reduced and the contribution CAW retirees make to their health care is increased, the sources said.

Ford Motor Co. has also indicated that the GM agreement is too rich, which means both companies are resisting one of the fundamental tenets of labour negotiations in the auto industry – that a deal reached by a union with one of the Detroit Three sets the pattern for all companies.

“The GM-CAW agreement will not deliver sufficient labour cost savings compared to auto manufacturing operations in the United States,” Joe Hinrichs, Ford's vice-president of global manufacturing and labour affairs, said in a statement.

Ford officials reiterated that stance in what CAW president Ken Lewenza called “a very frank discussion” Friday. “The facts of the matter are we have a pattern agreement in place and the CAW will not break the pattern,” he said.

Original Story - Globe and Mail