I call this meeting to order.
This is the 106th meeting of the Standing Committee on Finance. Our orders of the day—we are televised, colleagues—are pursuant to Standing Order 108(2). We are continuing our study of tax evasion and the use of tax havens.
We have six witnesses here today. We have a very full panel and we have two by video conference, so it will be a challenge from a technological point of view. I will do my best, as chair, to ensure that times move along and that each witness and colleague gets their proper time.
We have with us here today, first, Professor Walid Hejazi from the Rotman School of Management at the University of Toronto.
Welcome back to the committee.
We have Mr. Robert Kepes, barrister and solicitor.
Welcome to the committee as well.
From the Quebec Association for the Taxation of Financial Transactions for the Aid of Citizens, we have the président, Monsieur Claude Vaillancourt.
Bienvenue à ce comité.
We have His Excellency Luis Carlos Delgado Murillo, Ambassador of the Republic of Costa Rica to Canada.
Welcome to the committee. Thank you so much for being with us.
We also have two by video conference. First, from Kuala Lumpur, Malaysia, we have Monsieur Pascal Saint-Amans, director of the Centre for Tax Policy and Administration for the OECD donor assistance committee peer review team.
Bienvenue à ce comité.
From the United Kingdom, we have Professor Paul Collier, a professor of economics and public policy at the University of Oxford.
Welcome to the committee.
We will start in the order that I presented. Each of you will have up to five minutes to make your opening arguments. Then we'll have questions from all members of the committee.
We'll start with Professor Hejazi, please.
Thank you very much for the opportunity to appear before this committee to give my thoughts on the role of offshore financial centres and the role they play in the Canadian economy. This is a very important issue for the global competitiveness and prosperity of Canada, and therefore I believe policy-makers and the public must fully understand this issue in order to make the right policy decisions.
As you indicated, I'm a professor at the Rotman School at the University of Toronto. I've been a professor there since 1995. I've written extensively on Canada's competitiveness and the role of international trade, foreign direct investment, and the role of offshore financial centres.
I published a magazine article in The Banker in November 2012 on the importance of offshore financial centres to the global economy. I believe that article has been circulated to the committee. As my research demonstrates, there is a significant and broad-based benefit to the Canadian economy when Canadian multinationals undertake their international expansion through offshore financial centres. Canadian companies continue to expand globally at a rate faster than foreign companies are coming into Canada. Today Canada has more foreign investment abroad than there is foreign investment in Canada.
The empirical evidence is clear: both inward and outward investments have significant benefits to the Canadian economy. I can talk to both sides of these investments, but let me focus on the outward side.
Just as when foreign companies invest in Canada, when Canadian companies invest abroad, this generates significant economic benefits to the Canadian economy. These benefits include more global activities occurring in head offices of Canadian firms, more exports from Canada, and hence more employment and capital formation in Canada. All of these additional effects augment Canadian jobs and Canadian government tax revenues.
The natural question to ask is the following. When a Canadian company deploys a global strategy and uses a conduit jurisdiction such as Barbados, are these benefits sustained? The answer to this question is yes, and my research supports that. Furthermore, these benefits are not only sustained but enhanced. That is, when a Canadian multinational goes to a foreign market directly, the benefits to Canada are less than when they go to these foreign markets using an offshore financial centre. There's a lot of theory to support this empirical evidence, which I can elaborate upon if requested.
What this all means is that if Canadian multinationals are not allowed to use these jurisdictions to access the global economy, this will hurt their global competitiveness and hence the competitiveness of the Canadian economy. I will go further to argue that a move by the Canadian government to restrict the use of these jurisdictions will not—in capital letters—result in increased Canadian government tax revenue. It would be counterproductive policy that would reduce Canadian competitiveness and Canadian government tax revenue simultaneously.
I understand that this committee is interested in addressing tax abuse, something that every good Canadian and Canadian company applauds, but let's be clear: more tax abuse occurs in onshore locations than in offshore financial centres.
I would also highlight the following. My research has concluded that the use of offshore financial centres has helped Canadian firms expand abroad, but particularly in less familiar and more risky environments, as Mark Carney, the Governor of the Bank of Canada, has argued repeatedly. Canadian companies need to focus more on emerging markets where growth rates are much higher than in developed economies, but so too are the risks. We need to encourage Canadian companies to invest and expand globally and to be global leaders. Restricting the use of these jurisdictions' offshore financial centres will hurt the ability of Canadian companies to compete in those emerging environments.
Therefore, I think it would be wrong to restrict the use of offshore financial centres. That will not help Canada's prosperity. Rather, it will hurt Canada's prosperity.
Thank you, Mr. Chairman and members of the committee. I'm honoured to have been invited to appear today to assist in your study of tax evasion and the use of tax havens. I have been a tax lawyer in Toronto for over 25 years. Our clients are primarily private companies, entrepreneurs, owner-managed businesses, professionals, and high net worth families and individuals.
Our law firm provides only three legal services. We provide tax and estate planning, tax dispute resolution and litigation, and defence of criminal tax evasion and other financial or regulatory offences. Tax evasion is very different from legitimate tax avoidance or minimization. Tax evasion, at its core, is fraud. The evader’s intention is to deceive the crown by failing to report income or by claiming false expenses in order to minimize income. The law requires the crown to prove beyond a reasonable doubt that taxes were owed and that the accused both knew that taxes were owed and deliberately avoided their payment. The most serious cases of tax evasion, usually involving amounts of taxes evaded of greater than $250,000, are prosecuted either by indictment under the Income Tax Act or as fraud under the Criminal Code. The Criminal Code offence of fraud is frequently the preferred criminal charge for major, complex tax prosecutions. My paper details some of the reasons why the crown may prefer to proceed under the Criminal Code rather than under the Income Tax Act. Generally speaking, it's a little bit easier to prove fraud than it is to prove tax evasion.
The investigation and enforcement of tax evasion, because it is a crime, engages the accused’s charter rights, for example, those under section 7 of the charter, as well as the right against self-incrimination, freedom from unreasonable search and seizure, the right to legal counsel, and the right to be presumed innocent.
The committee has previously heard that, unlike tax evasion, tax avoidance is not a crime. That is a true statement. The Canada Revenue Agency takes a broad view that tax avoidance "involves minimizing tax by contravening the object and spirit of the law but not the letter of the law." I have to say I disagree with that statement. First, there is no “object and spirit” test in Canadian tax legislation. Second, the CRA may have made it sound as if tax avoidance is one shade of grey below tax evasion. That's not true. The gap between avoidance and evasion is wider than the Rideau Canal. Although the CRA and the Department of Finance dislike it, tax avoidance, even aggressive tax avoidance, is legal. It does not involve hiding assets, claiming false expenses or refunds, or the use of sham documents or entities. In fact, in my experience, all transactions involving a tax-minimization or -avoidance strategy are properly reported on financial statements and tax returns to the respective tax authorities.
I bring these differences between avoidance and evasion to your attention because it’s not enough to understand the legal distinction between the two concepts. It’s important to understand the CRA's powers and the limits of those powers, depending on whether it's engaged in finding avoidance transactions or in investigating tax evasion. A taxpayer is required to comply with an audit, with respect to avoidance, whereas the taxpayer has the right to silence under the charter with respect to tax evasion.
Now let's talk for a minute about tax havens and offshore accounts. The committee has heard various estimates of the amount being held by Canadian individual and corporate taxpayers in offshore accounts. If those numbers are to be believed, it's in the billions of dollars. No one seems to know how much of those billions is made up of potentially legitimate investments, but be that as it may, let's assume it's a large number. It's a given that tax evasion must be investigated and prosecuted. However, the government cannot manage what it cannot measure, and you cannot measure the total amount of proceeds from tax evasion, because it is, by definition, being deliberately hidden by the tax evader. However, the government should be able to measure the CRA's efforts and results in capturing tax evaders.
To that end, I did a very unscientific survey by searching the term “tax evasion” in the Canadian Legal Information Institute case law database. The search obtained 670 results, representing all of the Canadian court cases from 1900 that mention the phrase “tax evasion”. I narrowed the search to include the word “offshore” and obtained only 21 results. That strikes me as a very low number. I then went to the CRA website, because it routinely posts press releases of tax evasion convictions. There were 24 in the last three months, but none of them involved unreported income offshore.
Let me look at some of the recommendations. One of the recommendations is that the committee or the Auditor General has to annually measure the CRA’s progress in catching tax evaders.
If there are no offshore tax evasion cases, then either Canadians are much more law-abiding than we thought and the hidden billions offshore are a fiction, or, my theory, our tax evasion laws are not being vigorously investigated or enforced enough. Without investigations or prosecutions there can be no convictions, and as a consequence no deterrence.
To that end, I would ask the committee to perhaps look at something similar to the U.S. FATCA rule. That has its criticisms, because it is essentially the extraterritorial application of U.S. law. However, if you can't get information government to government, you can do what the U.S. did—namely, try to get information directly from financial institutions.
I also considered whether the CRA could institute and encourage a whistle-blower program similar to that of the IRS, which pays awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest, or other amounts from a non-compliant taxpayer. The award can be between 15% to 30% of the amount collected.
For the sake of time, I'd be happy to take questions or comments.
ATTAC-Quebec, the Quebec Association for the Taxation of Financial Transactions for the Aid of Citizens, thanks you for this invitation to appear before the Standing Committee on Finance. ATTAC is a non-partisan association that is active in some 20 countries. Established in 2000, ATTAC-Quebec is interested in issues relating to financial globalization, particularly issues relating to the taxation of financial transactions, tax havens and free trade.
We are delighted with the attention that the Government of Canada has paid to tax fraud and tax havens. Since our association was established, it has felt that there is a major problem creating even more injustice and significant budget issues that honest tax-paying Canadians must compensate for.
We would like to highlight an OECD report entitled Addressing Base Erosion and Profit Sharing. The report shows just how much tax leakage weakens the proper operation of governments and, as a result, democracy.
A number of investigations in Europe have shown that large multinational enterprises like Google, Apple, Amazon, Microsoft and Starbucks did not pay their fair share of tax because of complex financial arrangements and the use of tax havens.
There is nothing to say that Canada is exempt from such practices because it has signed tax agreements similar to those signed in Europe. ATTAC-Quebec has often criticized the double taxation agreement between Canada and Barbados, which has resulted in direct investments by Canada in Barbados to the tune of $53.3 billion. This agreement favours price transfers, among other things. It enables companies to register their profits in Barbados and bring that money back into the country without paying tax to the Canadian government.
A similar agreement concluded last fall with Hong Kong now makes it possible to do the same thing in Asia. Given the importance of trade exchanges with that continent, it all leads us to believe that a similar agreement will encourage the same type of financial manipulations that will harm the interests of Canadians.
We are also concerned about tax information exchange agreements with Switzerland and a number of Caribbean countries. These agreements may seem attractive, but they remain ineffective and actually facilitate tax evasion. The conditions for obtaining information are too demanding. Information is given only if it is requested in a context with extensive and numerous exceptions, which makes it easy to have an information request denied.
To get such dysfunctional agreements, Canada gave up far too much. In exchange, the Canadian companies established in these tax havens benefit from a tax exemption on revenue. Other countries, such as the United States and Australia, have not concluded this kind of agreement. It seems clear to us that the tax agreements that Canada has signed significantly contribute to increasing tax evasion.
ATTAC-Quebec has the following recommendations. The Government of Canada must make fighting tax fraud and the use of tax havens a priority. It must fund studies to provide figures on tax evasion and avoidance amounts, and to update the accounting practices that enable tax leakage. It must also invest in the Canada Revenue Agency so that it can undertake the investigations needed against fraudsters and detrimental tax planning.
The Government of Canada must put an end to all negotiation of tax agreements under the current model, and it must also thoroughly review the current agreements so that they no longer encourage tax leakage. The Government of Canada must strongly support the fight against tax havens in its foreign policy.
It must also work with other countries that are undertaking a similar fight. It must make a priority of supporting the UN committee of experts on international cooperation in tax matters.
Lastly, the Government of Canada must redistribute the amounts that are eventually recovered through the fight against tax leakage in the public services and social programs that were the main victims of the government's drop in revenue.
Thank you for your attention.
Mr. Chairman, honourable members, thank you for the invitation to join the Standing Committee on Finance of the House of Commons for this study session dedicated today to tax havens and fiscal paradis
Today I have the opportunity to showcase for you how a small country has developed a strategic path that gives us today the credentials to promote our candidacy to the OECD membership, full of confidence in a solid ethical and transparent financial system that has allowed Costa Rica to achieve billions in foreign development investment.
In the last ten years, the country has achieved consistent growth in foreign direct investment, which has become a significant complement to domestic savings. Total FDI inflows have grown an average of 10% every year since 2000, currently representing 5% of the GDP.
Moreover, the country has had success in attracting foreign companies in innovative industries such as services, advanced manufacturing, and medical devices. As a result, foreign investment contributes greatly to Costa Rica’s development in terms of export diversification, creation of more and better jobs, and accumulation of business capabilities.
Over the last 30 years, Costa Rica has accomplished consistent growth in its exports and in its diversification of its export products and destinations. Exports have grown at an average annual rate of 8% since 2001. We have free trade agreements with nearly all of our relevant commercial partners, including Canada.
Currently Costa Rica exports more than 4,000 products to 153 destinations. Due to the country’s commitment to social inclusion, Costa Rica is considered to be a country with one of the best human development performances. Our universal health care and education systems are definitely the pillars of our national stability. Education has been mandatory for 100 years, and we invest 8% of our GDP in this area. At the same time, we invest almost 11% of our GDP in health care, making the system universal.
The country has a strong and world-renowned tradition and commitment to democracy and human rights. Costa Rica has been one of the most stable democracies in the developing world, with no breakdowns since 1949, when it abolished its army. This has enabled resources to be delivered to and invested in education, health care, infrastructure, roads, and telecommunications, strengthening our democracy and fundamental freedoms. As well, Costa Rica has a strong commitment to environmental protection and a decisive commitment towards strengthening innovation and putting in place green growth strategies.
Thanks to its natural richness and environmental stewardship, the country is one of the top destinations in the world, especially for ecotourism. Annually we receive more than 120,000 Canadian tourists, and due to the high quality of life, more than 13,000 Canadians have decided to move to Costa Rica.
Our development is sustainable and inclusive. During the great financial crisis in 2008, we had a short recession and a strong recovery. Why have we done so well? We have a financial system based on prudential and efficient regulation. Even before the financial crisis started, we decided to set our financial regulatory standards above international minimums.
As a result, we have a solid institutional infrastructure that supervises and oversees the financial system. During the financial crisis, no banks failed or had to be rescued, and our financial system continued to provide credit to households and businesses. Additionally, we deployed a large fiscal stimulus package to stimulate the economy.
As we can observe in the graph, the GDP shrank in 2008 but had a strong recovery. Now it is expected to grow 4% over the next two years.
As you can see in the following graph, while government expenditures increased during the global crisis, revenues declined. This situation resulted in a budget deficit equivalent to 5% of GDP. Given this, the priority of the government is to regain the capacity to respond in a similar way to future adverse shocks, safeguarding fiscal sustainability. Moreover, we are concerned because high fiscal deficits could affect our macroeconomic stability.
In the absence of the approval of tax reform, the government made a great effort to sharply slow down the expenditures growth rate, which reduced the fiscal deficit. We recognize there are many challenges to this, but we believe we have the credentials to promote our candidacy to the OECD membership, which could work as a catalyst to promote and pass some of the reforms the country needs to undertake. Therefore, the OECD will be an enabling partner in Costa Rica's path to development.
Over the last year Costa Rica has increased its involvement in the OECD bodies' foreign initiative. We are participating in areas that showcase Costa Rica, like finance, within the OECD, where we can provide quality contributions.
Costa Rica will provide the organization with perspectives that may not currently be represented at the OECD: a unique case of a small developing country with sound policies and successful results. Moreover, our country has shown the commitment to move toward OECD standards such as fiscal transparency and public governance.
In 2012, Parliament approved legislation intended to reform the tax structure in order to incorporate all the elements and access to financial information that were requested by the international community: the Law of Compliance of Standards of Fiscal Transparency, and the Law Strengthening the Tax Administration Procedures.
Additionally, Costa Rica has 15 tax information exchange agreements with several countries including Canada. For different reasons, we would like to request the continued support of Canada in the OECD council's deliberations.
Moreover, Costa Rica could be a successful example to spread better practices and promote transparency among small and middle-sized—
Thank you very much, Mr. Chair.
For technical reasons I will speak in English, if you don't mind, as there is translation and interpretation. I apologize to your French-speaking colleagues about that. They will have to suffer my poor English.
Thank you for your invitation. I'm very glad to be able to share with you what the OECD is doing. It's an honour to be with you, if not physically, at least virtually. I'm currently in Malaysia for a peer review group meeting. This is precisely about what you are discussing today. The peer review group of the Global Forum is about checking transparency and checking the way countries implement the OECD standards on transparency and the exchange of information.
If I may, I would like to start with a few words on what the OECD is doing on tax matters. I'm the director of the Centre for Tax Policy and Administration. We do some tax policy: what is good for growth in terms of tax policy design and what is good for employment to reduce inequalities and so on.
We also favour cross-border investment through the elimination of double taxation. I think the OECD is well known for having established the OECD model tax convention, which provides for a framework to eliminate double taxation, and it's translated into many bilateral agreements. I think there are around 3,000 tax treaties based on the OECD model tax convention.
As regards the topic that you are investigating, I would like to make two main points.
The first one is about tax evasion, lack of transparency, and the need for information exchange. It has been said that tax evasion is about fraud. It's about not reporting income. It's about hiding income in low-tax countries that are not transparent.
I don't really know what a “tax haven” is. Everybody has their own definition: it's a small, remote island with palm trees or a small country with many lakes that is lost in the mountains. It depends on your approach, but there is no legal approach there. What matters is the consensus that emerged at the OECD back in the 1990s defining a tax haven as having no tax, no transparency, no exchange of information, and no real activity. That's the only common definition that you can find from an international organization, but again, that doesn't matter much.
What matters is that we have all agreed. When I say “we”, I mean the OECD member countries and now the whole international community. We all agreed that lack of transparency is an issue, because when you're able to hide money in a country where you are not physically present, or where you are not a resident, in order not to report the income arising to the countries where you are a resident, then there is a problem of tax evasion.
The attention of the international community, in particular of the G-20 and the OECD since 2008, has precisely been about fighting for more transparency and exchange of information. In 2009 at the G-20 summit on April 2, there was agreement to establish a list of countries that are cooperative and a list of countries that are not cooperative, with cooperation meaning “to exchange information on request”. When you are asked to provide information to a partner, you must give this information, including bank information.
Major progress has been achieved since then. More than 800 tax information exchange agreements, bilateral agreements, have been signed. A multilateral convention on mutual assistance has now been signed by over 50 countries, including Canada, which still needs to ratify this instrument, and I mention that as you are members of Parliament. But major progress has been made in this area. Five years ago, bank secrecy was almost a rule in many countries. Now it's the exception: no more countries support bank secrecy.
What is interesting and has been mentioned by one of my predecessors in the panel is that a number of countries are moving towards automatic exchange of information, largely due to FATCA, the U.S. legislation, through bilateral agreements. There is now a move towards generalizing multilaterally the automatic exchange of information.
Very quickly, the second pillar is about the emerging problem of what we call “double non-taxation”. The OECD rules have been established to eliminate double taxation. A company shouldn't pay twice on the same income because it operates in two different countries.
But the rules we've established—model tax convention, transfer pricing guidance, and other standards—should not result in not paying taxes anywhere or in paying taxes in a jurisdiction where there are no taxes, such as the low-tax jurisdictions we've mentioned, through conduits or companies or by locating the profit in a place different from the place where the real activity is taking place; for instance if the real activity were taking place in Canada, and investments were in Europe, and all the profits, all the intellectual property, for instance, were located in Bermuda, Barbados, or those types of jurisdictions.
Very recently the OECD launched something you may have heard about, particularly in the context of the G-20, which is reporting called “base erosion and profit shifting”, to address base erosion and profit shifting, known as BEPS. The idea of fighting base erosion and profit shifting is to restore at least one taxation. We need to eliminate double taxation. We also need to eliminate double non-taxation. Why is this so? I will conclude with that.
There is a budget issue. As you know, at least in Europe, but not limited to Europe, unfortunately, many countries are facing budget deficits, and they need to collect the money that is owed to them. Second, this is an economic issue, because if you favour some types of investors against purely domestic investors, small and medium-sized companies in Canada that are not exposed to international transactions, they will have an effective tax rate much higher than that of multinational companies. This is distorted and this is not good for investment.
Finally, this is a political issue. Because of budget constraints, governments increase taxes almost everywhere and you cannot explain to the people that VAT is increasing, that sales taxes are increasing, that personal income tax is increasing, that corporate income tax might increase when, for some players, there is hardly any tax because of this tax avoidance, which is well known as aggressive tax planning using legal frameworks.
Thank you very much for inviting me to speak to the committee.
As for my own credentials, I'm a professor of economics at the University of Oxford. I specialize in international economic issues, especially in the poorest countries. Prime Minister Cameron asked me to be the adviser on Britain's G-8, leading on tax issues. Britain is the host of the G-8 this year. In fact, I'm invited to the OECD on Friday to talk about the same set of issues.
I'd recommend, incidentally, last week's issue of The Economist magazine, which had a 12-page feature on this very issue. If you missed that, The Economist gives you a pretty good overview of tax havens and their importance.
Both avoidance of taxes and evasion matter. Avoidance is a matter of abuse of the law. Evasion is a matter of concealment. Canada, like other OECD countries, has become a victim of both of these phenomena.
Most of my work is on poor countries, which have been victims of these things for a long time, for much longer. This is the rare case where, in fixing our own problems, in putting our own house in order, we actually benefit the poorest countries in the world as well. It's even more of a problem for them than it is for us, so I congratulate the committee on focusing on this.
I'll start with some comments on tax avoidance. Of course, laws have intents and objectives, as well as legal language, so smart lawyers on the other side of course will be finding ways to meet the letter of the law but not comply with its objective and its intent. That is a continuing process, and the tax tables reflect the phenomenon, whereby very smart and very highly paid lawyers have managed to get quite a bit ahead of the intent of the law. It's now important that we do a catch-up process.
There is no once-and-for-all fix. It's like how the body fights disease: you have a constant struggle of changing the locks as the germs innovate and the body defends. That's what a legal system has to do to try to keep pushing back against these smart lawyers who innovate.
What is the heart of tax avoidance on the international scene is the misallocation of economic activity, the pretense of the signed ownership of an activity in a zero tax environment when the real activity is taking place somewhere else. This has become very prominent, certainly in Britain because of the case of Starbucks that has recently come to light: the company has paid virtually no tax in Britain. It appears to run as a charity, but it does pay very substantial payments to a subsidiary company in the Netherlands Antilles, which happens to be a zero tax environment.
Starbucks pays tax on its activity in Britain in a country that happens not to levy any tax. For next year, Starbucks has offered to pay more tax voluntarily despite the fact, and indeed because of the fact, that it's selling less coffee. This paying more tax on selling less coffee demonstrates the astounding divorce between real activity and profits. For an international company, profits could become a voluntary activity.
As the previous speaker said, companies like Starbucks are competing against local firms that don't have that opportunity, such as, in Britain, Costa Coffee. The tax tables are introducing an element of unfair competition.
There are more than 700 independent tax jurisdictions in the world. Most of those jurisdictions cannot be locations for significant real economic activity. The fact that a lot of activity appears to be taking place in those places is just a demonstration of abuse, of tax avoidance.
Going from tax avoidance to tax evasion is about concealment, and the heart of concealment is setting up companies where the beneficial ownership, that is the true owners of the company, cannot be ascertained. This is a relatively recent phenomenon and it has grown to extraordinary proportions. The epicentres of this are the lawyers in advanced countries working in partnership with branch offices in tax havens.
There was a recent study by a British university in Australia sending out 7,000 e-mails to legal service providers, organizations that will set up legal companies. These 7,000 e-mails asked the law firms around the world to set up companies in which beneficial ownership could not be ascertained, and various degrees of incriminating information were placed in the e-mails. For example, we'll pay you more if you'll keep it all completely secret. The success rate of these e-mails, the proportion saying, yes, we'll do it, was 40%, and it went higher than 40% in the e-mails that offered extra payment for complete secrecy. So there is a very serious problem here. It is extraordinarily easy to set up these shell companies, which can then set up bank accounts so money can be hidden—
Good morning and welcome to all of our witnesses. Thank you for being here.
I'm the finance critic of the official opposition, the New Democratic Party. We have been pushing to get this study of tax evasion and tax havens for some time, because we're committed to addressing the integrity of our tax system and ensuring that we are dealing with taxes that are not properly being collected by our country.
Obviously we recognize that there are legitimate reasons for investing in foreign countries. Mr. Hejazi and Ambassador Delgado Murillo, you both made the case for that, and we appreciate it. But I guess I come from the perspective that if you don't measure it, it's difficult to tax it, and we know that a quarter of all Canadian foreign direct investment is going to tax havens, or countries that provide tax havens.
In 2011 alone, Canadians invested $53.3 billion in Barbados, $25.8 billion the Cayman Islands, and $23 billion in Ireland, just as some examples, and banking and financial services now account for 51% of Canada's total direct investment offshore. We've heard from both the Department of Finance officials and the Canada Revenue Agency that they do not measure the international tax gap, unlike the U.S., the U.K., and Australia.
My question is both to Professor Collier and to Mr. Saint-Amans. Should Canada be measuring the tax gap in order to help us address the issue of tax evasion and tax havens, and tax this revenue as effectively as possible?
I'm not sure I would say that you need to measure it to tax it. I think you can tax it without measuring it.
In the report that we have just issued, “Addressing Base Erosion and Profit Shifting”, we recognize or acknowledge that we don't know the amounts, and they are almost impossible to calculate. On the tax fraud part, you may have some methodologies to give you some ideas. You referred to the U.S. or the U.K. calculating the tax gap, but that's about fraud. When it's about avoidance, I think it's almost impossible to come to a number, and that's why we say tax it, and then you can measure what you tax. That's where you can get the difference.
So to try to sum up, I think going for calculating the tax gap is an avenue you can explore, and at the OECD we don't have strong views on whether it's better or not, but what I can tell you is that if you don't measure it, you can still tax it and you have to tax it. I refer to the BEPS report, base erosion and profit shifting report, where you can find some other elements to measure. For instance, if you refer to that foreign direct investment, when you see some very small jurisdictions accounting for more than 25% of investment in India—that's the case of Mauritius—or the British Virgin Islands being in the top 10 investors in Russia or in China, you guess that there is a problem there, and what you need to do is to track the problem by making the analysis.
Thank you all for being here. This is a very interesting discussion.
If I had just tuned in, I would get the impression that there is this enormous, enormous problem worldwide that corporations are cheating governments. We had a witness in last week who estimated that in Canada it's approximately $5 billion to $7 billion. Now that's a lot of money, but when we put that in perspective to our overall budget, and if we take something like tobacco sales, for instance, from which we've pretty much lost the revenue because of the high price of tobacco or the high price of taxation, it's about the same. I think tobacco sales are about $4 billion.
I want to steer this committee and I want to make sure that, as a committee as a whole, we keep this thing in perspective. Not to say that we can't and shouldn't go after tax evaders—and I think a number of you have made that very clear—but I'm wondering...
I guess I want to direct my first question to Mr. Saint-Amans. From the OECA perspective, first of all, is there an estimate worldwide of how much tax is being lost through tax evasion? Have there been studies to determine which countries are most effective? Finally, have there been studies done to see if there is a correlation between that and what happens when taxes are raised?
In this country, we've lowered our corporate tax, and I think most corporations—again, some of the testimony we've heard bears this out—understand that they need to pay taxes. Is there a correlation when nations or jurisdictions raise their taxes to a point where people start to cheat more?
First of all, to the OECA.
Thank you very much, Mr. Chair. Thank you to each of you for joining us today.
Earlier today, the The Economist report was referenced called “Tax havens: The missing $20 trillion”. There's an interesting article in that report titled, "The OFCs’ economic role: The good, the bad and the Ugland. Havens serve clean as well as dirty money". I appreciate your advice on this because Canada's foreign investment is an important source of economic and political influence for our country, and it's really important that we as legislators understand how we can differentiate between, for instance, transactions that are about achieving tax neutrality and those that are about tax cheating.
Your Excellency, investments in places like Costa Rica, Latin America, and the Caribbean are very important as you develop, diversify, and grow your economies.
In December 2011, China invested $900 million to modernize one oil refinery. There's a growth of Chinese investment throughout Latin America and throughout the Caribbean in many of these countries that are deemed OFCs. Is it important that we differentiate that which is legitimate Canadian investment for the right reasons—to develop an economy and also as good investment for Canadian investors—and not diminish that or create barriers to that investment that could effectively reduce our influence and role in these very important developing economies and potentially create an opportunity for others who may be less transparent than our own investors ultimately? I reference the Chinese as potentially among that category.
As my initial action, I was reminded of that point in Shakespeare's Henry VI
, part 2, when Dick the butcher says to Smith the weaver that if he were king he'd kill all the lawyers. That was my initial reaction to this, that it's always “blame the lawyers”.
Some hon. members: Oh, oh!
Mr. Robert Kepes: The room actually got a little warm.
It doesn't surprise me, because there is the existential dilemma between a self-reporting and a self-assessing system, and there is a market economy and competition amongst law firms and accounting firms to attract and to retain clients.
I suppose the point is that if those law firms have broken an ethical law or have contributed to a client being able to commit tax evasion—that in and of itself is a crime, and I would definitely not condone that.
The fact that there is a beauty contest amongst lawyers or multinational accounting firms to provide clients with the most tax-efficient structures doesn't surprise me. That's just a function of the market economy and of competition amongst those firms.
Thank you for this question. Again I'm sorry to respond in English, but I heard your question in English through the interpretation.
I have a couple of comments. One is that we have made very significant progress towards better transparency through exchange of information on request, which is very protective of privacy and confidentiality, as one of the conditions to exchange the information is to make sure that confidentiality will be protected within the requesting party.
Contrary to what Professor Collier indicated, exchange of information on request is working. There is evidence. I'm here in Malaysia to assess the effectiveness of information exchange, and we have published reports describing this. So the evidence is there.
When you move to some other forms of information exchange, such as automatic exchange of information—and that's the case through FATCA—the U.S. has been able to convince dozens of countries throughout the world to agree to an automatic exchange of information with them, or something that is equivalent to automatic exchange of information. Please note that the G-20 is now moving in that direction.
Within the OECD, we're working at developing a platform to facilitate automatic exchange of information for countries. One of the challenges is to ensure that a country will exchange automatically with another country that will respect the confidentiality of the information. We are working on establishing standards to make sure that we check the ability of another country to respect that confidentiality.
But privacy is respected. The exchange of information is limited for tax purposes, and the information will remain within the tax authority— or might go, if both countries agree, to other enforcement agencies, but it's not for public disclosure.
Thank you, gentlemen, for being here this morning.
The comments you made about studying, Mr. Saint-Amans, are very enlightening. I agree with you in many ways. I'm a grain farmer. When I go to look at my field in August, it would be nice to know how much wheat is sitting in that field. But I'm not going to spend a lot of time and effort which I could use in harvesting the field in studying it.
I think it's very important that we acknowledge that the best thing we can do is, as you said, keep going on taxing and on going after those who are evading taxes, instead of spending too much effort in trying to identify what the problem is. Both are important, but I think one is more important, and that's getting results.
Would you not agree with that, Mr. Saint-Amans?
Thank you to the witnesses who've appeared.
I would like to focus my questions on Professor Collier and Mr. Kepes, and talk a little bit further about transfer pricing.
Professor Collier, you talked about multinationals making profits on voluntary activity, if I have your quote. The magazine The Economist, to which you referred us, talks a lot about possible reforms of the transfer mispricing, and it gives two suggestions. One is referred to as unitary taxation, which would aim to tax activities where they actually occur, it says, not where some tax adviser has shifted them, and companies would produce a single set of accounts on their worldwide profits and that's where the taxation event would occur, in that jurisdiction where the activity occurred. That's one idea they have.
The second idea I'd like your views on is the requirement that multinationals disclose the name, location, financial performance, and tax liability of each of their subsidiaries, and the role that the tax havens have played.
Do you think either or both of those ideas would help us address the issue of transfer mispricing?
I'd like to ask Professor Collier first, and then Mr. Kepes, please.
I think the starting point is indeed transparency in reporting. I think that would take us a long way.
If I can cite it, the British accountancy profession has recently done a report on this. It concluded that in the end the best enforcement was transparency: that companies had to get themselves in a position whereby they could defend and justify publicly what they had done, and that if they couldn't justify it publicly, then they probably shouldn't be doing it. So if they took the transparency or corporate reporting showing whether there is a reasonable correspondence between the distribution of reported profits and the distribution of genuine economic activity, that is something that transparency could itself police.
If transparency isn't enough, then what are the alternatives? The alternatives are basically some system that overrides the company's own choice of how it divides up profits between jurisdictions and in the end assigns profits on some other basis. It's very hard to do that. It's very hard to get agreement on doing it.
Where I think you possibly could get agreement—and this is where the G-8 and G-20 are important—is in fact in this distinction between reasonable tax competition between, say, Canada and America, both centres of genuine economic activity, and abuse by tax tables, which are not standards of genuine economic activity but which come in with zero tax. The mutual zero tax is a situation that we very definitely want to avoid, whereas competition between centres of real economic activity in their tax rates is entirely legitimate and, indeed, healthy.
I think the full unitary taxation approach is not going to happen anytime soon, but I think there may be a halfway house in which first you get transparency, which polices things, and second, where there are blatant abuses, despite transparency, there is some agreement amongst the major centres of real economic activity that they will jointly police the abuse of the system that transfers profits to places that don't have real activity.
Mr. Murray Rankin: Thank you.
Your questions are excellent. The unitary tax would require a complete rejigging of the international tax system in terms of how that's based. I think it's worthy of study. I think it would be very difficult to implement. I think you'd need to have an almost global tax-collecting entity to be able to make those allocations among countries, as opposed to leaving it up to each country. The State of California tried to implement something like that for their state tax, and there was a hue and cry, let me tell you.
On the transfer pricing in Glaxo, the Glaxo case represents two things. Number one, it was a huge loss for the Canada Revenue Agency. On the other hand, it did provide a certain amount of certainty to Canadian companies and multinationals with respect to the Canadian law. That is because the Supreme Court of Canada essentially decided that the Minister of National Revenue should not supplement or replace a business person's commercial reason for having a transfer price or entering into a commercial transaction with that of the Canada Revenue Agency.
In other words, the fundamental issue in Glaxo was that there was an additive to their Zantac stomach ache remedy, and it was possible to buy that additive from a generic drug company for, let's say, a tenth of the cost. The Canada Revenue Agency reassessed Glaxo and said that the fair market value must be what the generic company sells that additive for. Glaxo went all the way to the Supreme Court to have the Supreme Court say no, that's not true, in spite of the fact that the generic company could be selling an additive for 10¢ a pound. The fact is that the related entities of Glaxo provided additional value added with respect to that additive, which justified that fair market value price. As I said, it's a loss for the Canada Revenue Agency, but it did provide a certain amount of certainty within the transfer pricing area.
Transfer pricing in and of itself is really only transactions between related companies, such as, for example, a Canadian parent or a Canadian subsidiary, typically of a U.S. parent company. It's a decision on what the proper transfer price is. There are mechanisms between Canada and the U.S. as to what happens if Canada decides that the price should be higher and the U.S. says no, that they think the price should be higher on their side. There are mechanisms to take that into account.
Okay. I appreciate the work that you do because it will help us to develop some best practices.
I want to speak with Mr. Kepes. There are two issues that you brought up today and one I like very much, which is suggestion number 5 in your handout about encouraging a whistle-blower program. I would encourage this committee to seriously look at the suggestion you've made. I think it's a good suggestion. I come from a policing background and any time we can put forward something like this I think is good.
I do take issue with the comments you've made. You clearly did indicate that you're really not sure about it anyway and you don't know the answers when you talk about prosecutions and convictions for offshore account investigations. As you likely know, on the proof required to proceed to an actual criminal investigation, a criminal conviction, the threshold is much higher. It's beyond a reasonable doubt. When we're looking at audits, it's the balance of probabilities. This government has put forward a number of policy measures to ensure that we are tackling the problem with offshores in a variety of ways.
What you didn't address, and I think ought to come out on the record, is that we have voluntary disclosure. That's tripled since 2007 as a result of the measures put forward by this government. But we've also done many audits, which again, going back to the threshold, are being done because when we refer 150 to 200 cases every year to public prosecutions; they also determine whether or not there is some reasonableness for conviction.
So you can't just measure the CRA by the number of convictions. You must take into consideration—wouldn't you agree?—the voluntary disclosures, the audits, the fact that public prosecutions decide in the end whether there is a likelihood of conviction. I've been a police officer for a long time. We know people are committing crimes. Public prosecutions sometimes says they know it, but they don't have the proof for it, so they can't proceed criminally. Would you not agree that's a better balance of looking at the success of the CRA, taking them all into consideration, not just convictions?
The list in 2009 was designed to disappear quickly. If a list is to be successful it needs to disappear. Let me explain why.
In 2000, the OECD listed tax havens, meaning the jurisdictions that corresponded to the four criteria I referred to earlier. In 2002, the OECD did the list of unincorporated tax havens, meaning those that had not committed to implementing the standard.
In 2008, when the Liechtenstein scandal, which started all this renewal of the work on tax havens, occurred, we were in a situation where all the jurisdictions had committed but nothing happened in practice. So the way we designed the list for 2009 was to identify those that had not committed, and this was bad, and then those that had committed but had done nothing. Then we had an arbitrary threshold of 12 tax information exchange agreements, which was arbitrary, but that was something that had been agreed to by everybody and therefore we could use.
What happened was that in the days following the G-20 summit on April 2, 2009, those that were in the so-called black list immediately committed to implement the standards, and those in the grey list, which had committed but had fewer than 12 agreements, starting negotiating agreements. If you want to have information exchange, you need to have agreements.
This was very successful. Switzerland said it would take 10 years to get to 12. They did it in six months.That's why this list disappeared. But what we immediately did was to establish the global forum with new criteria.
The new criteria were that if you want to comply with the standard, you need to have the legislation in place, meaning you need to have agreement, not with 12 countries, but with all the countries asking for information from you. So if you have 30 agreements and you have Canada asking for an agreement with you and you say no, you are non-compliant.
It's good to have agreements but it's better to be in a position to implement them. To implement them you need to have the information available. So we are checking that the information on ownership, on accounting, on bank information, is available. If you have the agreement but you don't have access to the information when you're the tax administration, then there is a failure. So the global forum has set up a peer review mechanism in two phases.
Phase one checks whether all these elements are in place, and if they are not, the countries do not move to phase two, which I will come to in a minute. So it's not a list, but we identify those that are failing to exchange information by law. But if you have the law in place it doesn't mean you are doing it well.
We are going to check—and that's what we are doing today in Malaysia—whether you do it in practice. We check with all the partners of the reviewed country as to whether they are happy with the information exchange in practice. At the end of phase two—that's phase two, the checking practice—there will be an overall rating per country from compliant, largely compliant, partially compliant, to non-compliant.
You see that if it's not a list, it will give the ultimate test on whether a country does the job or not.
Thank you for your indulgence, Chair.
This is a question for Mr. Kepes concerning enforcement.
In one of your earlier interventions you mirrored what one of our earlier witnesses said, referring to a CRA study in October 2010 that revealed “tax practitioners believe the CRA is not doing enough to catch or prosecute tax evaders”. I think you reflected that perspective. But you very usefully put a number of enforcement ideas in your brief, and like Ms. Glover, I'm very attracted to your idea of the whistle-blower, for example, as one idea.
But I want to ask you two others quickly. First, is there any scope, as there is in other areas of regulatory law, for administrative monetary penalties—in environmental law, that's virtually all they use now, for example—in order to avoid what you've talked about in terms of the charter, and criminal law, and all of those difficulties?
Second, would you go along with what Senator Levin in the States has suggested, which is that there be strong penalties on “tax shelter promoters and those who aid and abet tax evasion by increasing the maximum fine to 150% of any ill-gotten gains?” How would you feel about that as another enforcement idea?
Sure. I'll just answer the first part of your question—and it's a great question.
I think the government has to make the choice as to whether, if prosecutions are difficult and the information is difficult to find, we're not going to go after the speeders who are going 110, 120 kilometres an hour on the highway, we're only going to go after the ones who are going 200 kilometres an hour. That's a government decision to make. If it's difficult to get a prosecution and the government decides they're going to levy financial penalties, that's for them to make.
My personal view on it is I don't think the state should abdicate its responsibility to enforce the law. Tax evasion is a crime. The fact that it's difficult is no excuse, in my view.
But there are administrative penalties, to answer your question, under the Income Tax Act. So there is a penalty, a gross negligence penalty, which is equal to 50% of the tax. For unreported income, it's a standard that it will be assessed by the CRA for someone who has unreported income.
There are penalties for advisers, whether that's a lawyer, accountant, financial planner, if they participate or acquiesce in the making of a false statement by a taxpayer. So it's a way to get advisers. Unfortunately for the government, that penalty has actually been determined by the tax court to be a criminal penalty because it's essentially infinite. Anyway, I'm happy to get into it. That penalty does exist, and assuming it is upheld as a civil penalty, it does provide a very, very large sanction for tax shelter promoters or anybody who participates in the making of a false statement, helping a taxpayer lie on their return, essentially.
You could certainly submit anything further to the committee, Mr. Kepes, and that certainly goes for all of our witnesses.
I just wanted to wrap up with a couple of points. Again, Mr. Kepes, your sixth recommendation talks about FATCA. I'm sure you're aware of the concerns expressed by Canadian financial institutions with respect to what they have to disclose to the U.S. government. Perhaps I'd get you to address it. How do you do automatic exchange? I think everybody nods and says that sounds like a very good idea until it's actually implemented in a practical sense, and then it has some implications that obviously we need to be concerned about. Perhaps you could address that.
The second item I wanted to put on the agenda was Professor Collier did put the Starbucks example on the table. It seems to me that is something we do have to take seriously, maybe not in a tax evasion sense but in a public policy sense. If a company is simply using a zero tax jurisdiction for tax purposes to be competitive, that's something we have to be concerned about from a public policy point. His Excellency certainly addressed it in terms of investing in a country like Costa Rica versus simply using a country for its tax status. Mr. Brison also followed up on that.
Perhaps you could speak on the FATCA issue, Mr. Kepes, and then if someone wants to—Mr. Hejazi, perhaps—you may address the Starbucks example again.
Mr. Kepes, please.
Okay. We'll have the analysts and the clerk distribute that to members.
I want to thank you all very much for joining us today. If you have anything further in any of the questions that were posed or any of the topics that you wish to submit to the committee in our deliberations, please do so through the clerk. But, again, thank you very much.
Thank you for your presentations.
Colleagues, we do have a couple of quick items for committee business, so I'm going to ask the committee members to stay at the table, but I will thank our witnesses here.
Thank you so much for being with us here today.
Colleagues, quickly, we have the fifth report of the subcommittee. The only change in item number 1 is that the clause-by-clause consideration of the bill will take place on March 28, not February 28.