Good morning, committee members. Welcome back.
Hello to our witnesses today. Good morning. It's nice to see you again. Thank you for being here.
We will continue with our briefings on tax havens and tax avoidance with
the Office of the Auditor General of Canada. Welcome.
I understand you have some introductory comments. We welcome them. Please proceed.
We thank you for this opportunity to speak with the committee about our work related to tax havens and international tax avoidance.
I'm accompanied today by John Rossetti, the assistant auditor general responsible for audits of the Canada Revenue Agency; Vicky Plant, principal; and Brenda Siegel, director, both responsible for performance audits of the Canada Revenue Agency.
I would like to begin by briefly outlining some points from our recent audits that are relevant to the issues you are studying. This work has helped us identify a number of factors that contribute to the success of the Canada Revenue Agency in identifying and addressing non-compliance and tax avoidance.
These factors include effective risk assessment techniques; robust information sources to facilitate risk assessment and the targeting of audit effort; experienced and well-trained auditors; qualified specialists to address complex areas like transfer pricing; information sharing with other national tax administrators; and a legislative environment that facilitates the administration of complex tax legislation and responds in a timely way to identified cases of abuse and unintended consequences.
In February 2007, we tabled a status report that followed up on our 2001 and 2002 audits of non-resident taxation and taxation of international transactions of Canadian residents. Overall, we found the agency's progress in addressing our recommendations to be satisfactory.
We found that the agency had undertaken some good initiatives in developing risk assessment techniques and tools for planning audits of international tax issues. However, we also recommended that the agency seek access to broader information sources about taxpayer activities where it can demonstrate that this would assist it in identifying emerging risks and improve its compliance efforts.
We also found that the agency had not developed any new initiatives to deal with the low-level of international tax audit expertise which continues in some of the tax services offices with the highest risk files. A lack of expertise could result in an inconsistent approach to and coverage of international audits across the country, as well as in a loss of tax.
It is important to mention that the agency is not solely responsible for maintaining international tax compliance in Canada. For example, the tax litigation services at Justice Canada are responsible for litigating tax cases, including abusive tax avoidance schemes. Finance Canada is responsible for initiating changes to the tax legislation and negotiating Canada's tax treaties that protect Canada's right to tax international transactions. All three organizations must work together if the tax base is to be protected.
We have reported on various tax plans that have come to our attention over the years. For example, in 2007 we reported on progress made by the agency in reassessing 72 trusts with capital gains of over $600 million. These trusts had been created to avoid Canadian tax by using the treaty with Barbados. They came to our attention in 2001, along with several other schemes developed to exploit the Canada-Barbados treaty.
A number of times in the past we expressed concerns about certain tax arrangements for foreign affiliates. We observed transactions where foreign-owned Canadian corporations incurred debt in Canada to finance investments in third countries. We also observed a transaction where a foreign affiliate of a foreign-owned Canadian corporation was used to move $500 million in capital gains from Canada to Barbados tax free.
It is important to note that my office did not call for the broad elimination of interest deductibility. Rather, we identified the issue as a potential threat to the tax base, and we recommended in 2002 that Finance Canada obtain and analyze current information to reassess the tax revenue impact and the rationale for allowing foreign-owned Canadian corporations to deduct interest on borrowed funds related directly or indirectly to investment in foreign affiliates and for allowing tax-privileged entities in treaty countries to bring income into Canada tax free.
The concerns we raised remain relevant today and clearly are of interest to the committee. We think the announcement by the Minister of Finance to create an advisory panel of tax experts to undertake further study and consultations is a positive step that addresses our long-standing recommendations. We hope that this will result in a clear determination of what legislative amendments may be needed to protect the integrity of Canada's tax base.
That concludes my opening statement, Mr. Chairman. We would be pleased to answer the committee's questions. Thank you.
Thank you, Mr. Chairman.
Thank you, Ms. Fraser, for appearing. It's always a good occasion when you come here. It's always about good things, and we want to continue on that path.
We're having a little trouble with the committee. From what we're hearing from witnesses, the issue is very complex in terms of whether we should have agreements with countries that are supposedly tax havens and whether it's good for Canada in terms of investment, maintaining capital here, and repatriating some of the capital that sometimes goes overseas and is coming back here.
Do you have an opinion on that?
Much of that is a policy issue and would have to deal obviously with tax legislation.
What we have been concerned about is the protection of the tax base in Canada, and Revenue Canada's work to ensure that this is maintained, that they have a proper risk assessment, that they undertake the necessary activities to identify where abuse may be occurring, and that they have the proper resources to do that. That's largely where our work has been focused recently.
In the past, we noted a number of areas where plans or schemes were being developed that would seem to go against the objectives of some of these treaties and agreements and would have the effect of reducing or undermining the Canadian tax base.
What we were recommending, and have been recommending for many years, is that there should be a very good study done of this. It needs to be quite a broad study because the issues are so interrelated, interest deductibility and tax havens, and all the rest, and it needs to clearly identify what are the major risks and how should they be addressed, likely through legislation.
Sorry to interrupt you, but we're limited for time.
We seem to have trouble really understanding what these schemes are. We had lawyers here, we had accountants, and they say it's normal procedure. We had CRA here, and they're telling us that unless we see the whole corporate structure, it's very hard to audit...unless we can actually have cooperation from the company being audited and we're able to see the whole corporate structure.
Where do we start? The lawyers are not willing to tell us what all their schemes are about. The accountants don't want to tell us either. I guess that's where they make their money. The CRA is having a hard time auditing the whole corporate structure unless there are tax treaties with the countries in which these multinationals have corporations.
Where do we start? How do we look at that whole risk analysis?
Thank you, Mr. Chairman.
Thank you, madam, for your presence here today.
When we undertook this study, a Bloc initiative, we found no progress had been made with respect to the accessibility of information. On point 10 of your statement, referring to recommendation 11.114 which you made in 2002, you said the following:
||...that Finance Canada obtain and analyze current information to reassess the tax revenue impact and the rationale for allowing:
And you refer to tax treaties signed between Canada and other countries. I am thinking more specifically of the tax treaty between Canada and Barbados.
Have you received a response from the minister on this point since 2002? This committee has been unable to obtain information which might have provided you with a response to your request.
Indeed, if we want to protect the tax base, it is important to have a good understanding of the threats and transactions occurring. We shouldn't be doing this on a case-by-case basis, but rather we should have a global outlook, because things are so interconnected.
I'd like to remind the committee that in 1997 a very significant report, the Mintz report, issued recommendations which were very seriously considered by everyone. As far as we know, there has been no follow-up to it. We believe that it would be good to have a study carried out, but we cannot forget about the one that was already done. Perhaps it could be updated and we could include the most recent events, but a comprehensive study was already done in the past.
Thank you, Mr. Chair, and thank you all for attending.
Ms. Fraser, we've heard a lot of these remarks. We've heard a lot of outcry, particularly from Bay Street and from the chief opposition party, that there are legitimate reasons for allowing tax avoidance and that we don't want to be the only boy scout out there trying to make sure people are paying their fair share of taxes, or aren't skirting the corporate tax regime we've put in place.
In your opinion, just broadly, if all nations followed that pattern, if all OECD nations said, well, we don't want to be the only boy scout who tries to make sure everyone pays their fair share of taxes, wouldn't that ultimately lead to a downloading of the tax burden onto individuals in, basically, all countries?
Okay. And I was encouraged to hear that you thought the approach taken by the minister, with regard to setting up a panel for consultations, was a positive step.
Lastly, I want to talk about the issue of tax fairness and lower taxes in general. One thing I have worked to establish with all witnesses, and one thing that has rung true, is the idea that as we lower tax rates, there is less incentive to try to circumvent them. It takes a lot of work, and certainly some of the schemes we've heard about that...or certainly there have been rumours. Companies invest a lot of money in tax planning, in coming up with means of skirting taxation. But if we reduce taxes, there is less incentive to try to come up with these schemes.
Would you agree with that?
One thing that strikes me, and that you noted in your 2002 report, is that Barbados has a corporate tax rate of 40%, but on international business the rate is only 1% to 2.5%. They have in effect two tax books. They're attracting investment into Barbados by basically inducing corporations to set up there that really would have no interest to set up there at all without this low tax rate. We heard the other day that they are listed as a cooperative tax haven by the WTO; they're not actually listed as not being a tax haven.
We've heard how these types of set-ups make businesses more competitive. Ultimately every business in Peterborough, I can guarantee you, would be more competitive if they didn't have to pay taxes. These aren't really positive things for Canada in that if they didn't exist at all, and no nation used them, everyone would have a level playing field and that would be great. They're only positive for Canada because other nations are using them.
Can you make a recommendation as to how we might work, moving forward, with other OECD partners to make sure that tax fairness becomes a little bit more of an issue broadly?
Thank you, Mr. Chairperson.
Thank you, to you, Madam Fraser, and to all your staff for being here on a long-standing issue that as far as I can tell goes back at least 20 years.
In your 1992 report you referenced the fact that the Department of Finance had committed in 1987 to review this whole area of tax rules on interest deductibility. Here we are in 2007, 20 years later, wondering what we've ended up with.
As I read your 1992 report and your 2002 report, my understanding is that in fact you were concerned about the general issue of interest deductibility when it came to foreign affiliates. It wasn't strictly a matter of double-dipping, although that was part of the concern.
You said in your 2002 report that your concerns were in 1992, and still were, that:
||When a Canadian corporation carries on business outside Canada to a foreign affiliate, the interest expense charged on the money borrowed to invest in the operations of the foreign affiliate can be deducted in Canada [...].
That was your concern then. Is that true? Was that your concern then, and is it still your concern?
It was raised as an issue, but our main concern was with foreign-owned Canadian companies. What they would do in their corporate structure was move debt into Canada. There were very few benefits to Canada by doing that. One can argue there is a difference between a Canadian-owned corporation that invests abroad...and then ultimately there can be some benefits back to Canadian shareholders.
I think we had examples in some of our audits. Most of the examples we had were U.S. corporations, but U.S. corporations that have a Canadian subsidiary. If that Canadian subsidiary has debt, perhaps even to the parent company, and then invests abroad, and the interest is deducted in Canada, well, the benefits are not ultimately going to come back to Canada.
There's a part of this whole issue, which has been ongoing for many years, that hasn't been dealt with. We need to get to the bottom of this and try to resolve it.
He announced a major anti-tax haven initiative on Monday, suggesting that the concerns, raised by you, the opposition, and for many years by all kinds of organizations, are being dealt with in this initiative. Do you believe that this announcement, this anti-tax haven initiative, addresses your concerns?
On behalf of the committee, I want to note the presence of a delegation of Pakistani parliamentary participants in our audience today. We welcome them and thank them for their interest in being here.
Some hon. members: Hear, hear!
The Chair: We continue now with Monsieur Thibault.
Monsieur Thibault, pour cinq minutes.
: Merci, monsieur le président
, and I hope our friends from Pakistan will find something to invest in while they're visiting Canada.
Some hon. members: Oh, oh!
Hon. Robert Thibault: Madam Fraser, thanks once again for bringing clarification to the committee.
If I understand your notes properly, you're suggesting that what you raised as a concern wasn't a broad interest deductibility, as was announced in the budget, but the abuses engendered by the use of low-tax havens for tax evasion, rather than international trade advantage.
When they came for estimates at committee some time ago, they pointed out that problem. I guess the international tax experts are a very valuable commodity. As soon as CRA trains them, they can earn a better income somewhere else. So it continues to be a problem.
We talk a lot about the Bahamas, because it seems to be the hot spot right now. But for international competitiveness, a lot of Canadian capital flows through the Bahamas as a conduit for investments in other markets. That becomes a competitive issue and can have some positive aspects. Our companies have to grow.
So we have to be careful, even when we talk about double-dipping or towering, that we take care of the abuses but don't eliminate the competitive advantage that our Canadian corporations...because they have to compete against other people using the same vehicles.
But you raise another element that has been suggested by a few people at this committee, which is a clear abuse and poses a risk to our competitive ability and our economy generally, and that is debt dumping in Canada. Do you have an estimate of how much this is happening? Have you gone that far in your analysis?
Sure. Let's follow that up then.
When I raise this issue or get input from constituents—and perhaps some of my colleagues have this as well—I'm initially dismayed by the fact that certain Canadian companies are able to avoid their tax obligations legitimately. That depresses me. So when I speak to constituents, I must tell you I'm somewhat disappointed in their reaction. The most common reaction I get is, “Where do I get one of those?”, or “How can I do that?”, not “That's not fair”, or “That's not right”, or “My taxes are higher.”
So maybe we're not exploring the right approach here; maybe we're not even considering the right approach. Instead of chasing around trying to bang the gopher with the hammer, and it's disappearing as fast as we can bang it, maybe we need to make readily available to more Canadians, small and medium enterprises, individuals who work to pay their taxes, the same kinds of mechanisms and give them access on a more level basis to the same kind of expertise that major corporations have.
What do you think of that idea?
Right, and I want to address that. It's a concern I have, and it's a concern I know Mr. Brison—who's here with us today—expressed in the context of the regulatory constraints faced by business, that regulations are disproportionately difficult for small business to comply with, but easier for large businesses, and he wanted to try to level the playing field. I know it's a concern that many of us who have dealt with the regulatory structures in this country have, and I see a parallel here.
So knowing that a number of small and medium businesses, and individuals, have tried to utilize these cooperative tax haven schemes being marketed, I was somewhat disheartened the other day when the Canada Revenue Agency came and testified they were working hard to shut those down and were addressing them as a real problem. But if that's a real problem for those small guys, and Canada Revenue Agency is focusing on addressing them, I think my concern is that they're doing that at the agency because they're checkers players and they are going after other checkers players when the chess player is escaping the attentiveness that needs to be focused on them.
Do you share a concern about the disproportionate obligation we're placing on small and medium enterprises versus large enterprises in the context of corporate taxation?
I just have a couple of elements in response.
First, when we looked at the last audit in 2007, we found that the Canada Revenue Agency was doing a much better job in assessing the risks to the tax base, and we wouldn't expect that there would be a disproportionate amount of effort being placed on small businesses vis-à-vis large businesses, but that they should surely be doing it on the basis of risk.
The other element I would add is that we have to recall that small businesses do have a favourable tax rate—at least for a certain proportion of their income—versus large businesses.
Thank you, Mr. Chairman.
Thank you, Madam Auditor General, for joining us.
In your 2002 report, you stated that the Canada Customs and Revenue Agency's data showed that Canadian corporations had received $1.5 billion in dividends from corporations located in Barbados.
Is your office in a position to give us an update on dividends received? Do you have an estimate?
This committee has also discussed the concept of residency, because the corporations which use tax treaties to repatriate tax-free dividends must in fact be located in Barbados. That is stipulated in the regulations.
However, witnesses that have appeared before us, including a professor whose name I've forgotten, have told us that it is not always obvious that these corporations have offices in Barbados where the real decisions are being made.
First of all, did you look into this issue? Do you know whether the Canada Revenue Agency does this type of check when carrying out its audits, or does it simply rely on companies acting in good faith?
There may have been; my wife's not one of them.
I arrived here a little bit late, but in your statement today you talked about what you recommended to Finance Canada in your audit of 2002. My question is really about process. When you do an audit—and let's use this example of what's happening in this area—do you make operational recommendations? When you did this in 2002, did you have a sense of when that work should have been done?
It's great for you to produce all this documentation, and we look at it and so on, but what is your office's expectation with that information?
In most cases, when we make recommendations, and certainly more recently, if the departments agree with the recommendations we make, and sometimes they don't, we would expect them to produce an action plan with clear timelines as to when they're going to address the issues.
We go back to do a follow-up audit, depending on the action plan and their commitment to taking action. We'll give a report on a follow-up, as we did this past February.
In questions like this, a good number of the issues we were raising here dealt with legislation. Obviously even the departments themselves can't always control.... That's why, when we did the follow-up on the international tax question in CRA, we indicated the agency had made good progress on many of the operational issues, but there were still some very large, complex issues that dealt with legislation over which the agency itself had very little control.
So we can simply note it, but obviously we can only recommend.
Thank you very much, Mr. Chairman.
Thank you very much for being here today, Ms. Fraser.
I have questions, first of all, on the distinction--and I think there's a lot of confusion--between tax haven and double-dipping. According to Ernst & Young, many people, including the Minister of Finance, are confusing the whole issue of tax havens versus double-dipping. Double-dipping is typically not related to.... Usually, with double-dipping it's a higher tax regime and with tax havens it's a lower tax regime.
Would you agree that the measures taken to address double-dipping, for instance, are very different from those to address tax havens?
For greater clarification on one of Mr. Brison's questions, because we had a presentation from Revenue Canada here earlier.... I want to be sure that I understand. You mentioned that these are two different issues, yet my understanding from Revenue Canada is that they are intertwined. The double-dipping and the tax havens can be intertwined, because essentially you're shifting debt. You're borrowing money in high-tax jurisdictions and shifting it into low-tax jurisdictions.
For example, Canada Co. takes it and ships it to Barbados Co., Barbados Co. then lends the same cash out to another high-tax jurisdiction, the U.S., the U.K., or whatever. So isn't the tax haven functioning as a conduit for the double-dipping? Aren't the two things interrelated? When the minister speaks of the two, he is entirely right in assuming that they are not mutually exclusive, is he not?
I also want to pick up on a point made by Mr. Brison. He was speaking about where the tax deductions might be claimed, indicating that these deductions might be claimed in Canada instead of in some other nation, which would reduce Canada's overall tax revenue.
But in fact one of the things we know from Advantage Canada is that Canada is moving toward the lowest corporate rate in the G-7. If that's the case, and corporations can only claim the tax deduction once from interest incurred on foreign debt, they're going to claim it in the highest tax jurisdiction so that they have the most savings from that interest. Isn't that inherently true?
Sure, but basic economics and finance would say that you're going to claim that deduction where it means the most money to you; you're not going to claim it in a lower-tax jurisdiction. That's basic finance.
I want to go back to something from 2002 that you said. You said:
||... hundreds of millions of Canadian tax dollars have been lost to multinational firms because of weaknesses in federal law.
||Foreign-based companies have taken advantage of loopholes in Canadian laws to cut millions of dollars from their tax bills here.... At the same time, many of those firms report their earnings in low-tax countries such as Barbados, and pay their taxes there.
||Tax rules that reduce tax revenue mean either higher taxes for other taxpayers
—the average Canadian—
|| or reductions in public expenditures.
—meaning we can't afford to pay for as much of our social safety net.
||Nobody wants to pay someone else's taxes. ... It's time to fix this.
This was in 2002. Well, here we are in 2007 and we're talking about entering into steps to eliminate double-dipping. It's time to move on this, wouldn't you agree?
I could listen to this witness all day.
Thank you, Auditor General, for being here.
We all agree around this table, I assume, that this is a pretty complex area. I was rather interested in what you said to Mr. Brison, that you weren't aware of any study that had been done—that was, at least, made available to you when you were writing your reports. It seems to me you've done yeoman's service in producing that report, but in some respects what it does is look at one side of the equation, and what we need to see is the other side of the equation.
We had a witness here from the University of Toronto last week. He said there's a widely held view that the use of offshore financial centres is bad simply because of the tax advantages that come with their use. Then he went on to say that when these financial centres are used, in effect their use stimulates economic activity back in Canada—obviously in head office jobs but frequently in back office jobs.
Financial institutions here in Canada are a classic example, when they invest offshore but the head office work is done here and the back office work is frequently done here. That stimulates people who are technicians; it stimulates all kinds of clerical work, and things of that nature.
My question to you is, when you are preparing these reports, are you caveating your report, or are you familiar with, if you will, the macroeconomic picture of how these offshore financial centres actually stimulate economic activity in this country?
We do not go into the kind of analysis of offshore that is being referred to. What we are really looking at is what the government does to protect the tax base when schemes or transactions are clearly designed only to avoid tax, when it is clear that there is no business reason.
We have the examples of the trusts, for example, where shares in a company are moved off to Barbados or another tax haven, are sold, and the gain is not taxed in Canada, and that is the sole purpose of doing that—those are the kinds of transactions we were focusing on here—or where multinational corporations are essentially dumping debt into Canada. We're recommending that the government really needs to understand what these transactions are, where the abuses can be occurring, and to take the measures to prevent them.
There obviously could be very legitimate reasons for people to do this, to stimulate business, but the studies aren't there. This is a question that's been around for a very long time—
They're taxing dividends coming from private corporations and public corporations at different rates, so I don't see why we couldn't do it for companies that receive dividends through tax havens or an agreement with Barbados. I don't see what the difference would be.
I have two quick questions, and one is on double-dipping. I understand CRA had a problem where they lost a case before the tax court. I'm not sure if it was the appeal division or what it was. But my understanding is that if you're deducting the same expense twice, it's not legal. It shouldn't be allowed.
I don't think anything the government does in the next little while about trying to deny double-dipping is going to change. It's a matter of trying to enforce it or actually catch the double-dippers. So I don't see how it's going to be any different one year, five years, or ten years from now, because it's not legal to deduct interest twice. Am I correct in saying that?
Welcome back, committee members. To some new committee members, hello, and thank you for being here.
Mr. Chong and Mr. Gourde, welcome.
Pursuant to the order of reference of Tuesday, May 15, 2007, we are considering Bill .
We have before us the responsibility of dealing with the budget bill.
Yes, Mr. Del Mastro.
We're generally agreeable to that motion.
The condition from our side is that there be up to four panels on the Monday, Tuesday, Wednesday, and that in the event that any one of the premiers do choose to attend, they be given some consideration in terms of having a separate panel for them. Other than that, I don't think we really have any other concerns.
I would propose to committee members, if they wish to submit suggested witnesses to the clerk's office, they do so by the end of the day today, no later.
I want to make clear to all committee members that I've had requests, at various times since your selection of me as your chair, from various of you, to see the witness lists of other members on the committee. On this, I must tell you, I've been consistent from the get-go—and I will continue to be—that those witness lists that you submit from your particular political party are your business and not the business of others on the committee. I will consistently conduct the affairs of this committee in that way.
That being said, we'll look for the complete and total list of all suggested witnesses by the end of the day, no later, so as to facilitate the contact that we have to make with the witnesses you desire to hear and get them here at the appropriate time.