I call to order meeting number 129 of the Standing Committee on Finance.
Our orders of the day, pursuant to the order of reference of Monday, June 10, 2013, are for the study of Bill .
Colleagues, I want to thank all of you for being here on very short notice. I sincerely appreciate it.
I also want to thank our guests, both here in Ottawa and by video conference, for appearing on very short notice. It is very much appreciated by our committee.
We have a three-hour meeting scheduled, from 11 till 2, and we are going to hear from officials from the Department of Finance first. Then we will have questions from committee members. I expect this will take 30 minutes minimum, or maybe a little longer. Then we will ask our witnesses to come forward and present their opening statements, and then we'll have questions from members.
At the time when members want to go to clause-by-clause consideration of the bill, they will indicate that to me, and we will do that.
For the other witnesses who are here with us and by video conference, you'll be able to hear the officials from the Department of Finance present their rationale for this bill as well.
First of all, from the Department of Finance, we have Mr. Ted Cook, who has been before our committee many times recently.
Welcome back to the committee, Mr. Cook.
We also have Monsieur Alain Castonguay.
Welcome to the committee.
Mr. Castonguay, I believe you have the opening statement for the officials. Then we'll have questions from members.
I would like to thank the committee for inviting us to appear this morning to talk about Bill .
Canada has one of the most extensive networks of income tax treaties in the world, with 90 tax treaties currently in force. Bill , once into force, will increase this number to 93, by implementing new treaties with Hong Kong, Namibia and Serbia. Bill S-17 will also implement a revised treaty with Poland, which will replace the existing treaty which dates back to 1987.
Further, Bill S-17 contains a protocol with Luxembourg and an agreement with Switzerland. In both cases, the agreements modify the provisions of the existing treaties with these countries relating to the exchange of tax information to ensure that they are consistent with the Organization for Economic Cooperation and Development standard for tax information.
Canada's tax treaties are generally patterned on the OECD model tax convention, modified to reflect the particularities of the Canadian tax system. Internationally, most tax treaties are generally patterned on the OECD model as well. Tax treaties are used for two main purposes: first, to eliminate tax barriers between two jurisdictions in order to promote bilateral trade and investment; and second, to prevent tax avoidance and evasion by encouraging the exchange of information for tax purposes between taxation authorities.
Allow me to expand slightly on each of these objectives and explain how the agreements in Bill support these objectives.
International double taxation can impose a barrier to cross-border trade and investment. Tax treaties prevent double taxation by providing greater certainty to taxpayers regarding their potential liability to tax in a foreign jurisdiction, by allocating taxing rights between two jurisdictions so that the taxpayers are not subjected to double taxation; by reducing the risk of "burdensome" taxation, which l will explain in a moment and which may arise because of high withholding taxes paid on certain payments; and, finally, by ensuring that taxpayers will not be subject to discriminatory taxation in the foreign jurisdiction.
Under our own domestic laws, payments of dividends, interest, and royalties made to non-residents are subject to rates of withholding equal to 25 per cent of the gross amount paid. Many of Canada's trading partners also have similar rates of withholding. Because the withholding tax does not take into account expenses incurred in generating the income, a taxpayer frequently will be subject to an effective rate of tax that is significantly higher than the rate that would be applicable if the income were taxed on a net basis. That's what I referred to earlier as “burdensome” taxation, which is clearly an impediment to cross-border trade and investment.
Tax treaties alleviate this burden by setting maximum levels of withholding tax that a treaty partner may impose on these types of payments or by providing, in some cases, for taxation exclusively in the state of residence. For example, the tax treaty with Hong Kong would impose limitations on the rates of withholding to 5% on direct dividends, 15% on other dividends, and 10% on non-arm's-length interest and on royalties.
Hong Kong is one of the largest financial markets in Asia in terms of trade and an important destination of Canadian foreign direct investment. Once the treaty is in force, it is expected that it will further encourage trade and investment and solidify our bilateral links.
The second objective that I mentioned at the outset was the prevention of tax avoidance and evasion. A key element our tax treaties is the provision authorizing the exchange of information between the respective tax authorities. Better transparency and access to information are important tools for tax authorities to enforce their own domestic tax law and to prevent international tax evasion.
In order to enhance Canada's network of information sharing, budget 2007 required that all of Canada's new tax treaties and revisions to its existing treaties would include the standard developed by the OECD for the exchange of information. The six agreements in Bill S-17 contain exchange-of-information provisions that are consistent with the OECD standard. In fact, two of the agreements in the bill with Luxembourg and Switzerland deal exclusively with the exchange of information. These provisions mandate the tax authorities of the treaty partners to exchange information relevant to the administration of each country's respective tax laws in conformity with the standard. The provisions also ensure that the effective exchange of information is not impeded by bank secrecy laws that may exist in the other country.
I mentioned at the beginning of my remarks that Bill would contribute to increasing the extent of our tax treaties network, but it is as important to revise our tax treaties and to update them, where necessary.
The treaty with Poland is a good example. The need to negotiate and sign a new treaty with Poland was the fact that the existing treaty between Canada and Poland was signed in 1987, in a much different economic context than today. The new treaty with Poland reflects Canada's new policies regarding maximum withholding tax rates on payments of dividends, interest, and pensions. Of course, the agreement includes the most recent standards when it comes to the exchange of information.
Mr. Chair, this concludes my remarks. I am available to the committee to answer any questions.
I ask the question because I assume it takes a lot of energy to get to the point of signing these bilateral agreements. And, we may wonder about the outcome.
As we said when we did our study on tax havens, there is a lot of doubt about whether bilateral treaties are really the best way of handling this issue. It's better to have them than not, but the progress made is still minimal.
You are probably aware of the article that appeared recently in The Economist. I would like to quote something from it. Unfortunately, it's only in English.
||Now accountants can shuffle intangible assets such as intellectual property, and the profits they generate, from one jurisdiction to another with ease. A confusing thicket of bilateral tax treaties lets them play off national rules against each other.
They give an example of the “double Irish with a Dutch sandwich”, which you might be aware of.
Some hon. members: Oh, oh!
In terms of treaties, we are spending a lot of time signing bilateral agreements but, in the end, don't you think the time should be spent on something else? Shouldn't we be taking on bigger problems, like the lack of transparency and double taxation or, as my colleague said, double non-taxation?
Following on what my colleague, Guy Caron, said, when we sign this kind of treaty, we often focus on the countries we are signing the treaties with, but we also need to look in our own backyard. Are we good students?
Professor Jason Sharmon, who wrote a very good article that appeared in National magazine, the official journal of the Canadian Bar Association, did a very good study on that. It is very interesting because it shows that Canada, like the United States, has its own system of secrets when it comes to front companies. It's a huge problem because we can't preach the adoption of good behaviour if we act just as appallingly.
This goes through companies that can set up front companies. Professor Sharmon mentioned Canada in particular. He quoted an example. In almost half the cases that were studied, very little if not no information was requested. In this specific case, he indicated that the company that offered its services to set up a front company clearly explained the risks. Despite everything, personal information was requested only if a credit card was going to be used to make a payment.
Canada has been a part of the financial action task force on money laundering since 1990. The group's criteria are very clear: Canada, like other member countries, must ensure that information is collected on owners who benefit from this type of front company.
What can you tell us about that? How do you explain all the gaps in Canada?
Mr. Castonguay, in response to my colleague, Mr. Caron, you talked about tax evasion being a multi-faceted problem, of which these bilateral tax conventions are but one element.
Presumably, you talked about Canada doing its work at the OECD. There's also the G-8, which is meeting right now in northern Ireland. Mr. Cameron, the Prime Minister of England, seems to have a preoccupation with dealing with tax evasion and tax havens, but Friday's Globe and Mail had a headline that read, “Has Canada become the bad guy of the G8 by fighting tax transparency?” A headline in the Financial Post reads, “Canada slammed for lagging behind in fighting tax evasion as G8 summit looms”.
I don't get the impression that Canada is really doing the heavy lifting on this with Mr. Cameron and other colleagues. Is that your impression, or is it just the media in Canada?
Thank you to our witnesses today.
Through the chair, I want to assure Mr. Rankin that the media is not always accurate, and the suggestion that we are resisting efforts to combat tax evasion is completely false. We certainly do support Prime Minister Cameron's efforts to achieve a consensus in the G-8 on tax havens and tax evasion.
It would be absolutely absurd to think that there would be any approach that we would take as a country other than to work very hard on this issue. Certainly, our history and our work globally speak to our commitment to move forward and deal with this issue.
I just wanted to make that as a general comment, because it is a very important issue.
I think the bottom line is that today we recognize that this tool is not the be-all and end-all to tax evasion use of offshore tax havens. Would you describe it—just a quick yes or no—as a tool in the tool box?
Good morning. Thank you for the invitation. It's a privilege to be here today to talk about the merits of Bill .
I do not support Bill because it represents an additional step toward the implementation of a global tax system where wealthy corporations or individuals can legally benefit from tax havens and avoid paying their fair share of taxes.
With the support of tax-optimization strategies, the Canada-Hong Kong tax treaty, for example, which Bill refers to, enables the legalization of a partially or totally tax-free corridor between Canada and a number of Asian countries.
This tax privilege does not come under the specific sections of the treaty, but relates to the simple fact that the Canadian tax system doesn't tax income from subsidiaries of Canadian multinationals in countries with which Canada has signed a tax treaty or an agreement to exchange tax information.
Given that the corporate tax rate is 16.5% in Hong Kong and about 25% in Canada, the Canada-Hong Kong treaty does more than avoid double taxation. It provides a 40% savings to Canadian multinationals that will export revenue to Hong Kong.
In addition, tax plans are already being developed to legally increase this 40% tax savings to a total tax exemption.
In a recent special report presented by Tax Analysts, an international think tank intended mainly for tax practitioners, the renowned Montreal tax specialist, Nathan Boidman, explains that revenue made in Hong Kong could be 100% exempt from Canadian and foreign taxation when subsidiaries set up in Hong Kong collect interest income, earnings gained from licensing or when corporate structures set up in Asia include a number of jurisdictions and where the revenue only passes through Hong Kong.
Thousands of tax agreements similar to the Canada-Hong Kong treaty currently exist between countries, so much so that they are being manipulated strategically. It is now legal for the world's wealthy corporations to pay 2% tax, if not no tax.
To compensate for the erosion of the tax base caused by this tax exemption for revenue exported legally to tax havens or jurisdictions that are taxed less, other taxpayers, the workers, the SMEs, major corporations here, all these immobile taxpayers are the ones who have to pay. And if they try to partially or totally avoid paying Canadian tax by using tax havens, like the wealthy corporations or individuals do, it is considered illegal for them. Moreover, as indicated in the various provisions of Bill relating to the exchange of information, the Canadian government is serious about its mission to corner those offenders.
I do not support Bill . However, I wonder if the effort made to implement these bills or even to contest them is the optimal way of stopping the implementation of this preferential tax treatment reserved for the wealthy. I might invest as much of our limited resources as possible in trying to replace international tax competition, which is the very essence of our current global problem, with some tax co-operation.
Thank you for your attention. I would be happy to answer any questions you may have.
Sirs et mesdames
, thank you very much for this opportunity to come here to speak before your committee again.
I'll have some initial comments about the treaties with Namibia, Serbia, and Poland, but really I'll confine my comments to some of the areas of controversy that have arisen this morning with respect to automatic versus information-on-request exchanges.
I did review those three treaties that I just mentioned. They seem not controversial to me. They generally track the OECD model tax treaty. As Monsieur Castonguay mentioned, Canada has been a member of the OECD since its inception. We follow the OECD model tax treaty for the most part. While I did not conduct a detailed examination of the treaties, they seem to me to follow most of the other Canadian treaties in this area.
I would like to make a few comments about the other three treaties, though, with respect at least to the exchange-of-information provision. This is a very fast-moving area. In defence of the Department of Finance, very few countries historically ever agree to automatic information exchange, but really we've seen in the last six months an explosion of activity in this area.
In particular, in April it was revealed through the ICIJ, the International Consortium of Investigative Journalists, that they had received the largest data leak in history, involving over 2.5 million documents and a suspected 450 Canadian taxpayers, according to the CBC.
Incidentally, in my last appearance I couldn't speak about this, but since the CBC has publicly disclosed their investigation—and I have been retained by them since the fall to review aspects of the data leak—I can now share with the committee some of the findings, at least those that have been publicly reported. The ICIJ leak created a controversy, particularly in Europe. The EU commission is now pushing for automatic information exchange.
With respect to countries like Luxembourg and Switzerland, recently they've agreed to engage in automatic information exchange with countries like the United Kingdom. They call it a “Rubik agreement”. It's slightly different from historical agreements; it's complicated, but you either exchange information on an automatic basis or the non-resident taxpayer pays a gross withholding tax at a rate of 30% or 40%, depending on the agreement.
Similarly, the U.K. has managed, just in the last few months, to reach automatic information exchanges with some of the tax haven affiliates or former colonies of the U.K., like the British Virgin Islands—again, identified as one of the major tax havens in the ICIJ data leak—and other countries like the Isle of Man. So there's been this recent push in favour of automatic exchanges.
The three treaties that I'll now touch on very briefly are interesting. Hong Kong I think is still consistent with the OECD model treaty. It inserts wording that says they are not required to engage in automatic exchanges or spontaneous exchanges. It's a somewhat redundant statement in this new agreement in that, again, historically Canadian treaties, based on the OECD model, envisioned three types of information exchanges: automatic, requests on demand, and spontaneous. The Hong Kong treaty doesn't carve out the potential, at least, for automatic or spontaneous exchanges. Anyhow, it's just an interesting treaty amendment that I haven't seen in the past.
Luxembourg and Switzerland seem to have taken more care to ensure that Canada will not be able to exchange on an automatic or spontaneous basis. The problem with this is that the OECD model commentary, as it currently stands, indicates that article 26 follows those three routes. If we agree to at least the latter two tax treaties with Luxembourg and the U.K., we're no longer following the OECD model treaty.
But again, things are moving so quickly it's understandable that Finance may have felt pressure in the last year to conclude these treaties on the basis that it did.
Thank you, sir.
Thank you for the opportunity to share my views on Bill .
The tax conventions and agreements included in Bill S-17 will be of very limited use in improving the recovery of taxes from those hiding their money in tax havens unless some key elements of the tax havens action plan proposed by British Prime Minister David Cameron at the G-8 summit are implemented. If Canada is serious about going after tax cheats who are using tax havens, then it should demonstrate this by fully supporting Prime Minister Cameron's action plan without trying to water down some of its key components.
In particular, the British proposals on beneficial ownership in multilateral automatic tax information exchanges are key to whether Bill will be a useful piece of legislation or a waste of time and effort.
Let me explain what I mean.
One of the problems with the tax conventions and agreements covered by Bill is that Canada needs to have quite a bit of information to begin with before it can request information under the current OECD bilateral agreement model that these agreements are based on, and we can clearly see this. If you look at the details in schedule 5 of Bill S-17, for example, you see all the steps that have to be taken in the case of Luxembourg to get the information Canada wants. It spells out quite clearly all the complicated steps involved.
It's similar to what the police have to go through to get a search warrant. As I'm sure Ms. Glover would be able to confirm from her experience, police have to have identified a suspect, and they need a fair bit of evidence in order to convince a judge to grant a search warrant.The challenge facing Canada Revenue Agency at the moment is that they have a very difficult time figuring out who their suspects might be and who they should be asking tax haven governments for more information on because of the banking secrecy that prevails in tax haven countries. How can Canada ask for information on a suspected tax evader if strict beneficial ownership rules are not applied? A tax evader can open trust accounts or set up shell companies in many tax havens without having to establish the ultimate beneficial owner. Without strong beneficial ownership rules in force, it's easy to hide your wealth offshore, and this facilitates not only tax evasion but also organized crime's money laundering, arms dealing, and financing of terrorism.
I am sure this government would not want to be accused of supporting such things.
The British G-8 tax haven action plan proposal on beneficial ownership calls for a public registry as well as much stronger rules to ensure the ultimate beneficial owner of any account. It's essential that beneficial ownership information be available in the public domain as opposed to being accessible only to police or tax authorities, because if it is available publicly it will be much easier for all countries to get access to this information. Multilateral automatic tax information exchange is the other key measure needed to make bilateral tax information exchange agreements useful. Proposals now under consideration at the G-8, G-20, and OECD would facilitate the exchange of basic information on account holders so that Canadian tax authorities would know when a taxpayer has not indicated on his or her tax return an offshore account in country X or Y, and then they would know who to go after, in terms of further investigation.
I know that the Canada Revenue Agency has come under a lot of criticism recently, including from our groups, but I actually have some sympathy for them given what they are up against. It's extremely difficult to undertake investigations on those who might be cheating on taxes using tax havens when they have very little to work with.
My final point is that there's a need to augment the capacity of the Canada Revenue Agency, especially given the recent leak of data that's now available to the Canadian government. The six or 10 additional people reported to have been assigned to a special unit will not be adequate to go through all the tax-leak data.
The CBC and the International Consortium of Investigative Journalists need to be commended for doing a major public service by exposing those who are using tax havens. It's imperative that Canada has the capacity to effectively follow up on that information.
My name is H. David Rosenbloom. I am a tax attorney and a professor of tax law. My area of specialization is international, or cross-border, taxation. I am a member of Caplin and Drysdale, a U.S. law firm. I am also director of the international tax program at New York University School of Law. In the late 1970s, I was the international tax counsel in the United States treasury department. In that capacity, I was the chief U.S. negotiator of the 1980 income tax convention between Canada and the United States.
I thank the committee for this opportunity to offer observations on Bill , an act to implement conventions, protocols, and agreements between Canada and various countries. All of these agreements are for the avoidance of double taxation and the prevention of fiscal evasion with respect to income taxes.
My comments are necessarily constrained by both my relative unfamiliarity with Canada's tax treaty policies and the extremely brief amount of time I have had to devote to a study of the bill. I am not a Canadian tax expert, and I was unaware of the bill prior to the afternoon of June 14. Furthermore, I have not been informed regarding the specific aspects of the bill on which I have been asked to comment.
My working assumption is that the committee may be most interested, not in the new conventions with Namibia and Serbia, parts 1 and 2 of Bill , but rather in the convention with Poland and the agreement with Hong Kong, parts 3 and 4; with the protocol to the existing convention with Luxembourg, part 5; and the supplementary convention with Switzerland, part 6.
These last two parts deal with the subject of information exchange. Parts 3 and 4, on the other hand, are a convention and an agreement with jurisdictions, Poland and Hong Kong, that have been used by investors from other countries to invest outside those jurisdictions.
I thus confine these initial comments to the newly proposed exchange-of-information provisions with Luxembourg and Switzerland, and the agreements with the intermediary jurisdictions, Poland and Hong Kong.
I begin with information exchange. The protocol to the convention with Luxembourg appears consistent with the current practices of the Organisation for Economic Co-operation and Development and with the pending protocol to the income tax convention between the United States and Luxembourg.
There are some differences among these texts, but they are of a technical nature, and I assume of relatively little interest to the committee. I have some reservations about the efficacy of such provisions for achieving useful information exchange, but I cannot see them doing any harm.
The supplemental convention with Switzerland, on the other hand, relieves a requesting country from the need to provide a specific name to the requested country in order to obtain information about a person and in order to identify the person in possession of that information.
Since the requesting country is often in need of the name—that is the reason for the request in the first place—a requirement that the name be given in order to obtain the requested information might often render the information exchange provision nugatory. Thus, this supplementary convention responds to a real problem, and despite my abiding skepticism about information exchange via tax convention, I can see no substantial objection to it.
The agreement with Hong Kong and the new convention with Poland are a different and much larger and more complicated matter. A major concern with jurisdictions that lend themselves, and their treaty networks, to investors from elsewhere is the possibility that their conventions become in effect agreements with the entire world.
In the United States, we think that most tax conventions are bilateral in nature and that the benefits they confer should be confined to persons with a genuine connection with one of the treaty partners.
One means of implementing this policy is to simply not enter into conventions with jurisdictions that serve as intermediaries, especially if there is no demonstration of a genuine risk of double taxation. Regrettably, the United States has not always followed this route. We have, for example, conventions with Bermuda, Cyprus, and Barbados, to name but three examples of jurisdictions where the need for a U.S. tax convention would not appear compelling.
Apart from the strategy of not negotiating conventions with certain jurisdictions, the United States relies on certain measures both within the text of its conventions and drawn from its general jurisprudence to combat treaty shopping. A limitation on benefits article requiring a genuine nexus between the party claiming benefits and the treaty partner is now standard in all modern U.S. tax conventions. And the economic substance doctrine, recently enacted into statutory law but of lengthy vintage in our courts, has served as a potent weapon against at least some types of treaty shopping.
I note that paragraph 3 of article 26 of both the convention with Poland and the agreement with Hong Kong represent an abbreviated version of what has become, in the United States, the “limitation on benefits” article. The article 26 provision, which also appears in the conventions with Namibia and Serbia, effectively precludes foreign-owned entities from enjoying a more beneficial regime in the treaty partner than do domestically owned entities. This is where early versions of the U.S. limitation on benefits provision began, but the provision has since gone much further. Whether it has always been effective is an open question.
I conclude by citing a provision of this type that actually seems to work. It appears in the U.S. convention with Cyprus, and it contains two substantive rules of general relevance: first, that U.S. benefits are available only to Cypriot entities that are owned to a large extent, both legally and economically, by genuine individual residents of Cyprus or, in some limited circumstances, by citizens of the United States; and second, that such benefits are allowed when it is determined on a discretionary basis that the establishment, acquisition, and maintenance of the entity and the conduct of its operations did not have as a principal purpose obtaining benefits under the convention. The provision is general and, some might say, unacceptably vague. Yet for that very reason it seems to have succeeded in thwarting attempts by third-country investors to use the Cyprus convention to obtain inappropriate treaty benefits in the United States.
I would add two thoughts on the basis of what I have heard thus far in this hearing. I throw them out for further elaboration. One, I do suggest to the committee that you carefully distinguish between concern about corporate-level tax avoidance, the use of tax havens by multinational companies, and transfer pricing, things that concern the multinational company on the one hand, and things that concern individuals taxpayers on the other. For the most part there we're talking about offshore accounts, the use of offshore trusts, etc. I think we're talking about two related but distinct problems, and I think there ought to be different responses.
Before I start, I would like to say something to the technicians. I am getting the simultaneous interpretation in English whenever people speak French. I do not need it and, moreover, I hear it when I am speaking. Please do not provide me with the simultaneous interpretation in either English or French.
Ladies and gentlemen, thank you for your invitation.
I would like to remind you that, internationally, mainly in the West but not exclusively, we are seeing an increased awareness of the importance of fighting not only against tax fraud, but also against the effects of tax havens, those states that make legal access possible. The people, some researchers and civic organizations are well aware of it. The OECD has established standards for action for its member countries, including Canada. Those measures are timid of course and often very unsatisfactory, but they still encourage public awareness and political awareness. We can congratulate ourselves for these advances and highlight the contributions of all the people of good will who participated.
That said, the measures proposed in the bill being studied today as part of the tax information exchange agreement with Canada are clearly ineffective. The OECD model, which Canada uses, is very often inoperative. The Swiss ambassador to Canada explains in his statement, which is included in the bill, that the request for information submitted by a Canadian officer to Switzerland under this agreement would be subject to a very heavy interpretative protocol. And I quote the ambassador: “...these are important procedural requirements that are intended to ensure that fishing expeditions do not occur,...”.
This is as much as saying that a tax haven like Switzerland will lift bank secrecy only if you have the information you want to begin with. In other words, it has to be a case like that of the former French budget minister Jérôme Cahuzac, where the Swiss authorities confirmed that he had an account in Switzerland only when everyone already knew about it. In other words, bank secrecy is lifted only when people already have the information, the way it was with Jérôme Cahuzac. So we are in the same place we were in 2004, a situation criticized by the French parliamentarian Vincent Peillon. He said the: “This type of logic does not allow us to provide assistance until the evidence is already in the hands of investigators”. We are therefore a long way from the automatic exchange of information required to really put an end to bank secrecy.
Furthermore, the tax agreement between Canada and Hong Kong seems problematic. It does not deal just with personal income but also corporate income. Article 5 of the agreement specifies that only Canadian companies that have real economic activity in Hong Kong are included in this category. This ensures that there is no tax on income that has already been taxed in Hong Kong, such as when a Canadian subsidiary transfers its revenue to Canada.
However, considering that many companies in the West are in Hong Kong to take advantage of the low taxes and low salaries there, the convention will enable Canadian companies that have industrial operations in Hong Kong, paying only the minimum taxes, to transfer the revenue from their activities to Canada without paying taxes on it. Politically speaking, it comes down to Canada recognizing Hong Kong as a tariff-free zone, allowing the relocation of companies and hurting workers around the world. Rather than a strictly administrative measure, we are seeing a symbolic display of strong political support.
In terms of the tax information exchange with Hong Kong, Canada does not have the tools to do what it wants. According to the law, in very specific cases, it can only obtain information that the Hong Kong government already has. Let me quickly cite the convention:
|| 3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:
|| (b) to supply information which is not obtainable under the laws...
In other words, the law states that Hong Kong will give information only if it has that information and is able to obtain it. But Hong Kong's trust law is laid out in such a way that the government does not have any information on the activities of the trusts or the real beneficiaries.
Let me read you a reference that explains the way trusts work in Hong Kong:
||Documents do not have to be registered and there are no statutory requirements in Hong Kong for a trust to make annual returns, submit audited financial statements, etc., unless it is carrying on business in Hong Kong.
In other words, the position of the Hong Kong administration does not recognize who the beneficiaries of the trusts created there are. As a result, it never provides any information we may request.
Today, it is recognized that there are extensive consultations in favour of the automatic exchange of information. We can hope that a mechanism like that will lead to international standards that will encourage the principle of neutrality among international tax authorities.
Thank you. I look forward to your questions.
Thank you to all of our witnesses for coming on such short notice. It's greatly appreciated.
I want to do a quick summary of what I thought I heard on a couple of key points. Then my questions will be for Ms. Alepin and Mr. Deneault.
I think I understood Mr. Deneault to say that Bill and the OECD model conventions were essentially inoperative.
Ms. Alepin, you said that you simply do not support Bill , for the reasons you gave.
Mr. Rosenbloom said, talking about the information provisions, that he doesn't see them doing any harm. I would call that the “damning with faint praise” approach.
Essentially there's an opposition to this, as Mr. Cockfield's remark would seem to suggest, because in light of the “explosion”, to use his word, of automatic information exchange and things going on laterally, these seem to be very old-fashioned.
Ms. McLeod used the expression of it being a tool in the tool kit. It would appear to these witnesses to be a pretty dull tool, at best, in going after the problem of tax evasion.
My question is for Ms. Alepin and Monsieur Deneault, and it's about Hong Kong, just so that's clear.
You said, Ms. Alepin, that profits in Hong Kong could be 100% tax-free if subsidiaries set up in Hong Kong or elsewhere were involved. Monsieur Deneault said that non-resident trusts don't have to declare, don't have any information to exchange, because in Hong Kong that information doesn't have to be registered. So essentially, how could one ever obtain information and make this work on tax evasion issues with respect to Hong Kong?
Mr. Cockfield had similar things to say, noting that there's no requirement, that indeed there's no automatic exchange of information possible. I'm just not sure how it would ever work with Hong Kong.
I'd like Ms. Alepin and Monsieur Deneault to talk about how it might be possible to use this agreement, if at all, with respect to Hong Kong, for example, to curb tax evasion.
In terms of the automatic exchange of information, I think my colleagues are in a better position than I am to criticize the terms and conditions of the current convention. Clearly, all the remarks made so far that seek to determine whether it is reasonable to think that the automatic exchange of information would bring tangible results are valid views. That is the case today before this committee and that was also the case before the Senate. It was said that this was a first step, and it probably is a first step.
In my view, what really worries me about Bill S-17 is that companies and very wealthy individuals can now legally avoid paying their fair share of taxes by taking advantage of tax havens. In fact, as with other bills dealing with tax conventions, with Panama in particular and other countries that have lower tax rates than Canada, we are heading towards a global tax system where it is legal for some taxpayers, especially corporations and very wealthy individuals, to avoid paying their fair share of taxes in their countries of origin. They take advantage of tax conventions because of globalization or international tax competition. Over the past 10 years, it has become possible to transfer money electronically.
However, under Bill S-17, if ordinary citizens find that they are already paying a lot of taxes and hope to be able to take advantage of tax havens as well, it is illegal for them. In their case, the government takes all the necessary measures to prevent them from doing so. During these meetings, we are wondering whether this is necessary or sufficient and whether it will really work, but those are just sub-questions.
Actually, the first question to ask ourselves is whether we want a global tax system that encourages companies and very wealthy individuals and that enables them to have legal access to tax havens or to do business with countries where the tax rates are much lower than in Canada. Second, we must ask ourselves whether we want to prevent ordinary citizens from doing it.
I don't think you can look to treaties as a primary tool in the fight against tax evasion, because the function of a tax treaty is basically to relieve taxation. In the United States it's a constitutional matter that you can't use a treaty to increase taxation. To look to a treaty to solve the problem, at least at the corporate level, I think is just looking in the wrong place.
As I indicated in my statement, I am also really skeptical about whether the exchange of information provisions in the treaties—which I don't object to in principle—are capable of addressing the problem of mass evasion at the individual level, and certainly not at the corporate level. I don't think that problem at the corporate level is an absence of information; I think it's a failure throughout the world to adopt coordinated rules to address the problem. Frankly I have real doubts as to whether there's political will anywhere to take the measures that are necessary.
So my general feeling is that looking to the treaties to solve this problem is just not looking in the right place.
Mr. Mark Adler: Oh, okay.
Mr. H. David Rosenbloom: Treaties are there to address double-taxation. That's their principal function. For me, the main reason that a treaty exists is that it establishes an international dispute-resolution mechanism to resolve cross-border disputes. Because we don't have a world tax court, we need to have some method of resolving cross-border disputes. Treaties create that mechanism; nobody has mentioned that yet today. That's the value of a treaty to a taxpayer.
Mr. Mark Adler: Okay.
Mr. H. David Rosenbloom: You need treaties because you don't want double taxation, but they're not going to solve the tax-haven problem.
By way of background, Canada only engages in ongoing automatic information exchange with one other country, the United States. As for how it works, let's say that I'm a Canadian citizen. If I move to New York City and open up a bank account with the Bank of America and that generates interest income, under U.S. law and regulations promulgated pursuant to the Internal Revenue Code—it's called the “qualified intermediary regime”—the bank must collect that information about the income earned. They send it to the IRS, and the IRS subsequently sends it over to the CRA.
My understanding, through informal talks with folks at the CRA in the past, is that this system works for the most part. The trickiness is in matching the source of income with the taxpayer's identification, so the ideal system that people have proposed would involve not only automatic information exchange, but some way to identify me when I registered that bank account with the Bank of America.
Maybe I'd have to give my Canadian taxpayer ID, which is typically our social insurance number, and which is quite controversial. But in any event, then they would have the payment and the taxpayer ID, and a software program, either in the United States or in Canada, could quickly be run to see if I had disclosed that information—the interest income—on my Canadian tax return. That's the system that has been ongoing, and I think it's the most effective system in Canada.
We do engage in automatic information exchanges pursuant to our bilateral tax treaties with other countries on a more limited basis. What has been recently entered into between the U.K. and Luxembourg—I briefly described it—is not without controversy. As I understand it—again, sometimes the colloquial term is “Rubik agreement”—the Luxembourgers have agreed to automatically share, like the U.S. with Canada, but the taxpayer can make a decision and say, “Well, I don't want my information shared with the U.K.” If that's the case, they impose a withholding tax.
Let's say there's $100 of interest income generated by a U.K. resident in Luxembourg. Either that information goes directly to the U.K. government, or the English person investing in Luxembourg would have to retain, say, $40 or €40 of that transfer if they didn't want their information divulged. If they pay the withholding tax—and this is the controversial part—my understanding is that they're completely off the hook. England, the U.K., has agreed not to prosecute that individual. That's quite controversial, because essentially they think that a lot of international drug laundering will shift to Luxembourg as a result.
The Canadian provision with Luxembourg as proposed in this bill does not ever contemplate automatic information exchanges or spontaneous information exchanges. The Luxembourgers presumably insisted on these new procedures, whereby we'd have to give them the name of an individual, a Canadian, say, who we believe is engaged in offshore tax evasion.
That's problematic on a number of levels. Often we just suspect that there's bad activity. We don't know that there's a name. The CBC investigation revealed that there's a new kind of international asset, sometimes referred to as an “ownerless asset”, so you won't actually have that person's name.
Thanks, first of all, to the committee for indulging me in appearing here.
The answer to the question is, no, I don't believe we were rushed on these matters. As Alain Castonguay explained, the operative standard for exchange of information is on request. Most of our tax treaties do provide the ability for automatic exchange of information if the two countries decide to do that. But as a matter of international treaty policy for us and other countries, for the most part what's insisted upon is the bottom line—in Canada's case, since 2007, that information exchange on request be the minimum provided.
It can go beyond that. Indeed, we heard earlier today that there's discussion of this issue internationally. There's discussion of this issue at the G-8 as well as to whether or not to move more rapidly or comprehensively to automatic exchange of information.
If that should happen, then Canada would join that policy. We would seek to get that in our treaties, and perhaps with some changes in our domestic law as well.
I will turn to Mr. Cockfield again.
You heard me quoting The Economist, which said the following about companies:
“A confusing thicket of bilateral tax treaties lets them play off national rules against each other.”
I think all the comments we have heard, particularly in the study on tax havens, have clearly shown that efforts should really be directed towards multilateral treaties to ensure that all the countries can work on having the same rules, perhaps even with the assistance of an international organization. To do so, we could perhaps follow the WTO model to some extent.
Do you think we should spend less time negotiating all the bilateral agreements and more time reaching an international consensus that would allow those countries to start with a level playing field?
I will also let Ms. Alepin answer quickly.
Again, I appreciate the conversation. I like the way Mr. Rosenbloom keeps bringing us back to what this legislation is and what it's not. Predominantly, the double-taxation issues and the issues around international trade are some of the key parts of it, and of course there are some tools in terms of the tax-evasion issue.
I have to say, just because the issue of tax evasion keeps coming out so often—and we talked about the tools in the tool box and this being one of them—that with the recent budget, we have the new mandatory reporting of international electronic funds transfers of over $10,000; we have reporting requirements for Canadian taxpayers with foreign income or properties; we have the streamlining of a judicial process that provides the CRA authorization to obtain information from third parties such as banks. As well, we now have a whistle-blower program, with awards of up to 15% of the federal tax collected for information leading to tax assessments exceeding $100,000; and, again, we have what we like to call our new SWAT team, as well as the additional dollars that are really focused in on targeting that evasion. The tool box still has room for more tools, but certainly, our government is very committed.
I really want to go back to what this specific piece of legislation is designed to accomplish. As we develop relationships and treaties with countries, that is often the start of a relationship that then progresses. Mr. Cockfield or Mr. Ernewein, do either of you have any comments about how we see things evolving with time and how to really have some of those key elements in the first place? We're talking about the government-to-government or official-to-official level perhaps helping us move towards more robust opportunities.
I can address that question.
As I mentioned in my opening comments, I agree that the treaties are largely non-controversial. They do a lot of good stuff, as Professor Rosenbloom also mentioned. I didn't mean to suggest that the Department of Finance had rushed these particular negotiations. They're certainly consistent with the Department of Finance's traditional treaty policy, and so there are no real radical changes.
I was just going to highlight this very recent trend towards automatic information exchange and how we're seeing some large financial centres—Hong Kong, Switzerland, and Luxembourg—pushing back. They don't like this regime through which we're moving toward greater global transparency. Perhaps they wouldn't have signed the treaty, as I think Mr. Castonguay suggested, without these particular amendments, so they're mainly a good thing.
But, as other witnesses have mentioned, they probably don't go far enough.
I want to thank the witnesses for their willingness to answer our questions.
While I was listening to your presentations, I could not help but think back to a joke made by a security expert several years ago. He was showing me a Frost fence around a company, and said that this was the best way to prevent honest people from illegally entering the premises. I thought that was an excellent commentary, as the fence was also a measure that applied to people who did not have the means to circumvent it. That is the case of my mother, who has only her basic retirement income. It is another story for much wealthier people.
My question is for you, Mr. Howlett. I will come back to shell companies and the situation I started talking about.
The Australian authors of the study asked 3,700 intermediaries, in 182 countries, to create a shell company to facilitate the process. I am proud of being Canadian, but certain situations may have a negative effect on our pride. In Canada, the average number of attempts needed to establish a shell company, which is practically impossible to trace, was under 5—it is apparently 4—while the number of attempts necessary for access to tax havens was 25 on average.
Clearly, international pressure—and more specifically the pressure exerted by developed countries—has resulted in tax havens being more accountable than Canada.
Would you like to comment on that data as it relates to our study?
When I had information from reliable sources in the U.K. about Canada's objection to the proposed beneficial ownership rules under the G-8, I was scratching my head in trying to figure out why this could be.
One of the possible reasons is that some of the practices in some jurisdictions in Canada may not come up to the proposed new international standard of really ensuring that the ultimate beneficial owner is clear when registering companies. Also, in our system you can register a company federally, but also provincially. The federal government may not want to undertake what it can't deliver in terms of provincial jurisdictions.
However, as I understand it, some of the pressure on the federal government, which was actually credited in budget 2013, comes from provincial governments that want the federal government to do more in terms of going after tax havens. I would think that if there is need for some reform in this regard in Canada, provincial governments would be willing to do this because they stand to benefit as well from additional tax revenue that may be generated from stronger international rules around beneficial ownership.
So I'm hoping, and the latest information I'm getting from the U.S. is that Canada maybe has moved somewhat on this issue. If that is the case, and we'll find out tomorrow, I would be very pleased to hear that, if the Canadian government in fact is going to support the proposed G-8 action plan.
I raised concerns about these additional amendments, or protocols, or whatever you call them. They'll become part of Canadian law once Parliament adopts Bill . Traditionally, you negotiate a treaty, and then you might have a protocol to amend the treaty, but these are notes that in any event are going to be part of the law, and they cut back on article 26 of the OECD model tax treaty.
As I mentioned, the commentary pursuant to this article says that it should envision three types of information exchange, whereas we have new language in these amendments, with the three treaties at least, that suggests we will only use information upon request. Again, that's understandable, given the bargaining power of each side and what Canada is trying to achieve. But for these amendments, presumably the parties would not have entered into an agreement with Canada.
Nevertheless, I do have concerns about the amendments.
It's unique in protecting the U.S. tax base from foreigners using Cyprus to invest in the United States. As I indicated later, that may not be as big a problem in Canada as it is for us, because we will generally reduce our tax down to zero, certainly on interest on royalties down to zero, and increasingly we're doing that on dividends. Canada maintains a substantial tax on the foreigners investing in Canada, so your concern is less important than ours.
I just mentioned it because, remember, my statement was prepared before I knew what you were going to focus on here. I would have thought that for us, in doing a treaty with Hong Kong, we would be very concerned about people investing in the United States, not about U.S. multinationals using Hong Kong abroad.
You might have more of a concern about the foreign investment, as was mentioned earlier—in other words, people putting money in Barbados and Hong Kong to invest outside Canada—but that's not because of the treaty. That's because your domestic statutory law allows people to repatriate tax from treaty countries free of further Canadian tax. We do not do that, so we have very little concern on the outbound side of treaties. We have much more concern on the inbound side of treaties; I think our situation may be different.
The answer to your question, however, is that the Cyprus treaty was deemed by the multinational community to be too general and too vague to be used in subsequent amendments. Since then, we've had all different manner of limitations on benefits provisions. Cyprus is unique, and it has not been changed.
I appreciate that I'm sort of an add-on here, so I will try to be brief, but I'm glad that you did return to this point, Chair, because the fact of the matter is that we do have some concerns. Perhaps they're not as grave, but we think they're still material for Canada in terms of treaty shopping. Indeed, a couple of the treaties that are in this package do contain, in the treaty proper, a rule trying to limit treaty shopping.
It's also the case that the 2013 federal budget proposed a consultation on treaty shopping, that is, the development and implementation following consultations, if that's where it ends up, on a domestic rule to try to curb the use of treaty shopping. It is all of a piece, I think. The U.S. has been engaged in this for quite some time, as we have more recently, but we do have some of those same concerns.
This is fairly recent research that has been done, and I think it does point out what should be of concern to all of us.
This is of concern, as I pointed out before, not only for tax evasion but also for money laundering, organized crime, financing terrorism, and so on. Even if the Canadian government has tightened up, in the recent budget, the reporting requirements of financial institutions—which is a step forward, and I support that—this new research points out that there are other glaring areas that need to be addressed if we're going to get a handle on this situation.
It's difficult, though, for one country to just set up its own system. What is preferable is a multilateral agreement about a new international global standard on beneficial ownership to tighten up on the rules of corporate registration and prevent shell companies, or trusts where it's not clear who the ultimate owner is.
I think what is being proposed at the G-8, which obviously is going to need to be followed up, is the route forward on addressing this problem.
We've talked an awful lot outside the scope of Bill . Mr. Howlett has in particular.
You continue to talk about G-8, Mr. Howlett, and you speculate as to what may or may not occur. I always enjoy listening to you. I particularly enjoy when you make reference to my policing background, as you did with regard to search warrants. But one thing I might say is that when we receive information that leads to a search warrant, it's not obviously public, but it is recorded information, as far as informants go.
So as you sit here today and refer to, you know, “I've heard people in the U.S. say”, or “I've heard other countries say this about what Canada's proposing to do at G-8”, I take issue with it, because you haven't divulged who said this.
To be very frank with you, it's somewhat selective listening, so I'd like you to hear once again what the Prime Minister himself said about the G-8, which you haven't referenced. You have referenced people you haven't identified, but here in fact is what the Prime Minister of Canada said just yesterday.
The question by the reporter was about the fact that combatting international tax evasion would be one of the main themes discussed at the G-8 summit, with two key issues: the public registry on beneficial ownership and the automatic tax information-sharing agreements. The reporter asked the Prime Minister to give his thoughts or reservations, if any, on either of these two particular issues.
Here's what the had to say about those two things, which you've talked about at great length here today, sir, without ever referencing this.
Here's what he said, and of course I'm reading from the transcript:
||We’re very supportive of all three Ts of Prime Minister Cameron’s agenda.
The three Ts, of course, as everyone knows, are tax, trade, and transparency.
He goes on to say:
||You know, tax evasion, there’s no upside to tax evasion. It’s bad policy, it’s bad politics, and governments lose revenue that governments should be getting.
He continued that we obviously believe in low tax rates in Canada, but that people need to pay the tax rates that we actually have. He added:
||The only reservation we will obviously express is that in terms of implementation in Canada, we’re going to have to consult with our provinces because we are a federal state and they have taxation powers.
||....It is important that we do it and that we do it together because when we’re dealing with tax evasion, we’re dealing with problems that cross borders. Even the most powerful governments of the world can’t deal with these things by themselves so I look forward to being part of the declaration and to making progress on this as we leave the summit.
I hear Mr. Rankin asking whether or not I have a question for him.
My intervention is basically to correct the record, sir, because you have mentioned absolutely nothing about what the Prime Minister of Canada has said. He has clearly said he intends to address the things that you question whether or not he intends to address.
So I think it's beneficial for Canadians to hear exactly what the Prime Minister of Canada has said, and to ask you, sir, to please divulge who these informants are that you continue to say have said he will not address it.
That's a second.... I don't know who their sources are in the British government—
Mrs. Shelly Glover: Ah.
Mr. Dennis Howlett: —but I put that together with what I was hearing from Canadian journalists as well.
The bottom line is that I do recognize that there seems to be some forward movement in Canada's position. I am pleased to see that, and I'm hoping that tomorrow we will learn if that is the case.
Now, there are two areas where we're still concerned. If Canada is supporting automatic information exchange, will they also support that being available for developing countries as well?
One of the concerns is that the G-8 or the OECD may limit access to that information only to the members of the G-8. That won't help the poorest countries, which are also hurting because of so much money fleeing from their countries due to tax havens.
So I'm hoping that it will be the full proposal put forward by the British Prime Minister that Canada is supporting.
Very good. I would like to go back to the questions.
As I say, Mr. Howlett, I'm not asking you these questions to be malicious in any way, but when you make statements to members of Parliament, when you make statements that are going to be on the national news, and when you make statements contradicting what the of Canada himself has said, I would expect that you would provide evidence for that.
I certainly wouldn't be able to get a search warrant without providing evidence that these things were said, so I would ask you once again, sir—although it appears that you don't have the names with you—to divulge these informants' names. You can submit that to the committee at your leisure, in a timely fashion, but I want to make it very clear that when it comes to this committee, we really do want to base our decisions on fact.
I have had conversations with all members of this committee about this tax convention, which is what we're supposed to be discussing today, and we all seem to be in agreement that it is a move forward. But to use the tax convention discussion to bring up the G-8 and to speculate based on absolutely no evidence, I think is unfortunate.
I think Canadians needed to hear that you're really basing your information on journalists who, quite frankly, sometimes get it wrong. You would agree with that, would you not?
It will be for the officials. Okay.
At this point, let me thank all of our witnesses for being here. I want to thank those of you who were here in Ottawa, and I want to thank Mr. Rosenbloom from New York and Monsieur Deneault from Paris,. Thank you very much for being here on very short notice. We very sincerely appreciate that.
We will call the officials back to the table.
Colleagues, I understand that you have the budget for this study before you. The amount requested is $3,800. Can I get someone to move this?
So moved by Mr. Hoback. All in favour?
(Motion agreed to)
The Chair: That budget is carried. Thank you, colleagues.
Mr. Ernewein, if you wish to stay at the table, you're certainly welcome to. It's your choice.
We welcome our two officials back to the table.
Colleagues, in terms of procedure, if you look at the clause-by-clause consideration part of the agenda, that is exactly how I will be proceeding.
So pursuant to Standing Order 75(1), consideration of clause 1, the short title, is postponed. Therefore, the chair calls clause 2.
You have a question at this point, Monsieur Caron?
Colleagues, we have clauses 2 to 15. Are there any clauses that members wish to speak to further on? Can I group these clauses together?
Some hon. members: Agreed.
The Chair: Shall clauses 2 to 15 carry?
(Clauses 2 to 15 inclusive agreed to)
The Chair: We have schedules 1 to 6. Can I group these schedules together?
Some hon. members: Agreed.
The Chair: Shall schedules 1 to 6 carry?
(Schedules 1 to 6 inclusive agreed to)
The Chair: Shall the short title carry?
Some hon. members: Agreed.
The Chair: Shall the title carry?
Some hon. members: Agreed.
The Chair: Shall the bill carry?
Some hon. members: Agreed.
The Chair: Shall the chair report the bill to the House?
Some hon. members: Agreed.
The Chair: Thank you so much.
I want to thank our officials for being here. I appreciate that very much.
I mean it this time when I say, have a very good summer.
Some hon. members: Oh, oh!
The Chair: Thank you so much, colleagues. Merci beaucoup.
The meeting is adjourned.