FINA Committee Report
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SUPPLEMENTARY OPINION OF THE NEW DEMOCRATIC PARTY OF CANADA The report: Tax Evasion and the Use of Tax Havens, successfully details the linked problems of tax evasion and the inappropriate use of tax havens. Unfortunately the recommendations of the report fail to adequately confront these very serious problems and, for this reason, New Democrat members of the Finance Committee have been compelled to submit this supplementary opinion. Testimony from several witnesses exposed the enormous erosion of the Canadian tax base as a result of tax cheats. Independent estimates suggest that Canada could be losing between $5.3 billion to $7.8 billion annually in tax revenue as a consequence of the illegal use of tax havens. Nevertheless, witnesses from the Ministry of Finance and CRA testified that there has been no effort to measure the international tax gap on the part of the government. New Democrats strongly believe that the federal government has an obligation to measure or estimate, to the greatest accuracy possible, Canadian tax losses to international tax havens and tax evasion, in order to the determine the federal “tax gap”. Without such an estimate, it is impossible to determine the degree of tax base erosion or measure the adequacy of corrective measures. The UK, the US and Australia have published official estimates of the tax gap; there is no reason Canada cannot do the same. It is also imperative that the Canada Revenue Agency require Canadian corporations, including their subsidiaries, to disclose all taxes paid in other jurisdictions, on a country-by-country basis, with the goal of achieving greater transparency in the operation of Canadian corporations in offshore tax shelters. The diminishing capacity of the CRA to pursue tax cheats is of particular concern to New Democrats. Hundreds of millions of dollars are being cut from the Canada Revenue Agency’s assessment and compliance divisions. The Agency has also cut 3,000 positions over the next three years. Such deep cuts will inevitably undermine the Agency’s ability to pursue tax cheats and recover lost tax revenue. To that end, New Democrats propose that the Auditor General be asked to evaluate, on a regular basis, the success of the Canada Revenue Agency in prosecuting and settling cases of tax evasion. The Auditor General or the PBO should also be asked to provide estimates of the marginal revenue that would be derived from the investment of additional CRA resources (e.g., auditors) in the areas of tax evasion and tax avoidance. The effectiveness of Tax Information Exchange Agreements was called into question by several witnesses during this study. Conservative members of the committee repeatedly touted the signing of such agreements as a significant step in the fight against international tax evasion, but that assertion was repeatedly contradicted by several witnesses who testified as to the inadequacy of bilateral agreements that lack automatic information exchange. It is critical that the federal government quantitatively evaluate the effectiveness of template bilateral Tax Information Exchange Agreements. In line with OECD recommendations, New Democrats propose that the federal government increase efforts to work multilaterally with international partners to move towards a system of automatic tax information exchange. Transfer pricing, which can allow for the shifting of income to jurisdictions with low tax requirements, is another issue of particular concern that is not satisfactorily addressed in the recommendations set out in the majority report. Testimony revealed that f several major multinational corporations have manipulated transfer pricing in order to avoid paying taxes in countries where corporations have substantial trading operations. The practice of transfer pricing has come under serious scrutiny recently in the United States and Europe, after Starbucks and Google came under fire for manipulating transfer prices to shift profits into low tax jurisdictions. For example, it was reported that Starbucks paid just £8.6 million in corporation tax in the UK over the past 14 years, despite sales of £3.1 billion in the country. Starbucks subsequently promised to pay £20 million over two years, despite the fact that its practices fell within the bounds of a flawed legal system. Testimony revealed that, in the United Kingdom, the amount that large multinational companies may have underpaid has risen 48% last year. As another marker of the scope of the problem, China retrieved approximately US $398 million of tax dollars after 178 investigations of transfer pricing in 2010, a 24% increase from the previous year. Due to the complex nature of this problem, New Democrats propose that the Finance Committee undertake a dedicated study on the issue of transfer pricing by multinational corporations, including an examination of international best practices with the goal of taking urgent action on this issue. The study also clearly demonstrated the need for the federal government to deal with those who enable tax evasion. New Democrats suggest that the government create an efficient system to identify tax evasion enablers, including accountants, lawyers and other professionals. Our hope for this study was that it would provide us with a clearer understanding of the scope of the problem of tax havens for Canada, and what we can do to improve Canada’s approach to this pressing issue. The study has made it abundantly clear that Conservative policies are failing to protect the integrity of our tax system and prevent the erosion of our tax base. New Democrats greatest concern emerging from this study is that the Conservatives will persist in their ineffective approach to dealing with tax cheats, despite the overwhelming evidence that a stronger, evidence-based response is necessary. New Democrats are committed to addressing tax evasion and ensuring the integrity of our tax system. We believe that the government of Canada has a responsibility to protect Canada’s tax base and ensure fair taxation for all Canadians. When tax cheats are allowed to continue unpunished, it means that law abiding Canadians are forced to bear more of the burden. It is critical that we put an end to the likely billions of dollars of Canadian tax dollars currently being lost through tax evasion. The recommendations included in the report Tax Evasion and the Use of Tax Havens simply do not go far enough to effectively address this very serious problem. It is our sincere hope that the government will consider and implement the recommendations of the New Democratic members of the committee, which, in summary, are:
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