Finance Committee on June 14th, 2007

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

I would like to pursue this matter further because although I am not an expert on the subject either, I am nonetheless convinced that companies use tax havens purely for taxation purposes. That seems rather obvious to me.

To answer your question about other international centres and why most Canadian companies use Barbados, I would have to say that the main reason is the tax treaty that Canada has signed with Barbados which allows Canadian companies to transfer home to Canada tax free any profits made in Barbados. Obviously a company will not use a tax haven that does not have a treaty with Canada because it would not be able to transfer home tax free any profits made.

Earlier, I asked if the main reason was not purely tax related. Let me put it another way, to help the committee understand the issue at hand.

Some Canadian companies are setting up legal entities in Barbados. We are talking about corporate entities, not actual places of business. These companies do not have employees working for them, no decisions are actually made. Corporations are created and business is transacted in various countries around the world, for example, in South America or Latin America. The corporations earn profits and after paying a tax of one or two per cent in Barbados, they transfer the profits home to Canada, where these profits are tax exempt because of the tax treaty in place.

If the Canadian government were to tell these same corporations that, instead of this arrangement, it was prepared to offer them the same rate of taxation as Barbados, namely 1% or 2%, while the rest of their operations would not be taxed, do you think that even one company would continue to use Barbados and to contend with all of these problems? Would even one company be willing to continue doing this?

[Prof. Walid Hejazi]

First of all, it's incorrect to refer to Barbados as a tax haven.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

We have already had that discussion. I asked you a very simple question. Would even one company continue to use Barbados if there was no longer any tax advantage to doing so?

[Prof. Walid Hejazi]

I understand the question and I'll answer. I'll start by answering that it's incorrect to call Barbados a tax haven. The OECD has taken Barbados off that list. If I'm going to answer a question, I want to answer a question that's correct.

[The Chair, Conservative, Brian Pallister]

Mr. Hejazi, to clarify, the OECD hasn't taken Barbados off such a list. It has taken them off a list of uncooperative tax havens. It has not taken them off the list of tax havens.

[Prof. Walid Hejazi]

That's not my interpretation.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

In any event...

[The Chair, Conservative, Brian Pallister]

Go ahead, sir.

[Prof. Walid Hejazi]

It's an international financial centre, not a tax haven. That's point number one.

Point number two, the example you described is not my understanding of what happens. Barbados provides many resources to Canadian companies that go through Barbados. It's not a hollow shell, as you described. Barbados has a legal structure. Barbados has a network of bilateral investment treaties. Barbados has tax treaties, for example, with Venezuela and China. Barbados allows Canadian companies to access many markets globally that they would not be able to get access to had they gone through what you refer to as a tax haven.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

So then, if Barbados offers all of these services and if it is so amazing from a business standpoint, why then are these corporations and companies all shell companies? Hundreds of plaques can be seen at entrances to office buildings listing the name of various Canadian companies. There are more companies listed that actual employees on site. If Barbados is so good for Canadian companies, why don't they send employees to work on site? Why are we always seeing shell corporations? Obviously, the only reason for this setup is to minimize the tax burden of these companies.

[Prof. Walid Hejazi]

I'm not sure the last time you visited Barbados, or when you went to a Canadian multinational business there. I have gone to more than a few. I have talked to many employees. I've talked to many Canadian employees who have moved to Barbados and are active in accounting, legal services, and so on. This description of it being an empty shell...I'm not sure that's accurate.

[The Chair, Conservative, Brian Pallister]

Dean Del Mastro.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Professor Hejazi, for appearing again before committee. I value your input on this issue.

I wanted to go back to the comments of Mr. McCallum and those of my colleague, Madam Ablonczy, and the questions she asked specifically pertaining to foreign investment and foreign takeovers. I wanted to suggest that your comments on that are very much in line with what we've heard from other analysts around the country. Specifically, the Financial Post remarked that, “Rarely has a political news release contained as many bad economic ideas as the Liberals compacted into their call yesterday for a national frenzy over foreign investment”. The Edmonton Journal said, “In what can only be construed as a lame attempt to exploit public angst about foreign takeovers....” The National Post said, “ Unfortunately, a more typical case of politicians meddling in a world of which they know little....” I wanted you to know you're not in exclusive company on that.

I want to come back to thin cap rules and debt dumping. I recognize you've indicated a couple of times that you're not a tax expert per se, and that's okay. We talk about double dipping, which the minister has specifically said is an area we would like to pay a little bit of attention to. I agree with you that it's important that we enable our companies so they can operate efficiently and effectively and so they can expand into global markets. That's good for Canada and good for Canadian jobs.

Having said that, if we are allowing them to bring what I would term illegitimate debt back into Canada, or if we allow them to operate outside of thin cap rules, effectively they don't pay any Canadian tax or they dramatically reduce their Canadian tax burden on Canadian income earned in Canada. If we are to look at that solely as a means of trying to get more in step with the 75% of OECD nations that do have thin cap rules, do you have any suggestions on that? Obviously we have to be very surgical in how we're doing this. The last thing I want to do is hamper Canadian industry from being able to succeed, but I also want tax fairness. Do you have any suggestions on that?

[Prof. Walid Hejazi]

I start by saying I'm not a tax expert, but having said that, my study and the underlying hypothesis of my study relates to taxation as it applies to Canadian business income generated globally. So everything I've said doesn't really apply to Canadian business income generated within Canada, and if Canadian companies are using these international financial centres to reduce domestic business income, then this is something you should look at.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, sir.

Obviously, as you indicated in your statement, the fact that they are able to generate money abroad, that they are able to compete abroad, the fact that they're able to access riskier markets and do so in a manner that doesn't put the company at great risk does have the effect of bolstering their operations within Canada. What we want to make sure is those bolstered operations and those additional revenues generated in Canada are not necessarily offset by illegitimate debt that's brought into Canada. So I appreciate your opinion on it.

Go ahead.

[Prof. Walid Hejazi]

Can I pick up on one thing? This idea that when Canadian companies generate income globally there is no tax paid on it is not quite accurate, because when a Canadian business repatriates that income to Canada you get a dividend cheque—you, as a Canadian. Employees get dividend cheques. They get it in their RRSPs. So the average Canadian gets a larger dividend cheque and the taxes are levied against the higher dividend cheque. Therefore it's not clear what the net impact is on tax revenue.

[Dean Del Mastro, Conservative, Peterborough, ON]

Am I done?

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

Monsieur Thibault.

[Robert Thibault, Liberal, West Nova, NS]

Merci, monsieur le président, and thank you for appearing once again.

You said in answer to an earlier question that the advantage that Canadian corporations have in using financial centres like Barbados is to do business in risky markets, areas where we don't have a lot of experience or we don't have the facilities within Canada to finance them properly.

You mentioned also that we're competing in those markets against the United States, Europe, and Asia, which do have different systems in their nations, in their home countries, where they don't necessarily have to use centres like Barbados and can do the investment directly.

Could you outline what those differences are? Is it our taxation system? What are the differences between Canada and the U.S., Asia, and Europe?

[Prof. Walid Hejazi]

Actually, I would argue that many of the companies from these other jurisdictions, from Europe, from the United States, and from Asia, also have tax treaties with countries like Barbados and including Barbados. So many of these companies from these competing jurisdictions are not going into Latin America and into east Asia directly; they're going indirectly through these international financial centres.

The point that I think is very important is that changes in the structures available to Canadian companies will make them less competitive relative to American and European multinationals that have access to fundamentally the same types of tax structures.

[Robert Thibault, Liberal, West Nova, NS]

Are there changes we can make within Canada that wouldn't reduce the relative competitivity of our corporate sector, international corporations, relative to the Americans and Europeans, and that wouldn't make it necessary to use these international centres? Can we become an international financial centre?

[Prof. Walid Hejazi]

We could, and in many states in the United States there are elements of that. But let me just say one thing. I want to tie this back to the foreign takeover debate that we raised a few minutes ago. If a Canadian company was somehow disallowed from accessing the global economy using these tax structures, in my opinion that would contribute to the hollowing out of Canada, because now that company would immediately, for tax reasons, become more valuable as a U.S. company than as a Canadian company.

So we have to tread very carefully. But to answer your point directly, Finance Minister Flaherty—and I think this is very important in helping our understanding—talked about having a panel of experts to discuss many of these different dimensions, to exactly look at what are the benefits that go to the average Canadian from these tax structures, and are there ways to make adjustments that would not reduce the competitiveness of Canadian companies? I think this is something we need to look at, and I do hope the panel of experts does take on that question.

[Robert Thibault, Liberal, West Nova, NS]

I have a final question. In terms of the elements of double dipping, or double deductions, and debt dumping, can abuses within the structures that create those types of things be resolved without reducing Canada's competitivity internationally?

[Prof. Walid Hejazi]

Given my understanding, I think that would hurt Canadian companies. The reason I say that is the following. The Canadian company will take the first dip, the interest deduction in Canada, and they will not take it in the second country, say, the U.K. What ends up happening is that Canadian tax revenues do not rise; U.K. revenues rise. Canadian companies are made less competitive because they're not able to compete.

Again, I go back to this point for multinationals from other countries that have access to the same financing structures. As long as multinationals from other countries have access to, for example, the double dip, if we take it away from Canadians, we're making those Canadian companies less competitive. That's something we need to think about.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Thibault. Merci, monsieur.

Mr. Wallace.