Finance Committee on Feb. 1st, 2011

[Alain Deneault]

The political signal we are sending to the international community is actually creating problems. If Canada claims to be fighting against tax havens, but then signs a free trade agreement with a country that is well known for being a hub for laundering drug money, we have a problem indeed. I presented some data collected by criminologists on this issue to the Standing Committee on International Trade. This is also a problem in terms of responsibility and credibility. If on the one hand we encourage and recognize the states that enable drug money laundering, but on the other hand we fight against tax havens by participating in peer review committees, we have a credibility problem on our hands. This is a major factor.

Let me go back to a point that we will have to deal with at some stage. At the World Bank, an institution that is not at all insignificant, Canada shares its seat with a group of Caribbean tax havens. This group is often the target of distinguished criminologists who consider them to be connected to drug trafficking is some shape or form. Canada should be asking itself some moral questions if it wants to be credible, if it wants to be able to say eventually that it takes part in a peer review mechanism and that its presence makes the process credible. This is not the case right now.

[The Chair, Conservative, James Rajotte]

Merci.

We'll go to Mr. Brison, please.

[Jeffrey Owens]

May I just come in for one moment?

[The Chair, Conservative, James Rajotte]

Okay, but please be very brief, Mr. Owens. I'm trying to share as many rounds as I can.

[Jeffrey Owens]

One of the questions asked whether you can actually force taxpayers to put on their tax returns whether or not they have offshore accounts. The answer is yes. Many countries do, and they back that up with penalties.

[The Chair, Conservative, James Rajotte]

Thank you for that.

We'll go to Mr. Brison for a five-minute round, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you very much, Mr. Chairman.

Thank you very much to each of our witnesses for appearing before us today and informing our thinking on this important issue.

Madame Alepin, you said earlier today that Stephen Harper's government seems ambivalent to tax havens. I'd like you to explain that. You have also, on previous occasions, written similarly that more could be done.

Why do you think Prime Minister Harper is being ambivalent to tax havens? At a time when we have a $56 billion deficit, I would think the Prime Minister and his government would want to identify and retrieve as much revenue as possible. Do you have any insight as to why the Prime Minister would be ambivalent?

[Brigitte Alepin]

That is a question for the Prime Minister.

As I said in my testimony, the federal government's stand on tax havens seems ambivalent. On the one hand, it keeps saying that it wants to do something about tax havens. On the other hand, I testified before Christmas at a commission on international trade where the signing of a tax treaty with Panama was being negotiated. When we sign tax treaties with tax havens, we allow revenues that should have been taxed in Canada by the Canadian government to be exempted from taxes completely. We allow them to pass through tax havens where there are no taxes and we let them come back on Canadian soil without being taxed.

If we want to do something internally, it is true that there is much to be done on tax havens and it must also be done internationally. But there are still things that can be done nationally, such as limiting tax agreements. I am not talking about the tax information exchange agreements that Mr. Owens explained earlier. I am talking about tax treaties. Canada should have restrictions on signing tax treaties with tax havens. More review processes should be implemented and more money should be invested in the review processes of all transactions that take place in tax havens. In my view, we should also try to be more creative when it comes to informants. We have to be more daring in terms of information methods. I think the Canada Revenue Agency should consider the current trend towards having major informants.

[Scott Brison, Liberal, Kings—Hants, NS]

Merci.

Monsieur Deneault, you mentioned Halifax earlier. I'd like you to elaborate further with some specific examples of Halifax and Nova Scotia Business Inc., the province's crown business promotion agency. I would like examples of cases in which, as you have implied, Nova Scotia Business Inc. is involved in business dealings with tax havens and in offshoring money, potentially illegally. Those are serious implications, and I'd appreciate your elaboration on this matter with some specific examples.

[Alain Deneault]

We have seen that, through announcements, official documents and so on, there are significant tax incentives in Halifax that even lead companies in Bermuda to hire accountants in Halifax, accountants that can no longer be found in Bermuda. So we are moving in the opposite direction. These are no longer companies that leave constitutional states for tax havens; these are corporations that, once they are in tax havens and are looking to hire people, go to Halifax to enjoy the benefits that are clearly designed to get them to hire accountants there, allowing, in the insurance industry—

[The Chair, Conservative, James Rajotte]

This is the last question, and a brief one.

[Scott Brison, Liberal, Kings—Hants, NS]

But you're not alleging illegal activity. Surely to goodness, Nova Scotia Business Inc. would not be making public announcements. That wouldn't strike me as being prudent.

You're not alleging illegal activity, and there's a difference between tax avoidance and tax evasion. Are you suggesting tax evasion?

[Alain Deneault]

I really believe that players in this field are clever enough to avoid illegal situations. I have a problem with two things. The first thing is that the activity in Halifax has its roots in Bermuda, where it is very difficult to know whether what goes on is legal or not. We know that money laundering methods are so sophisticated today that we cannot distinguish between what is illegal and what is not. Justice Jean de Maillard explains it very well, among other things. Second, we won't be solving the problem if we start differentiating between what falls under tax avoidance and tax evasion, meaning what is legal and what is illegal, simply because it is lawmakers who decide what is legal or illegal. So, if we start legalizing wrongdoings, we will not be making any progress.

[The Chair, Conservative, James Rajotte]

Thank you very much.

[Scott Brison, Liberal, Kings—Hants, NS]

Mr. Chair, further comments--

[The Chair, Conservative, James Rajotte]

Sorry, Mr. Brison. We will have at least two more Liberal rounds.

Mr. Carrier, the floor is yours.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Good morning, ladies and gentlemen.

The useful information you provided us with shows that this is a somewhat daunting problem. Ms. Alepin, you said earlier that, despite all your knowledge in the field, even if you were the prime minister of this country, you would not be able to eliminate tax havens or tax evasion. That seems to be an admission of impotence. I hope that's not all there is to it. If that's the case, we might as well stick our heads in the sand and let things be.

I would like to ask you a question, but don't be afraid to give me a glimmer of hope that things will improve. Let's take the example of our five major Canadian banks that have 79 subsidiaries set up in tax havens. Since those countries have been identified as tax havens, this means that we are letting our Canadian chartered banks set up their branches in tax havens. They told us themselves that they saved their clients $1.3 billion in taxes by setting up shop in these tax havens. It doesn't make any sense. Words and actions don't match. We want to eliminate tax evasion, but we let our financial institutions get this whole system going.

Could you explain why our government allows chartered banks to operate this way, since this is official information?

[Brigitte Alepin]

In this whole discussion about tax havens, we must remember one main thing. As Mr. Owens said, we must deal with globalization, which is here for good. We cannot take a step back. Ever since we have been faced with globalization, when we want to do something about tax havens or tax rates, we keep making the strong argument that our major corporations must be competitive internationally.

That is why I said that, even if I were the Prime Minister of Canada, I wouldn't be able to face the tax haven problem and solve it by myself because it has to be an international initiative. I would probably work very hard on an international initiative. It has to be an international approach since our Canadian multinational corporations must be able to take advantage of a tax system that will still be competitive internationally.

That should always be a priority for us. Unfortunately or fortunately, all states have been losing some of their autonomy in terms of taxation and tax policies since the beginning of globalization. This is the reality we have to deal with.

But I would like to go back to the earlier remarks. If Canada really wants to take action, you have suggested a great idea, Mr. Carrier. It is true that we could ask that banks limit the access to bank accounts in their branches in tax haven. The idea to tell the Canadian government to stop signing tax treaties with tax havens would probably come first in the list of ideas that I am personally in favour of.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Precisely, in terms of agreements with other countries, quite often we make the so-called positive argument that these agreements could include a tax information exchange. Could the tax information exchange eliminate or, at the very least, ease or minimize tax evasion?

[Brigitte Alepin]

Absolutely. It is a matter of first establishing an international discussion platform and coming to an international agreement on the way to proceed, whether with minimum tax rates, information exchange or global regulations. Since we have been globalized, the taxes on multinationals must be discussed globally. As soon as it is a question of information exchange, all countries should come to an agreement and apply it progressively, all together—that's a fantastic idea.

It really is a great idea, but each country has to cooperate, even within the state. Internally, countries must not go against it and must allocate the resources required to implement the information exchange standard.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Ms. McLeod, please, for five minutes.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

I'm also very pleased to be joining you on this committee.

I want to pick up on something Mr. Owens said. I think it was related to the issue of the tax gap. He said it's there, it's big, and we need to deal with it.

It sounds as though you're not looking to quantify it. Could you talk a little bit about the actual complications of trying to quantify that issue?

[Jeffrey Owens]

Measuring the tax gap is prone to conceptual and practical difficulties. A starting point is that even if you could measure it, you would not want to collect every single dollar of outstanding taxes. You would end up with a lot of your constituents complaining to you that Canada Revenue Agency was being too aggressive. If you say that the tax gap is $100 billion, don't think that the $100 billion is just waiting out there to be pulled in.

The second issue, of course, is that if you could measure it accurately, you could very simply probably tax it.

I think that the most productive thing to do is track what progress Revenue Canada is making. Are they in fact increasing the yield from offshore non-compliance? Are their risk management tools identifying the sectors and the types of taxpayers that are most prone to evasion? That's the way you can see whether or not progress is being made in closing the tax gap.

Some countries have tried to measure the tax gap, and probably the best example is the United Kingdom, which looked at the gap under the VAT. I think what they found was that the absolute figure is far less interesting than a time series, which actually shows you what's happening in terms of whether you're doing the right thing and whether you're closing the gap.

I think you just have to be very careful and not see the tax gap as some sort of silver bullet that's suddenly going to solve an issue.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you.

I presume it would also take fairly extraordinary resources that could also be better focused in terms of the actual process.

I'm somewhat new to this committee. It sounds as though we have countries that don't have any agreements, period. We have a number of countries that you identified as not moving into phase 2, and then some that are looking pretty good in terms of what they're doing and where they're going. Can you take that down from a 30,000-foot level to a 10-foot level in terms of what the implications are, what measures we are moving towards in countries that haven't signed agreements, and where we are going with the countries we've signed agreements with that are not very successful? Can you talk a little bit about what's happening there?

[Jeffrey Owens]

We prepared a background document for this hearing that sets out where the 96 countries that participated in the global forum stand in terms of agreements. What we've seen since April 2009 is that the vast majority of these 96 countries are now in the category in which they actually have more than 12 agreements.

When we set the threshold of 12, we thought it was very ambitious. We were very surprised, in fact, at how quickly countries got up to 12, but 12 is not the end of the game. We always say that if you have 12, you still have to respond positively to any requests by a country for another agreement. Don't see the 12 as a ceiling; see it very much as a floor from which you need to move on.

Currently where we stand is that a vast majority of onshore and offshore financial centres have these agreements. They're all good agreements, because we verify that they meet the OECD standards. The 18 reviews that we've done so far show that of those 18 countries, 12 already make it. They have the framework in place to maintain an effective exchange of information. Six don't. The six that don't primarily are countries that either don't have good international agreements—tax information exchange agreements or double taxation agreements—or countries that don't have good access to information. We have identified the changes we want in these six countries and now will be monitoring that they make those changes over the next year.