Finance Committee on Feb. 1st, 2011

[Jeffrey Owens]

As I said, this is not just a question of raising more revenue, although that obviously is important. It's also a big issue that honest taxpayers know that the tax burden is fairly shared, and it's also a question of making sure that legitimate companies are not put at a competitive disadvantage by illegitimate companies that are prepared to use tax havens to gain a competitive advantage.

What did I mean by action on the ground? Basically, it is that these agreements now need to be implemented. Canada, like other countries, needs to be able to ask the tax havens that have agreements to help them in terms of compliance to provide the information Canada needs to ensure that Canadian residents are not using places--whether it's Panama, Bermuda, or anywhere else--to evade Canadian taxes. That's the work that is now under way.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you.

To follow up on other questions with regard to financial institutions, how effective are the tax information exchange agreements in increasing tax transparency and decreasing bank secrecy in tax havens and offshore financial scheme centres?

[Jeffrey Owens]

Well, in fact, in the two standards that we have, one standard is on transparency, so you can't have bank secrecy and you can't have bearer shares. You have to be able to get behind beneficial ownership arrangements. In other words, you need to have a transparent system in place, and then you have to be able to exchange this information with your trading partners, which requires that you have some agreements.

In a sense, I think we already have a universal endorsement of these standards, and we have 600 agreements that are implementing them. We now need to make sure that they are implemented in a coherent and effective fashion.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you.

I have one last question. In the slides you gave us, you referenced the TRACE project. Can you tell me a little bit about the TRACE project?

[Jeffrey Owens]

Yes, I actually skipped over that. It's a pretty complex area. It basically involves how you go about taxing income from collective investment vehicles.

The challenge for governments is how you find a balance. On the one side you want to make sure that tax does not act as a barrier to the effective operations of capital markets, particularly the national capital markets, but on the other side you want to make sure that the people who use these markets are in fact paying their fair share of taxes. The TRACE project is intended to achieve those twin objectives.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you.

[The Chair, Conservative, James Rajotte]

You have a minute and a half, Ms. Block, if you wish.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Mr. Hiebert...?

[The Chair, Conservative, James Rajotte]

Go ahead, Mr. Hiebert, briefly.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Thank you.

I noticed also, Mr. Owens, that on page 7 of your document you talk about peer reviews. Eighteen reviews have been agreed on. You list a bunch of countries. A number of countries have failed to move to phase 2. Could you just explain to us what these reviews are about and what the significance is of a failure to move to phase 2?

[Jeffrey Owens]

Yes. The process has been set up collectively by the 96 countries that are within the forum. The reviews are always done by two assessors, two countries, and a member of the OECD secretariat. It's very impartial. The rules are the same whether you're a large country or a small country, an offshore centre or an onshore centre.

What happens is that we collect the information for a particular country and then put it together. It's then presented to what we call our peer review group. If they say yes, this country passes on to the next stage. In other words, it moves from phase 1, which is the review of the legal framework in a country, to phase 2, which is whether or not there are practical impediments to the effective exchange of information.

Each of the reviews contains recommendations for changes. For 12 of the countries, we felt that the recommendations were not that important, so they could move on to phase 2, but for six countries we decided the changes were so important that they should not move on to the next stage until they have remedied those deficiencies.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

We will have time for another round. Thank you, Mr. Hiebert.

We'll go to Mr. Szabo, please.

[Paul Szabo, Liberal, Mississauga South, ON]

Thank you.

On the question of the voluntary disclosure program in Canada, the last time it came up in Parliament I think it had to do with Mr. Mulroney's tax returns.

There have been some changes in Canada, as I understand. Are you aware of the arrangements under the voluntary disclosure program with regard to offshore amounts? No?

The website of the National Union of Public and General Employees makes the allegation that the government is allowing those with secret offshore bank accounts to disclose that fact without paying a penalty. They go on to say that auditors only go back a maximum of 10 years when determining the amount owed, but previously voluntary disclosure led to an assessment of penalties and interest that compounded over multiple decades.

Are you aware of changes in the government approach to dealing with those who have been found to be evading taxes? Would anyone like to comment?

[Brigitte Alepin]

As far as I am aware, the voluntary disclosures program has stayed essentially the same. I have had occasion to work with situations like that. When Canadian taxpayers have accumulated money in offshore tax havens and they want to bring it back into the country, or when they get the feeling from information in the media that tax authorities could be taking an interest in their case, they do a voluntary disclosure. That may allow them to avoid a significant tax penalty, or, in the worst cases, a prison sentence. The program has had some success in Canada. It is along the lines of programs in effect in other industrialized countries.

[Paul Szabo, Liberal, Mississauga South, ON]

Tax evasion by using offshore havens, etc., is a very sophisticated method of evasion. It also involves billions and billions of dollars. Is there any suggestion that somehow the penalties and the consequences should be increased to reflect the gravity of the crime committed?

[Brigitte Alepin]

That is a very good question. When we are discussing a situation like that, we have to remember that essentially two kinds of taxpayers use tax havens. There are individuals who are simply trying to avoid paying tax by hiding money in offshore accounts in tax havens. Then there are multinationals who are, by legal means, not paying what might be considered their fair share of taxes.

If you increase the penalties, you are going to target the taxpayers who are hiding money in tax havens. There, yes, it is a good idea to increase the penalty as a deterrent, in an attempt to limit the attractiveness of tax havens. But I think that there must be measures on the other side too. Otherwise, the risk is that some taxpayers will be made to suffer simply because they are the ones who have been found out. The measures in place are largely aimed at tax evaders, and they are mostly private individuals.

[Paul Szabo, Liberal, Mississauga South, ON]

I have one last question. Are you aware of the Canadian Institute of Chartered Accountants, the Canadian Tax Foundation, or the Law Society of Upper Canada having any initiatives ongoing right now to address tax evasion through use of offshore tax havens?

[Brigitte Alepin]

I am not sure whether the organizations you mention are the same ones I am referring to. I know that steps have been taken. The question of raising some penalties has been discussed. Personally, I would say that, if you choose to increase penalties, you will also have to look at the situation of the multinationals and limit the attractiveness of tax havens for them as well. They generate greater amounts in taxes.

[The Chair, Conservative, James Rajotte]

Thank you. Merci.

We'll now go back to Mr. Hiebert, please.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Thank you.

Mr. Owens, you were just finishing an answer, and I was asking you to elaborate on the implications of failure to move to phase 2. There are a number of countries listed in your document on page 7. What's the practical implication for them for not proceeding in this process, other than the peer review?

[Jeffrey Owens]

In a sense it's an issue of reputation, because all this information is published. You can actually read why Barbados or Panama has not moved on to phase 2. That does not go down very well in the financial community, so there's a reputation price to doing that. They also can't get the final rating, because we won't give a final rating to a country on whether they are compliant or non-compliant until they have completed both phase 1 and phase 2, so it's a pretty important public statement that comes out. We put one out this week, in fact, saying that places like San Marino, the Seychelles, and Barbados are not moving on. It's a pretty powerful statement.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Okay.

Ms. Alepin, you commented about multinationals legally avoiding paying taxes through complex legal structures that allow them to avoid paying taxes without actually evading taxes. You've basically been telling us that we need to close the loopholes for tax evasion. Are you also saying we need to close the legal loopholes for tax avoidance?

[Brigitte Alepin]

Yes, certainly, if you want a comprehensive approach, if you want to limit the use of tax havens as a way for individuals to evade taxes, you have at the same time to limit the use of tax havens by multinationals, accepting that they are avoiding taxes, or planning their taxes, in ways that may not pass ethical tests on a societal level.

Otherwise, you are going to end up with a two-tiered tax system, meaning that you are going to prevent individuals from using tax havens while allowing multinationals to do so. That may seem acceptable in the short term, but, in the long term, the average tax payer may well run out of patience with the tax system.

I think that all countries, not just Canada, need a global approach in order to create a balance between the tax evasion committed in tax havens by individuals, trusts and foundations and the dubious tax planning conducted there by multinationals

[The Chair, Conservative, James Rajotte]

You have about one and a half minutes, Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

I want to thank our guests for coming today.

Ms. Alepin, I want to thank you for coming again. I think we saw you before the committee back in 2007, and I was a member of that committee. I looked up a quote from you. My translation might not be exact, but you said:

If we want to solve the problem of tax havens, there is only one choice: that is to ask those countries to follow the same rules as other countries, and sit down. One things is certain: we will not reach that goal overnight. We must deal with this issue internationally.

Do you still agree with what you said to us in 2007?