Finance Committee on Feb. 26th, 2013

[The Chair, Conservative, James Rajotte]

Mr. Kepes, please.

[Robert Kepes]

Sure. I'll just answer the first part of your question—and it's a great question.

I think the government has to make the choice as to whether, if prosecutions are difficult and the information is difficult to find, we're not going to go after the speeders who are going 110, 120 kilometres an hour on the highway, we're only going to go after the ones who are going 200 kilometres an hour. That's a government decision to make. If it's difficult to get a prosecution and the government decides they're going to levy financial penalties, that's for them to make.

My personal view on it is I don't think the state should abdicate its responsibility to enforce the law. Tax evasion is a crime. The fact that it's difficult is no excuse, in my view.

But there are administrative penalties, to answer your question, under the Income Tax Act. So there is a penalty, a gross negligence penalty, which is equal to 50% of the tax. For unreported income, it's a standard that it will be assessed by the CRA for someone who has unreported income.

There are penalties for advisers, whether that's a lawyer, accountant, financial planner, if they participate or acquiesce in the making of a false statement by a taxpayer. So it's a way to get advisers. Unfortunately for the government, that penalty has actually been determined by the tax court to be a criminal penalty because it's essentially infinite. Anyway, I'm happy to get into it. That penalty does exist, and assuming it is upheld as a civil penalty, it does provide a very, very large sanction for tax shelter promoters or anybody who participates in the making of a false statement, helping a taxpayer lie on their return, essentially.

[The Chair, Conservative, James Rajotte]

You could certainly submit anything further to the committee, Mr. Kepes, and that certainly goes for all of our witnesses.

I just wanted to wrap up with a couple of points. Again, Mr. Kepes, your sixth recommendation talks about FATCA. I'm sure you're aware of the concerns expressed by Canadian financial institutions with respect to what they have to disclose to the U.S. government. Perhaps I'd get you to address it. How do you do automatic exchange? I think everybody nods and says that sounds like a very good idea until it's actually implemented in a practical sense, and then it has some implications that obviously we need to be concerned about. Perhaps you could address that.

The second item I wanted to put on the agenda was Professor Collier did put the Starbucks example on the table. It seems to me that is something we do have to take seriously, maybe not in a tax evasion sense but in a public policy sense. If a company is simply using a zero tax jurisdiction for tax purposes to be competitive, that's something we have to be concerned about from a public policy point. His Excellency certainly addressed it in terms of investing in a country like Costa Rica versus simply using a country for its tax status. Mr. Brison also followed up on that.

Perhaps you could speak on the FATCA issue, Mr. Kepes, and then if someone wants to—Mr. Hejazi, perhaps—you may address the Starbucks example again.

Mr. Kepes, please.

[Robert Kepes]

I have just a 10-second comment on Starbucks. I guess the question is whether there's any proof of unfair competition to the extent that if Starbucks is selling coffee at $3.00 a shot, does that mean the local retailer is being prejudiced? That would be a question I would like to know the answer to before Starbucks is criticized for how it structures its international affairs. If it does lead to unfair competition, it's definitely an issue.

With respect to automatic exchange, how that would work on the ground is that someone—a snowbird—would walk into a bank in Florida and ask to open a U.S. bank account, that U.S. bank would report to the IRS, and the IRS would report to the CRA. That is how automatic exchange works today between Canada and the U.S. Then of course, you're catching an awful lot of innocent people, who are having that information provided to the Canada Revenue Agency, because every Canadian snowbird who opens up an account is going to be reported. You have an enormous amount of information that would be flowing from one country to another. That's how the automatic exchange would work.

You would just end up having to extend it to each one of the countries Canada would have those agreements with. Presumably those countries have entered into these TIEAs, which only allow for information on request, because there's a balance between not allowing the government to go on a fishing expedition and trying to capture everybody who has an account in Miami.

[The Chair, Conservative, James Rajotte]

Okay, I do want to follow up on that in terms of whether FATCA, as it's structured now, could be better structured or could be implemented in a better way.

[Robert Kepes]

Well, from being the chair of the tax executive of the Ontario Bar Association, I know there are members of our executive who are tax lawyers who either work at a bank or advise banks. The amount of administrative nightmare they're going through to comply with FATCA is a common complaint. That administrative burden and those additional costs that are being borne by those Canadian financial institutions presumably are not going to be taken out of their pockets, and presumably consumers may see them in either higher interest rates or higher bank charges. But my point about FATCA is that it's not enough to have an agreement between two countries, because you're always going to have a third country that will have a bank that will not comply with something like that because they're not carrying out business in the U.S. That's why I said you have to make it multilateral, if FATCA is the way to go, and you'd have to have at least the G-20 involved.

One comment I would make is that big money is nervous. As you said, it's very easy to speak about tax havens. The fact of the matter is that most people are not going to put a million dollars in the hands of some middleman, unless they are career criminals and that's a different story. But if you're talking about business people who want to structure their affairs, even if they wanted to do something avoidance-related, I don't see them putting millions of dollars into the hands of a third-rate bank that is not tied to an international exchange system.

[The Chair, Conservative, James Rajotte]

Okay. I hate to cut you off.

Mr. Hejazi, do you have a brief comment on the Starbucks question?

[Dr. Walid Hejazi]

Just very quickly, if I may give a parallel example, I look around the room and I see lots of Apple products. If you look on the back to see where it is made, you will see “assembled in China” but “designed in California”. The reason that's an important issue is the following. Even with transparency, even with disclosure, it's not magic to allocate profits across jurisdictions. So when we go and buy an Apple product for $1,000, how much of the profit Apple earns should be allocated to each of the jurisdictions? It's related to taxes, absolutely; that's where the transfer pricing comes in. But it's related to the value added, the functions, the risks, and so on associated with the global supply chains.

So, if we think about Starbucks, for example, one needs to think about the functions, what's actually done in the U.K. when someone goes out and buys a tall latte. Then one needs to think about all the work Starbucks did to generate the brand. When you think about the brand and so on, not all of that can be allocated to selling the coffee in the U.K. You have to think about these things very carefully. So, on the issue of transfer pricing, one needs to think very carefully about the distribution of value across the supply chain.

It's not straightforward even in an environment where there's transparency, because there's a lot of interpretation, as the Glaxo case we just talked about referred to.

[The Chair, Conservative, James Rajotte]

Okay. I'm terribly sorry, but unfortunately we are bumping up against time here.

[Peggy Nash, NDP, Parkdale—High Park, ON]

I'd just like to request a document.

I would like to request that the OECD report from last week addressing base erosion and profit shifting, which Mr. Saint-Amans referred to in his testimony, be tabled with the committee for our consideration. It's a very recent, very pertinent document that Canada would have participated in.

[The Chair, Conservative, James Rajotte]

Is it a public document?

[Peggy Nash, NDP, Parkdale—High Park, ON]

It's a public document. I just would like it to be tabled with the committee as evidence for our study.

[The Chair, Conservative, James Rajotte]

Okay. We'll have the analysts and the clerk distribute that to members.

I want to thank you all very much for joining us today. If you have anything further in any of the questions that were posed or any of the topics that you wish to submit to the committee in our deliberations, please do so through the clerk. But, again, thank you very much.

Thank you for your presentations.

Colleagues, we do have a couple of quick items for committee business, so I'm going to ask the committee members to stay at the table, but I will thank our witnesses here.

Thank you so much for being with us here today.

Colleagues, quickly, we have the fifth report of the subcommittee. The only change in item number 1 is that the clause-by-clause consideration of the bill will take place on March 28, not February 28.

[Mike Wallace, Conservative, Burlington, ON]

So moved....

[The Chair, Conservative, James Rajotte]

It is so moved.

Are all in favour?

(Motion agreed to)

Secondly, for the committee budget....

Do you want to move it?

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

No, I have an amendment to propose, though.

[The Chair, Conservative, James Rajotte]

Okay.

With respect to the budget, the amount requested is $36,700.

Order, order.

[Mike Wallace, Conservative, Burlington, ON]

The meeting's still going on, folks.

[The Chair, Conservative, James Rajotte]

Who wants to move it?

[Mike Wallace, Conservative, Burlington, ON]

I'll move it.

[The Chair, Conservative, James Rajotte]

It is moved by Mr. Wallace.

Mr. Caron, do you have anything to add?

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

With respect to the people from Vancouver, I would like to suggest that we give them the opportunity to appear by videoconference, if they wish.

[The Clerk of the Committee, Ms. Christine Lafrance]

Done.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Already? Excellent. Thank you.

[The Chair, Conservative, James Rajotte]

Okay.