Finance Committee on May 15th, 2007

[Erin Weir]

I think it's a critically important piece of context that Canadian corporate taxes have been cut to the bone in recent years. They're much lower than American and Japanese corporate tax rates, for example.

As a result, corporate profits have increased to their highest level, relative to gross domestic product ever. Since we started keeping those statistics, we've never seen corporate profits as large, as a share of the economy, as they are now.

The flip side is that business investment in the Canadian economy is at very sluggish levels. It's at low levels compared to where it's been at other points in Canadian history and compared to where it is in other countries. So it's certainly not clear that these corporate tax cuts have produced a lot of economic benefits. The case for further corporate tax reductions is really questionable.

I'd also point out that one consequence of corporate profits being so large is that the cost of corporate tax cuts is also very large. We're talking in the tens of billions of dollars from cuts that have already been made. So you're absolutely correct about that.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Brigitte, do you want to add anything

on the issue of competition between companies in Canada?

[Brigitte Alepin]

My fellow panellist touched upon the crucial issue of tax rate that should apply to our Canadian companies. I always compare these rates to rates that are imposed on SMEs. SMEs constitute the engine of the economy. We therefore must make sure that they benefit from a more favourable tax rate than large companies. In fact, this is written in all documents, interpretive bulletins and documents on deductions for small businesses.

Indeed, Canadian tax rates are surprising. I wonder why our tax rate is lower than that of the U.S. We have an abundance of resources that attract companies. We do not necessarily need a tax rate that is 5% lower than that of the U.S.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you.

I have another question, and it is for Mr. Lareau. Perhaps you can answer both questions at the same time.

The Liberals would like me and us to believe that when we think about Barbados and other tax havens, this is a figment of our imagination. I doubt that Mr. Arrindell would be here if there wasn't some advantage for him to attract Canadian businesses that's not offered in Canada.

There was a recent study at the University of Quebec that showed that major corporations and banks have used tax havens to avoid paying $10 billion in taxes since 1981.

The study goes on to say that in the House of Commons a few years back, when Scott Brison was still in the Conservative side of things, he said:

The tax treaty with Barbados is a special case because of the fact that there is a disproportionate percentage of Canada's foreign direct investment in Barbados that does not make sense given the size of its economy and the nature of the investment.

In 1994 Paul Martin closed a bunch of tax havens and said: “Accordingly, we are taking measures to prevent companies from using foreign affiliates to avoid paying taxes.” Then he proceeded to justify why he needed to keep the Barbados tax haven open in terms of the Canada Steamship Lines.

Recently, we know that Revenue Canada is auditing Merck Frosst for $2 billion in unpaid taxes because they'd used the Barbados tax haven.

Is this a figment of my imagination?

Mr. André Lareau, would you like to respond?

[André Lareau]

You are absolutely right. The Canadian tax system indeed allows openings mainly to Barbados. In the 2002 report, the Auditor General stated that $23 billion had been invested in Barbados. There is a reason for that. Barbados, in particular, has a tax agreement with Canada. Because section 30 of the tax agreement stipulates that International Business Companies, IBCs, are exempt from the agreement, we are led to believe that Barbados has no preferential link to Canada.

With respect to what you said earlier about 1994, I will remind you that in 1995, an amendment was made to tax regulation 5907(11.2)(c) according to which tax agreements concluded before 1995 could permit entry of tax-free dividends. This is not a random occurrence.

Earlier, Ms. Alepin asked why we should feel obliged to reduce Canadian rates. Indeed, that is a good question. In Europe, competition takes place within the European Union. There was an upward trend in recent years. Ireland increased its tax rates in 2001, 2002 or 2003. Hungary also increased its rates in 2006. Currently, Bulgaria has a tax rate of 10%, the lowest corporate tax rate in all of Europe.

Our closest competitor is the United States. Therefore, we always feel the need to tie yourselves closely to the U.S. But let us be careful! Our tax system is entirely competitive. For example, the exemption on $500,000 of capital gain has been increased. The 1997 Mintz report clearly indicated that this measure did not create jobs in Canada and should be eliminated. Therefore, we should not only consider tax matters as they relate to tax havens, but also as they relate to our domestic tax matters.

[The Chair, Conservative, Brian Pallister]

Excusez-moi.

The time for Madam Wasylycia-Leis is past, in terms of her questions at least.

[Some hon. members]

Oh, oh!

[The Chair, Conservative, Brian Pallister]

So we'll go with a second round of four minutes, and I think that should allow everyone to get in.

We'll begin with Monsieur Thibault.

[Robert Thibault, Liberal, West Nova, NS]

Thank you for your presentations and your answers.

Professor Hejazi, nobody argues with the fact that we have to eliminate the abuses caused by low-tax jurisdictions that become tax shelters. Nobody argues with that, and Judy pointed to a case where the Canada Revenue Agency was able to take corrective action, and if the party is guilty, hopefully the CRA will retrieve the funds.

But there's a reason these low-tax jurisdictions exist. You talked about the conduit helping our businesses carry on activities in other areas where they might be unfamiliar or have different court systems. Could you explain exactly what that conduit is in one minute? What is the advantage of that conduit with a place like Barbados or other jurisdictions?

[Walid Hejazi]

Basically, the results of the study show very clearly that when a Canadian multinational goes to Latin America, there is a complementarity between Canadian trade and Canadian foreign investment; when a Canadian multinational opens a production facility or an office in Latin America, that increases the footprint of Canadians in that foreign jurisdiction, which increases the demand for Canadian production in Canada to service that foreign market.

If they use a conduit like Barbados, the tax benefits associated with that use, because the income that flows back to Canada from those foreign operations, come back to Canada at a lower tax rate or at no tax. Then that Canadian company is better able to compete with American and European multinationals that are operating in those same foreign jurisdictions and that have access to the same financing structures. This is not something that's unique to Canada, and eliminating this conduit possibility for Canadian multinationals would make Canadians less competitive in those foreign jurisdictions.

[Robert Thibault, Liberal, West Nova, NS]

Madame Alepin made the point that you either, through international negotiations or through a body, get everybody to abide by the same rules, or you have a laissez-faire approach.

The other thing would be to eliminate all Canadian investments through the conduit of low-tax jurisdictions. She didn't suggest that. I'm just saying that if you did that--if you eliminated them today, as the minister had a short while ago--what would be the effect on the Canadian economy? Would head offices move out?

[Walid Hejazi]

They would, absolutely, if it were made more difficult to use conduits like Barbados. If they were shut down, the Canadian economy would be adversely affected to a very large degree. Tax rates in Canada would have to rise. Tax revenues in Canada would fall. Canadians--

[Robert Thibault, Liberal, West Nova, NS]

On the question of tax fairness, would taxes have to increase for the average working salaried employee?

[Walid Hejazi]

Her taxes or his taxes would have to rise, and their salaries would fall. It has been very clear, and I could point you to thousands of studies that have shown that globalization is the most important source of prosperity in developed countries over the last 30 years. If we prevent the ability for Canadian multinationals to access the global economy, it makes Canadian companies less competitive. It will result in reduced Canadian exports to the global economy and reduced government tax revenue. Simply put, this idea that somehow there's a tax benefit associated with using these conduit jurisdictions, that somehow this is bad for Canada and good for the multinationals, is incorrect.

This is something I've been researching for a long time, and I remember 20 years ago, when everybody was complaining about so much foreign investment in Canada--

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. Thibault.

Mr. St-Cyr, you have four minutes.

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

Thank you, Mr. Chairman. I'm pleased to welcome two witnesses who are speaking to us in French today. It has been several months since we've had French speakers appear before the Finance Committee, and I'm very happy about this.

Please do not hesitate at all to express yourselves in your language.

I am a bit surprised when I hear the argument that companies which invest abroad, should pay lower taxes, and that this is profitable for Canada. It is the same argument as those who claim that the lower Canadians' salaries are the better the economy. I do not believe in this argument.

Let us consider the economic impact. Earlier, my colleague talked about the $4 billion that comes back from Barbados free of tax, which deprives the federal government of some $800 million in revenue. This calculation does not include the provincial tax or other tax havens and double dipping measures, etc. Therefore, we are talking about several billion dollars.

As a society, if we give up this billion dollars, then we must increase individual taxes, or cut back on services that keep the economy running. Is this good for the economy?

I would like for either Ms. Alepin or Mr. Lareau to answer.

[Brigitte Alepin]

I reiterate a point that I took some time to understand. When we talk about tax havens, what my fellow panellist said is neither true nor false. This is the first stage of reflection. In an era of globalization, we must make sure that the tax context in which Canadian multinational companies operate is competitive compared to what exists elsewhere. If we put an end to the present situation regarding tax havens, and cut off the possibility for multinational companies to conduct business in Barbados, there would be a negative impact because certain multinational companies will seek to do business elsewhere. Globalization is about capital mobility. Even though we've been discussing this for some time now in Canada, it is for this reason that many countries must also take part in the discussion. It is a decision that must result from international discussions, and Canada has a chance to shine. To my mind, of all the countries in the world, Canada is one of the those that should start talking about it.

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

Mr. Lareau.

[André Lareau]

When we give up taxing profits earned, particularly in Barbados, and we are talking about $800 million, there are no losses in Canada. That amount is not being taxed in Canada. Therefore, we cannot even talk about reduced revenues for Canada's Treasury.

On the other hand, Canadian jurisdictional sovereignty means that Canada has the power, through legislation, to impose the tax rate it decides upon. By not taxing profits earned abroad, particularly in a country with low tax rates, Canada is giving up its jurisdiction and handing it over to another entity. We cannot allow this to happen, because it makes no sense.

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

I would like to come back to the issue you raised earlier, that of disclosure practices in other countries. Can you give us more details? Were you talking about a simple disclosure to better understand the situation? Are there studies done to determine whether or not it is illegal, in some cases, to levy additional taxes?

[André Lareau]

In the United States, with Circular 230, that went into effect June 20, 2005, any taxpayer who wishes to set up an aggressive tax scheme with the assistance of accountants, lawyers or any other professionals, must submit the opinion letter issued by that professional with a description of his aggressive tax scheme as well as a request for a tax rebate. This is necessary in order to obtain authorization for the scheme. If this is not done, or if the aggressive tax scheme is attacked, stiff penalties and sanctions can be imposed. Professionals, lawyers and accountants are under the obligation to issue this opinion letter, otherwise they may also be subject to significant sanctions.

[The Chair, Conservative, Brian Pallister]

Merci, Monsieur.

Professor Lareau, we know from Statistic Canada information that the growth in the use of Barbados in particular as a conduit has increased exponentially inthe last number of years. Could you please explain further how there were exceptions made in the mid-1990s, in respect of Barbados? Could you explain what those were and to what degree that has affected the use of Barbados by Canadian companies?

[André Lareau]

Previously, during the 1980s and up until the 1990s, countries that handed over dividends in Canada tax-free, and received by a parent company tax-free, were called designated countries. There is a list of countries, and if anyone of those countries paid up dividends in Canada, they were exempt from paying taxes. Some of these countries had a practically zero tax rate. Therefore, shipping companies especially were created in these countries.

In her reports published throughout the 1990s, the Auditor General stated that these practices made no sense and that henceforth, Canada should favour countries with which it has tax agreements. The legislation was amended to stipulate that countries authorized to pay dividends in Canada tax-free were countries that had concluded a tax agreement with Canada.

Under section 30 of the Canada-Barbados agreement, International Business Companies, IBCs, are excluded from the tax agreement. This has created a problem, because maritime companies in particular have left certain foreign countries in order to go to Barbados. An amendment was made to regulation 5907(11.2)(c) of the Income Tax Act stipulating that even if a company was an IBC, it would also be subject to the tax agreement. Therefore, a company residing in Barbados, whose control centre is located in Barbados, and whose important decisions are made in Barbados, would henceforth be subject to the tax agreement.

From the research I conducted, the problem lies in the fact that companies located in Barbados do not necessarily make important decisions in Barbados. Professionals I met with clearly indicated to me that decisions are taken by a committee of professionals located elsewhere, abroad, or in Canada. Companies are able to repatriate dividends to Canada under subsection 5907(11.2)(c) of the regulation as is stipulated in the agreement signed before 1995, and that specifically deals with Barbados.

[The Chair, Conservative, Brian Pallister]

Okay, we know that this doesn't relate. A previous ethics commissioner ruled on this issue with respect to the previous prime minister when he was finance minister, saying that he did not behave unethically in respect of shifting his private interests to Barbados.

How far-ranging is the potential to use Barbados as a conduit in the way that you've just described? In other words, Madame Alepin alluded earlier to SMEs and the importance of SMEs in the Canadian economy, with which of course we all agree. How difficult is it for other companies to utilize this conduit that is available for avoiding tax?

I'll allow Madame Alepin to commence, because I don't want to use up too much time. We have a couple of other questioners.

[Brigitte Alepin]

I have been a tax expert for some years. I will not tell you exactly how many years, because I do not want to appear too old. I have spent nearly my entire life in giving tax advice to SMEs. There is a very simple reason for this: SMEs have no access to the kind of fiscal planning that would let them use tax havens. This is unfair. I recently had a discussion about this issue. SMEs cannot afford to pay the professional fees of financial experts who do this kind of planning. It costs at least $50,000 in fees to set up this kind of structure. SMEs cannot afford to pay such professional fees. Besides, an SME is usually not large enough to be able to open an account with certain financial institutions over there. I wrote about this in my book. This is really a selective kind of fiscal planning that discriminates in favour of more wealthy Canadians.