Finance Committee on Feb. 3rd, 2011

[The Chair, Conservative, James Rajotte]

I call this meeting to order, the 56th meeting of the Standing Committee on Finance.

Colleagues, we are continuing our discussions today pursuant to Standing Order 108(2), our study of tax evasion and offshore bank accounts.

We have the pleasure this morning of having as a witness the Honourable Donald Johnston, Privy Councillor and former cabinet minister.

Mr. Johnston, thank you so much for being with us here this morning.

We did hear from someone from the OECD on Tuesday, Mr. Owens, as well as two other witnesses, academics, regarding this study. This study will continue for some time, but we are very much interested in hearing your perspective on this issue, and then we will have questions from all members.

I understand you have some introductory remarks you'd like to make to the committee prior to questions.

[Donald Johnston, As an Individual]

Thank you very much, Mr. Chairman.

It's a pleasure to be here. I can't say there are too many of my old colleagues around, but that's not surprising, since I last sat in the House in 1988.

I welcomed this opportunity because, first of all, I regard this as a very important committee, and I always have. And second, the issue of harmful tax competition and the use of offshore tax havens has grown steadily in importance over the last few decades.

I went to the OECD in 1996 as Secretary-General and it was at that time, effectively, that the G-7—I think it was still the G-7—became concerned about the illegal use of tax havens, as the OECD had been for some time. You can have legal uses of tax havens, as you all know. There is nothing wrong with having an offshore bank account, provided it's declared and transparent. But of course over the ensuing period we came to understand that there was a great deal of money that had been filtered into tax havens that were not cooperative in terms of either transparency or exchange of information and were hiding behind bank secrecy.

But really, I was surprised at how little action we were getting out of governments at that time, including the United States government, including the IRS and the Treasury, with which I met on several occasions, because there were some opponents to the OECD.

I should tell you that the OECD began the program with a misnomer, calling it “harmful tax competition”, which, as I recall, was the language actually used in the résumé from the G-7 at the Lyon summit. They used the term “harmful tax competition”.

Well of course that opened the door to those who like to charge the OECD as being a European-controlled organization where people like to pay a lot of tax, where the social contract is financed with taxpayers' dollars at exorbitant rates. They like to charge that the OECD—when it refers to tax competition—is really saying that everybody should pay the same tax. Well of course nothing could be further from the truth. I don't know if Jeffrey Owens testified on this point or not, but the OECD, from an economic point of view, had regarded competitive tax rates as being very healthy and that they could be very efficient. So the notion of competition in tax, which backfired in terms of the initial communications on this program, was corrected in 2000 and it became essentially “harmful tax practices”.

But the opponents of the OECD work continued, of course, to harp on the theme that it was really a European-dominated organization with a totally different view of the relationship between the individual and the state and the social contract, and that the OECD was set on creating uniformity in taxation all over the world. Some of the most outspoken critics were in the United States. The Heritage Foundation—the tax part of which was led at that time by a man called Dan Mitchell—frequently published in newspapers in the United States attacks on the OECD to the point where I had to go to Washington to meet with senatorial staff and senators to explain the program. Some of them were threatening to cut off funding to the OECD, which of course would have buried the OECD, since the United States contributes 25% of the budget. That's changed somewhat, but not very much. But at that time it was a statutory obligation that in the OECD they paid 25%. Even under the formula of contributions it would have been much more because of the size of the economy.

On the other hand, we had strong support from some senators, such as Senator John McCain and others, who realized how important this work was. And similarly, in most of the treasuries around the world they realized how important this work was.

In the last few years, in fact almost since my departure, there has been an acceleration of activity in the area. And I expect—since you heard from Jeffrey Owens—that he explained to you how the global tax forum, which we created in the year 2000, has grown in significance and grown in structure, if you like. At that time it was more of an informal gathering. We had numerous meetings, some of which I attended, but since then, as I understand it, it's become much more effective.

It has many more members, and the OECD, with pressure from the G-20, has been successful in bringing more and more countries into the transparency and exchange of information orbit. Now there are actually no blacklists. We had blacklists at that time of uncooperative jurisdictions, but my understanding is that those blacklists have now been eliminated. That does not mean that all countries are conforming to the tax information exchange agreements they've signed or committed to, but they've made the commitments. Now it's up to peer pressure and review by the committees that have been set up under the auspices of the OECD to ensure that there is compliance and that ultimately they adhere to these obligations they've undertaken.

I can't help but believe that whistleblowing has played a rather significant role in this. As you know, there have been at least three instances of whistleblowing. There has also been evidence of some major Swiss banks that have been involved with tax evasion exercises in the United States, and I suppose in Canada and other countries. Most recently, there was a chap from HSBC Private Bank in Geneva, where it takes $500,000 just to open an account, who went to France. You probably know this. He gave the French authorities the information he had on his computer, which involved some of 15,000 accounts, a fair number of which, about 10%, as a I recall, were Canadian. A very large number were French. I think the number was about 7,000 or something in that neighbourhood. Of course when you take out your pencil and do a bit of multiplication, you're beginning to realize that you're talking about big money. And this is only one bank. We're not talking about the other issues with respect to the UBS, which you've read about, and other jurisdictions.

So suddenly governments said that in this period, when we're all running deficits and fighting for every tax dollar, we have to basically come to grips with this problem. For me it's so fundamental, because what's happening is that you and I around this table are paying those people's taxes, which should be paid here in Canada.

Those are the few introductory remarks, Mr. Chairman, I'd like to make. I'm very pleased with the way this program has evolved. I'm very pleased that the OECD has continued to play such a significant role. And in fact I think this is why the OECD is at the G-20 meetings, because suddenly this has become a major issue for all of our treasuries.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Johnston, for your opening statement.

We'll start members' questions with Mr. Szabo, for seven minutes, please.

[Paul Szabo, Liberal, Mississauga South, ON]

Thank you.

Welcome, Mr. Johnston.

Your experience in the OECD is very useful. I'd like to start off by asking you an open question about whether you believe the OECD has the will and has in fact taken necessary steps to determine what some would call best practices to deal with this kind of problem.

[Donald Johnston]

Are you asking me if the OECD has done that?

[Paul Szabo, Liberal, Mississauga South, ON]

In your experience, is this the body that has the best international interests?

[Donald Johnston]

Absolutely. My experience with the OECD, not just on tax issues--as you know, we cover the full range of public policy outside of defence and maybe culture.... We have 150 committees and working groups. They all, of course, are usually manned with delegates from capitals, and they're supported also by business, the business industry advisory council, and the trade union council. All of them are engaged, so when there is an OECD proposal, it is usually non-partisan and objective. And it has, I think, made huge progress on many structural issues, in particular, throughout the membership and beyond. There are many countries that are also now much engaged with the OECD. When I was there, we got up to about 70 non-OECD members, including China, India, Russia, and Brazil. And all of them draw upon the best practices of the OECD, because these are really the world standards.

[Paul Szabo, Liberal, Mississauga South, ON]

Having listened to the witness from the OECD, I was a little concerned that there seemed to be a gap in terms of the completion of the commitment to deal with the problem by virtue of the fact that so many agreements, tax information sharing agreements and other agreements, have never been ratified or are at various stages of ratification. There doesn't seem to be an aggressive commitment to dealing with what you call big bucks.

[Donald Johnston]

That's a challenge for any OECD instrument that requires ratification. If you're just dealing with conventions and best practices you don't need ratification. You don't have to come before these committees and so on. Where you do, the parliamentary procedures in all jurisdictions will slow down that process, because it becomes not just soft laws, and most of the OECD's work is.

You're quite right. For example, the convention that we adopted to fight corruption back in 1997, the bribery of foreign public officials, actually came into being when Canada ratified it, because Canada took a certain critical mass. I can't remember the number, 14 or 15, whatever. Then it continued over the years to be ratified at different times by different countries, because that, unfortunately, is the nature of our processes. Here, I think the pressure will come from the G-20 and the review mechanisms that are in place. The compliance with the undertakings will be audited regardless of whether the agreements have been ratified by Parliament. I could be wrong on that, but I think that would be the case. When the government has signed a taxation and information exchange agreement--called the TIEAs, or whatever they are--when that happens they will then go on the list. That list is usually published when those particular countries will be examined by an independent team.

[Paul Szabo, Liberal, Mississauga South, ON]

There was an example given of the U.K.'s efforts to address this in part. I stand to be corrected on the numbers, but it was something like 4 billion euros invested yielded 100 billion euros in return and recovery. Given the magnitude of that example or our general knowledge of the magnitude of the problem, how does that stack up against other significant priorities of OECD countries?

[Donald Johnston]

That's difficult for me to judge. It's going to be different from country to country. When I was President of the Treasury Board here, we always had that argument with the tax department. If we had more inspectors it would increase exponentially the amount of revenue that could be recovered. That's always an argument of the revenue officials, and there's obviously some truth in it. But there's also a point of diminishing returns.

In the case of what we're looking at here, I don't have the numbers, but I think you'll find that the voluntary disclosure mechanisms that countries have introduced have been quite effective. I was looking at some of the numbers in the United States and I've heard some in Canada and I expect it's true right around the system. That's where most of the money will be recouped, even in the absence of signing agreements.

[Paul Szabo, Liberal, Mississauga South, ON]

Canada has international trade agreements with 80 to 90 countries around the world. We don't seem to have tax information sharing agreements attached to those so we can cooperate on the trade and economic activities side. Those kinds of things, in terms of tax information sharing or other agreements to cooperate on tax evasion, don't seem to be linked to those trade deals directly. They may be side deals in some cases, but normally it would be a separate deal totally.

In your experience, would good faith between countries mean that tax information sharing agreements should be part of them?

[Donald Johnston]

If we had that good faith historically we wouldn't be having the debates we're having today and the activity within the OECD. There have been many countries that have not been cooperative. Now with the double taxation conventions, DTC, and I think it's article 26 or whatever it is that incorporates these obligations of exchange of information, if they're complied with then I think we've come a long way to solving that problem, independent of the fact that there's nothing in the trade agreements or the investments agreements per se. The double taxation and convention agreements, which are probably in effect with most of the countries you refer to, would have that mechanism.

[The Chair, Conservative, James Rajotte]

Okay.

Thank you, Mr. Szabo.

Monsieur Paillé, s'il vous plaît.

[Daniel Paillé, Bloc, Hochelaga, QC]

Thank you. Welcome back to your Parliament, Mr. Johnston.

You said that tax information agreements exist between countries, tax agreements, and that they are based on good faith. Yet someone who wishes to engage in tax evasion has all sorts of characteristics, except good faith. At the end of the day, what we have here is a global situation where companies are using legal, albeit increasingly unethical and illegitimate, means to access tax havens and avoid taxes, is it not? But if it's legal, it's legal.

You also have individuals and companies that practise this kind of tax and bank secrecy illegally elsewhere in the world. These are not everyday people with limited means. They are usually the people and companies with the deepest pockets, those that have tax experts, accountants and lawyers at their disposal and can afford such services. Your average small or medium-size business, whether it be in Hochelaga or some other riding, does not have the means to access a tax haven. Only very large companies can do that.

You are no longer at the OECD, so you have the perspective necessary to answer our questions and the opportunity—I was going to mention your wisdom—to do so. Governments talk about relying on these people's good faith, but would you not agree that these companies have everything but good faith? The U.S. situation you mentioned earlier happened in the late 1990s, but the fact remains that the Americans, who are responsible for 25% of the budget, are saying don't move too quickly. Who would suffer, other than those companies lobbying internally?

Is there not, on one hand, a group of good Samaritans involved in international talks on best practices, and on the other, a bunch of corporate bums, to use a political term from your day?

[Donald Johnston]

Corporate welfare bums was the term used.

To some extent, you are right. Otherwise, as I explained, we would not be taking an in-depth look at how to solve the problem right now. That does not mean we should do away with all the activities that these corporations engage in, especially insurance corporations. The real issue is transparency and bank secrecy, which you mentioned. If this information were available to authorities in Canada, the United States and elsewhere, it would be possible to amend the legislation so as to change the rules of the game. That is what we have always done.

I used to be a tax expert. Back then, we would use countries such as Bermuda, but it was always done in a transparent manner. Then the government decided that it was going to apply rules governing foreign accrual property income, so as to prevent Canadians—both individuals and corporations—from accumulating income abroad without paying taxes in Canada. It was not so much a matter of activities at that time, just investments, dividends, interest and so forth. Things need to be transparent. The members of this committee will make recommendations to the government, which, in turn, will have to make some decisions. It is important to consider ways of maximizing the benefits for these corporations while doing away with abuses. So finding a balance is key.

You mentioned good faith, but we have more than that. We are now conducting audits. We are going to put pressure on corporations that do not comply with Canadian laws. We are always dealing with Canadian laws, given that no international laws govern this type of activity. So it is Canada's laws that must be enforced. And it is up to you and to federal tax authorities to enforce them appropriately.

[Daniel Paillé, Bloc, Hochelaga, QC]

There are a given number of inspectors and employees. By using a cost-benefit analysis to establish that one employee brings in $150 million, for example, we could justify the cost of hiring more staff to conduct investigations at the Canada Revenue Agency; it would be cost-effective.

As far as voluntary disclosure goes, if someone makes an investment but fails to pay the applicable taxes, that person may not be subject to any penalties or legal action if they report the violation. Do you not think that makes things too easy for the tax evader?

[Donald Johnston]

Good question.

[Daniel Paillé, Bloc, Hochelaga, QC]

It is the answer that interests me.

[Donald Johnston]

It seems to me that is for parliamentarians to decide. The flip side of that argument is that voluntary disclosures result in more income more quickly. Then you have what they call “naming and shaming”, which could be useful, but we are talking about confidential information. You discussed that with Mr. Owens. One of the provisions of this entire procedure is to view this information as confidential. There are tax evaders, but I am not quite sure what Canadian authorities say to them. I believe they are required to pay fines and perhaps the taxes on the interest that has accrued over the years, as well. I do not believe they get off the hook simply because they report that they should have paid a given amount but did not do so. Nevertheless, I am not an expert in the procedure that applies in Canada.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Paillé.

Mr. Wallace, the floor is yours.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

I want to thank our guest for being here today.

At the beginning of the meeting I mentioned to Mr. Johnston, who has written a book entitled Up the Hill , that I had read his book a number of years ago. It talks about life on the Hill, and it's a very good read; I would recommend it to anyone. You can compare it with what is happening today.

What are you doing now, Mr. Johnston? When did you leave the OECD, and what are you doing now?

[Donald Johnston]

I'm doing several NGO-type activities. But professionally I'm a consultant to a foundation in Geneva, which is focused on education, health, and the environment, with the primary focus on Africa at the moment—Liberia in particular. That's about half of my time. The other half of my time I'm back as counsel to the law firm of which I was a founder in 1973. It was called Johnston Heenan Blaikie but is now Heenan Blaikie. I'm back there, and it has offices across Canada.

[Mike Wallace, Conservative, Burlington, ON]

Thank you.

In your previous experience at the OECD, I believe, and I think in your opening statement today, you were trying to differentiate between tax evasion and tax avoidance, such that tax evasion would be illegally not paying taxes you're required to and tax avoidance would be proper tax planning to take advantage of the tax system to pay as little tax as possible without breaking the law.

Is that your view now? Was that the view at the OECD? Did that evolve while you were there? What's your position on the statement you've made in the past?

[Donald Johnston]

The attitude of the legislatures and the courts has evolved somewhat from the days of the Duke of Westminster case, which you may recall. That was an example, which was the classic case, of tax avoidance. I don't know whether any of you are tax specialists here. Then we began the role of asking what the intention was, and we know there's much more discretion given to tax authorities than in the past.

But tax avoidance.... If you contribute to an RRSP, that's a form of tax avoidance. Had you not done it, you'd pay tax on that money. When you rearrange your investments so that you can deduct your interest, that's tax avoidance. All of these issues are tax avoidance and are quite legitimate. Some, in fact, like RRSPs, are encouraged by the legislation. Others, when they become too abusive.... For example, I started the film tax shelters in Canada back in the late 1960s, and we produced some very good pictures, but that became.... Some of them were bothered by authorities, so they kept narrowing, changing, and so on to make sure that there was not tax abuse in that sector. And that's the way the law should operate, basically.

So the distinction is still, I think, quite legitimate between avoidance and evasion—evasion being fraud, really.