Thank you.
And thank you also for this invitation to provide comment on this important issue. I'll also make very brief opening remarks. I'll touch on three areas. I'll discuss what is international tax evasion, try to gauge the extent of the problem for Canadians, and then discuss possible reform initiatives.
Of course, this is quite a complex and tricky area of tax law. Tax evasion generally requires a purposeful non-disclosure of income. This is to be contrasted with tax avoidance, which really involves attempts to engage in tax planning while complying with all relevant Canadian and foreign tax laws.
I just thought I'd note up front that our Income Tax Act encourages international tax planning, encourages the use of offshore tax havens for devices like double-dip financing, where you place a financing affiliate in your tax haven.
So my comments will only focus on tax evasion and not avoidance.
What is encouraging the enhanced international tax evasion? Tax academics have focused on two particular factors: globalization and technology change. Of course, globalization is shrinking the world, bringing us closer together, encouraging a greater provision of cross-border financial services, but also, importantly, there is the technology change. We have this information technology revolution. It's making it cheaper and easier to shift funds offshore. It's leading to the development of certain financial products, like offshore credit cards. These became more prevalent around 15 years ago. If a Canadian shifts his or her moneys offshore, she can now have a Bank of Nova Scotia branch in Barbados and have a credit card issued to that bank. The credit card is used to make purchases here in Canada, but there's no paper trail because all of the invoices get sent directly to Barbados.
In terms of gauging the extent of the problem, nobody really has their head around what sorts of revenue losses we're looking at. I'm not aware of any empirical studies that try to measure this problem. That would in any event be problematic due to the fact that this is illegal and secret. These offshore havens have bank secrecy laws that make it a criminal offence to divulge financial personal information to any third parties.
For comparison purposes, a U.S. Senate permanent subcommittee, back in 2006, estimated that U.S. residents are evading between $40 billion and $70 billion each year as a result of tax evasion. So they spent a lot of time half a decade ago looking at this problem, but they also acknowledge that this estimate is quite tentative.
How much is really in these havens, not just from Canadians but from folks all around the world? Again we don't know. Estimates range from $5 trillion to $38 trillion. The latter figure is from a Boston consulting report.
I think there is some good news, and that is that when tax academics measure tax compliance and they prepare these comparative international surveys, the surveys show that the vast majority of Canadians are honest. Our tax compliance rates are among the highest in the world.
But—and I think this is in part why this committee's work is so important—there are a lot of stories, anecdotes, that suggest international tax evasion is on the rise. Page 2 highlights some of these things. I won't get into them in any detail, but our Auditor General, Sheila Fraser, in 2001 and 2002, in those reports highlighted really aggressive international tax planning, not evasion. Nevertheless it brought some attention to the issue, and subsequently there were more resources devoted to fighting the problem, resources given to the CRA and elsewhere.
Then the other stories, which I think you've heard from other witnesses, about the Liechtenstein bank, the UBS Swiss Bank, and most recently the HSBC Swiss bank, all suggest that certain Canadians are engaged in this illegal international tax evasion. We've seen a rise in audits and moneys recovered from these audits. A previous witness here from the CRA indicated that in 2009 alone, $1 billion was recovered from international activities. It wasn't clear whether that's attributable to evasion. In fact I think for the most part it's audits of aggressive international tax avoidance.
So we suspect that the problem is on the rise, and what can we do about it? Well, again, page 2 of the memo sets out a number of possible reform initiatives. I've listed them in order of what I consider to be the cheapest, most realistic options to the more difficult options. I won't touch on all of them. I'm happy to answer any questions.
The first issue is that Canada needs to ratify the Council of Europe and OECD Convention on Mutual Administrative Assistance in Tax Matters agreement. We signed it in 2004. I've been told in the past by people at Finance that legislation has been introduced on several occasions to ratify this agreement, but for reasons that of course have nothing to do with this particular agreement, that legislation wasn't passed. In any event, the agreement is not in force in Canada, and it ought to be ratified.
Another possible reform effort could involve a public education campaign that would emphasize the criminal sanctions. Possibly, we need enhanced audits and even greater resources to the CRA. The Auditor General wrote about this in her 2007 report, but then she appeared later on that year before this committee, the standing committee, and indicated that the progress was satisfactory. So there is a view that maybe there are sufficient resources. But since 2007, again, we've heard all of these stories that suggest the problem may be greater than we previously realized.
I would advocate reforming the voluntary disclosure program. I think it's generally working, but it could be tweaked. The one recommendation I'll mention up front is to have a temporary reduction in the interest penalties, and this could be done by removing a subsection in the Income Tax Act, subsection 220(3.1), I think, that indicates there can be no interest relief beyond a 10-year period. But when I talked to lawyers in Toronto and elsewhere, their clients have had these accounts, some of them at least, since, say, the 1980s and they're not getting any interest relief. So the penalty, in their view, is so large that they're not coming forward and entering into the program. Again, the purpose of the program is to rehabilitate these tax cheats, and I think there could be certain steps to reform the program.
TIEAs are one thing that has been on the policy horizon in Canada since the 2007 budget, tax information exchange agreements. It's an open question whether they'll actually work. We've been signing them. The OECD currently is in the review stage of looking at them. Many tax scholars who have written in this area suspect that they won't work, there won't be meaningful cooperation by the tax haven countries. Perhaps we ought to offer incentives to certain countries to engage in this meaningful cooperation.
The bottom of page 2: the problem could be fixed, although it may require a level of global cooperation that's currently unrealistic. In a 2001 article that I wrote—it came out in the Minnesota Law Review—I set out a potential regime using the Internet to share taxpayer information, a secure extranet among all participating tax authorities. If we got all of the fairly wealthy countries, the OECD countries, to agree to it, then if they had absolute information sharing, we could impose a withholding tax on any payments outside of these participant countries. I'm not sure, again, whether that is politically feasible.
Then, finally I thought I would highlight taxpayer privacy. I'm a tax researcher, but I've also been a member of the Queen's Surveillance Study Centre since 2001. We conducted in 2005 an international survey of 7,000 respondents in eight different countries, and the Canadian respondents indicated that they were quite worried about their privacy; in particular, they're worried about foreign governments and foreign businesses misusing or mishandling their personal information.
So this is the tricky part: we want to be aggressive and go after the tax cheats, but the other side of the equation is we need to do it in such a way that it continues to preserve their taxpayer rights, including privacy.
Elsewhere, I've suggested that a multilateral taxpayer bill of rights might actually encourage heightened information sharing among different nations, because sometimes the Canadian authorities, other tax authorities elsewhere, are reluctant to share information because they don't know how that information is going to be treated. They don't know whether that information is going to be treated in the same way that would be required by their domestic law. But if we all got together and agreed on the threshold of legal protection for taxpayer rights, it actually, in my view at least, would enhance information sharing and would help to fight international tax evasion.
Thank you.