Thank you.
Thank you for the opportunity to appear before this committee to give my thoughts on the role that offshore financial centres play in the Canadian economy.
I apologize for not being able to travel to Ottawa, but I have several other commitments here in Toronto today that I could not rearrange.
I am a professor at the Rotman School of Management in the University of Toronto. I have been a professor at the university since 1995. I have written extensively on Canada's competitiveness and the role of international trade, foreign direct investment, and, as well, the role of offshore financial centres.
These writings include academic articles and studies written for the Department of Foreign Affairs and Industry Canada. I have shown empirically that the use of these offshore financial centres by Canadian companies to access the global economy has in fact enhanced the competitiveness of those Canadian companies, and that's enhanced Canada's exports, employment, and investment levels.
The impact on tax revenues to the Canadian government as a result of the use of offshore financial centres by Canadian companies is by no means clear. It is incorrect to assume that tax revenues flowing to the Canadian economy are lower as a result of the use of offshore centres by Canadian companies.
There are many positive effects that result from the use of these offshore centres that enhance Canadian tax revenues. For example, when Canadian companies operate in the global economy, they are more competitive because of the lower tax they have to pay on repatriating those profits to Canada. When those profits return to Canada, they are ultimately paid out to shareholders of these widely held Canadian companies.
When shareholders receive a dividend payment, they in fact pay tax on that income. Similarly, when Canadian companies do very well in the global economy, that enhances access for Canadian exports. It increases head office functions within the Canadian economy and so on. So the net impact on tax revenue in Canada is by no means clear.
I can elaborate on this later if you would like, but I think it's incorrect to assume that the effect on tax revenues is negative, because that has not been shown to be the case. The abuse of these jurisdictions by individuals or organizations to hide income or assets from legitimate tax authority has resulted in a negative view of all such jurisdictions.
Let's be clear: the use of these jurisdictions by any organization to evade paying taxes that should be paid is illegal and such organizations should be prosecuted. But as in the case of purely domestic scenarios, taxpayers have the right to arrange business affairs in such a way as to minimize the tax burden by legal means. Tax minimization does not mean tax evasion.
There will also be those international investors who use creative ways to reduce taxes owed to legitimate tax authority, and in that sense, OFCs are the same or are no different from what we see in a purely domestic environment when people use these creative ways.
So there are benefits that do flow from the use of offshore financial centres by Canadian companies. The use of offshore centres for illegitimate purposes is minimized when there are agreements on transparency and the exchange of information between such jurisdictions and home economies. As is clear from the OECD's most recent list, many, but not all, jurisdictions have in fact moved in the direction of enhanced transparency and disclosure.
There are also benefits that flow from transparency and disclosure of information that I must highlight. The greater the transparency and disclosure of information between, for example, Canada and any particular offshore financial centre, the less likely bad things are going to happen and the more likely that the OFC is being used for a legitimate purpose that serves to enhance the competitiveness of the Canadian economy.
Canadians have a love-hate relationship with foreign investment, but there are a lot of benefits that come when we have foreign investment in the Canadian economy, including the impact on employment, on earnings, on productivity, on capital formation, and on the ability of Canadians to tap into global supply chains. But these benefits are up against the whole issue of hollowing out the Canadian economy. That's on the inward side.
What many Canadians are unaware of is that Canada now has more investment abroad than there is foreign investment in Canada. Canadian companies continue to expand globally at a faster rate than foreign companies are coming into Canada. Today we have about 20% to 25% more investment abroad than there is foreign investment in Canada.
The Government of Canada's website states that direct investment abroad by Canadian business is part of its strategic effort to increase market share and stay competitive in foreign markets. Companies are increasingly using outward investment to strengthen their operations, penetrate new markets, and acquire new technologies, resources, and skills. Over one-third of global trade is in manufacturing and is undertaken between related parties; hence the role of multinationals is even more important. In short, Canadian investment abroad has enhanced the competitiveness of the Canadian economy.
When you dig down into the data, you see about 20% of the investment abroad is actually going through offshore financial centres.
The objective of the research I have done is to go beyond the view that simply because there's a tax advantage associated with using these offshore centres, somehow they're bad.
What are the positive effects of using these offshore financial centres? Offshore financial centres represent conduits for Canadian businesses to gain access to the global economy. This point is important. It allows Canadian companies to go into less traditional, more risky and emerging markets, and to diversify away from the U.S. market. Given the current environment, that's incredibly important.
Canadian companies experience a reduction in the cost of capital when they use these offshore financial centres, and hence they're more competitive when they operate globally. This improvement in the competitiveness of Canadian multinationals generates many gains for the Canadian economy. Limiting the ability of Canadian companies to access the global economy using these offshore centres would significantly impede their competitiveness and would have, in my opinion and supported by my research, a negative impact on the Canadian economy.
One piece of research that I'm currently working on but which I have not yet finished, and I think the speculation is very important for this committee's deliberations, is the following. When Canadian companies use offshore financial centres for legitimate purposes to access the global economy, there are lots of gains that come back to the Canadian economy. When these offshore jurisdictions are used for illegitimate purposes, I don't support that. I think people who use offshore financial centres to evade taxes should be prosecuted.
It is my speculation that the more enhanced transparency and disclosure is between Canada and any particular jurisdiction, the more likely the activities taking place in those jurisdictions will in fact be legitimate and therefore will generate significant benefits to the Canadian economy.
To summarize, there are many benefits that flow to the Canadian economy when our companies use offshore financial centres. Any moves to enhance transparency and exchange of information are likely to be positive and good for Canada, as long as they do not limit the ability of Canadian companies to use these jurisdictions for the legitimate purpose of accessing the global economy with the reduced cost of capital and hence be competitive relative to corporations from other jurisdictions that have access to similar financing structures.
Thank you very much.