Finance Committee on Feb. 7th, 2013

[The Vice-Chair, NDP, Peggy Nash]

Good morning, everyone.

Pursuant to Standing Order 108(2), the House of Commons Standing Committee on Finance is now resuming its consideration of tax evasion and the use of tax havens.

I wish to welcome our guests today. First, by video conference from Washington, I want to welcome Mr. Thomas Cardamone, managing director for the Global Financial Integrity organization. Welcome.

Also by video conference from New York, I want to welcome Mr. H. David Rosenbloom, from Caplin & Drysdale. Mr. Rosenbloom is also attached to New York University School of Law as the director of the international tax program. Welcome.

Here in Ottawa, I want to welcome Mr. Peter Gillespie, project director of the Halifax Initiative. Welcome.

In Ottawa, as I'm sure our guests by video conference know, we have all the sitting members of the House of Commons finance committee. The chair, Mr. James Rajotte, has asked to be excused today to attend an event outside of Ottawa, and he has asked me to chair this meeting, which I have accepted. My name is Peggy Nash. I am vice-chair of the finance committee.

I will also need to excuse myself at a later point in the meeting, and Mr. Rajotte has asked Mr. Van Kesteren if he would chair. I understand he has accepted as well.

For our two-hour meeting we'll hear first from our guests. Each will have between five and seven minutes to provide us with preliminary remarks; then we'll have the question and answer session when members of the committee will each have five minutes.

With that, we'll start with Mr. Cardamone, from Washington....

Yes, Mr. Caron.

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

I simply want to make sure that the participants in the United States have access to simultaneous interpretation.

[The Vice-Chair, NDP, Peggy Nash]

Do you have access to simultaneous translation, those of you by video conference?

[Christine Lafrance, Clerk of the Committee, Standing Committee on Finance]

Yes, they do.

[The Vice-Chair, NDP, Peggy Nash]

I understand they do. Thank you, Mr. Caron.

We'll start with Mr. Cardamone, in Washington, and then we'll move on to our following witnesses.

Mr. Cardamone, you have the floor.

[Thomas Cardamone, Managing Director, Global Financial Integrity]

Good morning, and thank you for the opportunity to appear before the finance committee today.

My name is Tom Cardamone, and I'm managing director of Global Financial Integrity. GFI is a Washington-based research and advocacy think tank promoting policies aimed at curbing the illegal movement of money across international borders, especially out of developing economies.

It is that issue of illicit money and the mechanisms in the global financial system that facilitate its movement that I'd like to discuss briefly this morning.

Despite billions of dollars in foreign aid being sent into developing economies, many developing countries fail to grow to the point that they no longer need aid. The problem is not that foreign aid is inherently ineffective, but that it is being drowned out by illicit financial outflows.

Our research conservatively estimates that from 2001 to 2010, developing countries across the world lost close to $6 trillion to illicit outflows. This means that for every $1 poor nations receive in foreign aid, $8 in illicit funds leave those countries.

This topic is of particular relevance to Canada because of its long-standing commitment to reducing poverty worldwide. Through CIDA, Canada gives billions of dollars annually to developing countries, yet its contribution is dwarfed by the amount of illicit money flowing out of those recipient nations.

For example, in 2010 and 2011 Canada provided approximately $34 million in aid to Indonesia. According to our most recent report on illicit financial flows from developing countries, Indonesia lost on average $11 billion in illicit funds every year from 2001 to 2010.

If this money had remained in Indonesia, countless infrastructure, poverty alleviation, and social welfare projects could have been implemented successfully, reducing the need for future aid.

How does this happen? In developing countries, where governance can be weak, trade-based money laundering, tax evasion, black market transactions, bulk cash movements, smuggling, and corruption are among the mechanisms used to facilitate illicit capital flight. The underground economies of developing countries in general promote weak governance, which in turn cyclically strengthens the underground economy.

As these illicit activities increase, governments have more trouble generating revenues for such important basic services and public investments as schools, hospitals, and roads.

The illicit movement of money from developing countries is actively facilitated by tax havens, which also function as secrecy jurisdictions for criminals, tax evaders, and corrupt public officials. Secrecy services may include anonymous shell corporations and trusts, laws that protect the secrecy of bank accounts, and institutions that will take any business, no questions asked.

Another major source of money leaving developing countries comes from abusive transfer pricing, which is used by multinational corporations, or MNCs, to avoid taxes. Multinational companies use abusive transfer pricing to move revenue offshore, in order to increase profits declared in low-tax jurisdictions, while decreasing profit in the high-tax jurisdictions where they actually earned the money.

This is according to a November 2012 report by the OECD:

While these corporate tax planning strategies may be technically legal and rely on carefully planned interactions of a variety of tax rules and principles, the overall effect of this type of tax planning is to erode the corporate tax base of many countries in a manner that is not intended by domestic policy.

As a first step toward solving this problem, Global Financial Integrity advocates for country-by-country reporting of sales, profits, taxes, number of employees, and costs for all multinational corporations. This method of presenting disaggregated financial statements would shine a light on the massive amount of money that MNCs claim they make in tax havens. Trillions of dollars are kept in tax havens by MNCs in order to avoid paying higher tax rates in home countries. This resulting tax revenue loss hurts both developed and developing countries.

In order to combat corruption in international aid and investment, and ultimately decrease the amount spent on aid, Canada can adopt a few measures.

The United States Foreign Account Tax Compliance Act—FATCA, as it's known—requires banks to find American account holders and disclose their balances, receipts, and withdrawals to the Internal Revenue Service in the United States or be subject to a 30% withholding tax on income from U.S. financial assets held by the banks.

Canada could implement its own version of FATCA, and use it to pressure banks in tax havens to automatically share tax information with Canadian authorities, to prevent cross-border tax evasion by individuals. Automatic exchange of tax information between Canada and the United States has existed for years and works very well.

In order to combat anonymous shell corporations, which are another tool used to hide and launder funds, the government should require that every corporation or trust created in Canada be required to provide substantial beneficial ownership information about the true owners of the entity.

Furthermore, Canada should advocate at the G-8 and G-20 for a strong international beneficial ownership standard. In order to help developing countries immediately, Canada could also consider providing technical tax assistance to its aid recipients. This would help train local authorities while making Canada's aid donations more effective.

Ultimately, we must ask ourselves why so many countries still require foreign aid 50 or 60 years after independence—50 or 60 years after the IMF and World Bank were established. Shouldn't the development challenge have been solved by now? Something is clearly not working.

Developed nations such as Canada should provide the tools developing countries need to help grow their economies. But that can't happen unless there is also demonstrated leadership in the G-8, G-20, and OECD to address the corrosive policies that permit opacity in the global financial system to continue unabated.

Until there is greater transparency in the global financial system, illicit money will continue to be siphoned out of developing country economies by the hundreds of billions of dollars.

[The Vice-Chair, NDP, Peggy Nash]

Mr. Cardamone, can you wrap up? You have about 15 seconds, please.

[Thomas Cardamone]

That's all I have left?

[The Vice-Chair, NDP, Peggy Nash]

That's all you have left, I'm afraid. But we'll have more time in the questions.

[Thomas Cardamone]

Once lost, those funds rarely return to the country of origin. They flow into offshore spaces where they are hidden, laundered, and held for the benefit of a select few. That is not a viable model for development.

Thank you once again. I look forward to your questions.

[The Vice-Chair, NDP, Peggy Nash]

Thank you very much. Again, we'll have more time in the discussion afterwards.

Now we'll go to New York and to Mr. Rosenbloom.

You have seven minutes, please.

[H. David Rosenbloom, Caplin and Drysdale, New York University, School of Law, As an Individual]

I thank the committee for the invitation to make this presentation.

My name is H. David Rosenbloom. I am private a tax attorney and a professor of tax law at New York University's School of Law.

I have specialized for nearly 40 years in international or cross-border taxation. I direct the international tax program at NYU law school, and in the 1970s I was the International Tax Counsel in the United States Treasury Department. In that capacity, I was the chief U.S. negotiator of the 1980 Canada-U.S. Income Tax Treaty.

A colleague of mine, Scott Michel, testified before this committee about a year ago on the subject of offshore banking and undeclared accounts. That topic is a bit different from what I’m going to focus on today, because it’s both narrower and broader. The topic of tax evasion and the use of tax havens is much broader than simply offshore accounts and banking. On the other hand, offshore accounts and banking extend beyond tax havens.

So I’m taking the words at face value. I didn’t have much guidance on what the committee is interested in, so I prepared my own very succinct views on tax havens. I’m going to offer five observations about tax havens and tax evasion. I'll elaborate on any or all of these if the committee wishes.

First of all, the link between tax havens and tax evasion does not need to be made. It’s very clear. As I say in my written testimony, no one is deflecting income to Japan. The money is going from high-tax jurisdictions to low- or no-tax jurisdictions, so I don’t think there’s any effort needed to be made to make that link.

Secondly, in my view, the responses of the developed world to the use of tax havens for tax evasion has been pretty pathetic. It’s ranged from the catatonic, totally passive, to the contributory, helping tax evaders to use tax evasions. I don’t think taxation is a game, and I think that most governments in the developed world have not been faithful to their obligation to their citizens in their responses to tax havens and the role they play in tax evasion.

Third, the most difficult aspect of analyzing tax havens is identifying precisely who we are talking about. We all know that some countries have low or no income taxes and that some countries actively seek to entice investment from higher-taxed countries. But there is a range of countries—and I cite specifically in that regard Ireland, Singapore, Luxembourg—that are tax havens in some sense, but that also have genuine economic activity within their borders. And there is a larger group of countries that afford special benefits to foreigners in an effort to persuade them to use these countries as conduits for investments in third countries. Think in that regard of Switzerland, the Netherlands and, yes, in certain circumstances, the United States.

Fourth, I think it is self-defeating for a developed country with a rational tax regime to pretend that all other countries stand on the same footing insofar as it is concerned. There is a difference between Germany and the Cayman Islands. Tax havens need to be dealt with separately, both in the internal tax system and in considering which countries are proper candidates for the status of tax treaty partner.

Finally, I think a systematic review of the rules relating to cross-border activity is called for, with an eye to special rules and a special approach to tax havens. Whether this is in the form of a white list or a black list, or something else, at the end of the day does not matter. The point is that across the board, in internal law and in the treaties, the havens need to be singled out.

No country should be in the business of telling other countries what to do with their tax regimes or what they should look like. I am not suggesting that any country wishing to maintain low tax rates must change its policy or that any other country should be in the business of telling such a country to change its policy.

However, every country has the right, and indeed the duty, to protect its own tax base with rules that fit the real world and not some imaginary or ideological fairy tale. Tax havens exist. They need to be addressed.

Now finally, I am not a Canadian, and although I know something about the Canadian tax system, I am by no means an expert. My comments are general, and of course they're influenced heavily by my background with the U.S. tax experience.

I thank you for your attention and I'm prepared to respond to any questions that the committee may have.

[The Vice-Chair, NDP, Peggy Nash]

Thank you very much, Mr. Rosenbloom.

Our third witness is here in Ottawa.

Mr. Peter Gillespie, I will pass it over to you, You have up to seven minutes.

[Peter Gillespie, Project Director, Halifax Initiative]

Thank you and good morning.

Just as a note, the Halifax Initiative, the organization I am with, is a coalition of Canadian NGOs, labour, and faith-based groups, and we focus on international economic issues.

Personally, I am not a tax attorney. I have spent the last 30 years of my life working with anti-poverty organizations in Asia and Africa, and thus my comments today will focus largely on the role of tax havens in facilitating tax losses from developing countries. Tom has certainly already spoken about that.

I will also comment on the part that Canada can play to promote transparency in international finance.

As my colleague Tom said, tax havens are essentially secrecy jurisdictions, and these jurisdictions enable people or entities to escape the laws, rules, and regulations of other countries.

I know that some of you met James Henry when my organization brought him to Ottawa last November. Mr. Henry conducted a major piece of research into how much individual wealth has been channelled through offshore tax havens. That study estimated that $21 trillion to $32 trillion of the financial wealth of individuals from 139 low- to middle-income countries has been channelled tax-free through more than 80 offshore tax havens. This represents tax losses to these countries of almost $200 billion a year.

Colleagues at the University of Massachusetts have found that $700 billion fled 33 sub-Saharan African countries between 1970 and 2008. This means that sub-Saharan Africa is a net creditor to the rest of the world, its foreign assets far exceeding its foreign debts of about $175 billion. A significant proportion of these assets is in the hands of individuals.

In 2007 African high-net-worth individuals had offshore assets of $1 trillion. As my colleagues have said, tax havens also provide opportunities for multinational companies to reduce or eliminate their tax obligations. By establishing subsidiaries in tax havens, they can transfer profits from high-tax to low-tax jurisdictions. A recent study by Christian Aid calculated that between 2005 and 2007, transfer mispricing shifted $8.5 billion out of the world's 49 poorest countries, resulting in tax losses of $2.6 billion over that three-year period.

An African colleague of mine was speaking at a conference this week in South Africa, and he asked, “How is it possible that a company with 3,000 employees in Malawi and three employees in the Cayman Islands can attribute 70% of its profits to the Cayman Islands?”

The deputy finance minister of Zambia said a month ago that most international mining companies operating in Zambia report that they're unprofitable and thus pay no corporate income tax. He reckons that his country loses $2 billion a year due to profit-shifting. He said, “That money could build a lot of hospitals and schools.”

This reality has deadly outcomes for poor countries. It reduces the capacity of poor countries to finance essential public services. It contributes to higher child mortality rates—there's research on that—and it undermines development assistance from countries like Canada.

So we have four propositions, some of which Tom has already alluded to.

First, we believe that a multilateral framework for the automatic exchange of tax information needs to be established, requiring all governments to collect data from financial institutions on income paid to non-residents, corporations, and trusts.

Second, we need to put an end to the secrecy provisions that provide anonymity to individuals and companies. The beneficial ownership, control, and accounts of companies, trusts, and foundations should be on the public record.

Thirdly, we believe—Tom mentioned this—that transnational companies should be required to report all of their financial transactions: sales, purchases, labour costs, financing costs, taxes, and value of assets on a country-by-country basis. This would reduce the ability of corporations to shift profits to low-tax jurisdictions and costs to high-tax jurisdictions. We have made submissions on this issue to the International Accounting Standards Board.

Lastly, we support the call of many developing countries to transform the UN tax committee into an intergovernmental commission, a proposal that Canada has to date opposed. International tax policy has been dominated by the OECD, an association of 34 wealthy countries. Developing countries want an international forum where their needs and interests on tax matters are represented.

We believe that Canada should be a leader in the G-8, the G-20, the OECD, in promoting transparency in finance and in promoting tax compliance. Prime Minister Cameron has said that corporate tax avoidance will be a priority agenda item during Britain's G-8 presidency this year, and we hope that Canada will support and engage in that initiative.

Our proposals are ambitious, but the stakes are high. If these massive outflows from developing countries can be curtailed, it could lead to major improvements in the lives of millions of poor people.

Thank you.

[The Vice-Chair, NDP, Peggy Nash]

Thank you very much, Mr. Gillespie.

Thank you to all of the witnesses for your testimony.

We'll now move to our first round of questioning, and we'll start with Mr. Rankin.

You have five minutes.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Chair.

I want to thank Mr. Cardamone, Mr. Rosenbloom, and Mr. Gillespie for excellent and thoughtful summaries.

With the time available, I've so many questions, I don't know where to start. Perhaps I could pick up something that Mr. Gillespie ended with, and that is the issue of secrecy provisions.

I guess your suggestion was that beneficial ownership should be known on the public record.

I invite Mr. Cardamone and Mr. Rosenbloom to reply as well, if possible as well.

Where are we with secrecy laws? What are the best practices from elsewhere in the world? Are there reforms in the United States or elsewhere we might learn from as we address the whole issue of secrecy?

Maybe I could ask you, Mr. Gillespie, to start.

[Peter Gillespie]

Well, I think the tax attorney may have a far more profound answer than I.

[Murray Rankin, NDP, Victoria, BC]

All right.

Mr. Rosenbloom, would you be able to comment on where we are with reforms in banks and secrecy, and best practices Canada might learn from?

[H. David Rosenbloom]

Yes, of course.

I think there's a long tradition of secrecy of tax information, and there are reasons for it. Tax administration in my country and in many countries depends on achieving a certain level of willingness of the taxpayer to comply with the laws, and it is thought that if secrecy were breached broadly, that would be a deterrent to appropriate compliance.

We had a blip of discussion of whether that kind of thinking was equally true at the corporate level as at the individual level. That came about I would guess about ten years ago. I haven't seen anything on it in quite a while.

My own judgment is that there is probably something to be said for a serious examination at the corporate level, and perhaps at the trust level as well, to making more information publicly available. I think I would be not at all confident that doing that at the individual level would be.... Although it might be equally desired, I think that might have more deleterious effects.

So I think you have to be careful because there are reasons for secrecy. Secrecy didn't just originate for no reason whatsoever. There are tax administration reasons why we maintain secrecy of information generally, but I think they're applied more broadly than is probably necessary.

[Murray Rankin, NDP, Victoria, BC]

Mr. Cardamone, do you have any comments on the issue of secrecy and best practices?

[Thomas Cardamone]

Thank you very much.

It seems that the discussion is not about public dissemination of tax records but more specifically about public transparency of the ownership of companies and trusts. That's the key point here.

The specific question was, are there best practices? I don't know where there are: certainly not in the United States. It's been estimated that for some two million companies in the United States no one knows who owns those entities. These are probably SMEs. They certainly aren't multinational corporations, of course, but small to medium-sized companies, and when they are incorporated, they are incorporated using an incorporation agency, a buffer between the actual ownership of that entity and the public. No one knows. The state doesn't know who owns the company, and that's a problem.

Viktor Bout is an infamous international arms dealer who was just prosecuted in the United States last year. He had over a dozen shell corporations in the United States, in Florida and Texas, that he used to help launder profits from arms sales around the world. That's just one of numerous examples that I could provide to you of the adverse effect of having this secrecy in...[Technical difficulty—Editor]. These are not tax forms we're talking about; it's just who owns the company. I think that's the specific issue we're trying to get at today.

[Murray Rankin, NDP, Victoria, BC]

Thank you.

[The Vice-Chair, NDP, Peggy Nash]

You have 10 seconds, Mr. Rankin.

[Murray Rankin, NDP, Victoria, BC]

Does that include their response?

[Voices]

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