Evidence of meeting #103 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was havens.
A recording is available from Parliament.
Managing Director, Global Financial Integrity
Are you suggesting that foreign countries would ask American banks to report back to them, when American banks have account holders from those countries? Is that the suggestion?
Conservative
Cathy McLeod Conservative Kamloops—Thompson—Cariboo, BC
No. What I'm asking is how you would differentiate that in terms of what you were suggesting in terms of multilateral flow of information.
Managing Director, Global Financial Integrity
FATCA is sort of a step in the right direction. It's not an agreement, of course, between governments, as we're suggesting should be in place, like the European savings tax directive...[Technical difficulty--Editor]...a requirement put upon foreign banks to have American account holders.
Caplin and Drysdale, New York University, School of Law, As an Individual
Actually, I think FATCA is evolving toward an intergovernmental system, because FATCA, as drafted, really doesn't work very well. It's just incredibly intrusive.
The United States has developed several models of intergovernmental arrangements, and it's negotiating currently with more than 50 countries. I think it's probably already negotiated with Canada. I haven't followed it on a day-to-day basis.
This is not contemplated by the legislation. The Internal Revenue Service, commendably, has converted FATCA into more of an intergovernmental arrangement.
As to whether it would work on a multilateral basis, I have some real doubts. It's very expensive for financial institutions to comply with. And if you had to comply with similar legislation throughout the world, with all countries asking banks, I think it would be quite a burden.
On the other hand, you could argue that it's one of the reasons why FATCA is a poor piece of legislation. If you pass a piece of legislation that you don't want to have coming in your direction, that's a suggestion that the legislation had some defects to begin with.
NDP
Murray Rankin NDP Victoria, BC
Thank you, Chair.
I'm going to direct this question to Mr. Rosenbloom, taking you up on your comment where you said that you've resisted simple things you can do to protect the U.S. tax base from tax havens.
I know there have been a couple of recent bills in the U.S. Senate: Senator Levin's bill on tax havens, and just recently Senator Sanders has a bill as well.
Are there any things that those might give us, any ideas of best practices to protect our tax base? Are there any ideas from there, or any ideas you have on that subject?
Caplin and Drysdale, New York University, School of Law, As an Individual
I actually think that what I said earlier, about forming some kind of a group of similarly-minded developed countries, is the most positive thing you can do.
Some countries have blacklists, some countries have white lists. But the bottom line, when I speak of something simple, is developing rules that are targeted to tax havens.
I said this earlier, but let me make it very clear. We have a set of transfer pricing rules that we apply to the entire world. So we divide the world into two parts: the United States and everywhere else. That, to me, is foolish. That means that we need to have the same rule when a transfer pricing situation arises with a tax haven that we have when it arises with Japan. That doesn't make sense to me.
We can be a lot less concerned about transfer pricing abuses between Japan and the United States than between the United States and, say, the Cayman Islands.
When I say “simple”, I think we—and I don't say Canada, because I don't know—we ought to take a look at our law with a view to having special rules targeted to the havens. But rather than anything substantive like that, the best procedural step would be to organize a group of countries' technical experts to exchange best practices. I think that would make a lot of sense.
NDP
Murray Rankin NDP Victoria, BC
This is a question, then, for Mr. Cardamone.
Back to the question about the transfer pricing, I think a suggestion you made was that on a country-by-country basis we should compel multinational corporations to produce information. Presumably under Canadian law if we were to do that, we would require in our tax act a number of things that must be reported.
But is that enough? Is that just more information that's put on a shelf somewhere, or do you think there should be basic rules in the tax code to address abuses?
Managing Director, Global Financial Integrity
Certainly there should be rules in the tax code that would address abuses or close loopholes, primarily. I think that's a key thing.
Mr. Rosenbloom suggested before that very few multinational corporations get into legal trouble in the tax area, because they understand what the rules and the laws...[Technical difficulty--Editor]...go right up to the line, and many times they don't go over it, but the problem is where the line is.
In effect, legal regulations enable tax avoidance to a significant...[Technical difficulty--Editor]. Statutory changes or regulatory changes could be implemented to close those loopholes as they address offshore holdings, tax haven holdings...[Technical difficulty--Editor]...go a long way to capturing some of the tax revenue that's due to these governments.
NDP
Murray Rankin NDP Victoria, BC
In Canada there's a rule called GAAR, which is the acronym for the general anti-avoidance rules. So you can look at a transaction and, after the fact, assess whether it's over the line of tax avoidance into the line of tax evasion. In our system, the IRS equivalent, the CRA, has the ability to impose taxes if they think it's one of those type of rules.
I don't know if the American system, Mr. Rosenbloom, has something similar to that. But if so, would this be an area that could be expanded to cover inappropriate transfer pricing and the like?
Conservative
Caplin and Drysdale, New York University, School of Law, As an Individual
I think it's basically separate from transfer pricing. We do not have a GAAR. I'm quite familiar with both the Canadian GAAR, the New Zealand GAAR, and the Australian GAAR. There are problems with GAARs, because although they sound wonderful in general, you still need standards for what is abuse. I mean, the GAAR doesn't exempt you from having to think through the application of the rule in particular cases.
We have economic substance in our law. We have the rule that transactions will be disregarded unless they have economic substance.
It used to be a purely judge-made law. It came out of our courts and was around for probably 60 or 70 years. It was enacted into our Internal Revenue Code in March of 2010 as paragraph 7701(o) of our Internal Revenue Code. We'll see; it's too early to see how that's going to play out.
But I think it is, certainly in your terms, similar to a GAAR.
Conservative
The Acting Chair Conservative Dave Van Kesteren
Thank you, Mr. Rankin.
Mr. Del Mastro, welcome. You're on, sir.
Conservative
Dean Del Mastro Conservative Peterborough, ON
Thank you very much, Mr. Chairman.
I want to thank all the witnesses for appearing here today.
Mr. Rosenbloom, I'm very familiar with your work. When I was a university student studying finance and accounting, obviously one of the things we would focus on a lot, especially in senior tax accounting, was tax avoidance.
Lawful tax avoidance is, frankly, something that corporations and individuals practise regularly. Everyone in this room has practised tax avoidance when they claim their basic personal exemption, when they claim charitable tax receipts. When they claim any of these things on their returns, they are in fact practising tax avoidance.
Corporations do the same. I was happy to hear you point out that corporations largely, and I would say overwhelmingly, abide by the tax laws. I watched your last election with great interest, and I heard an awful lot of commentary about corporate tax rates and personal tax rates on higher-income earners in the United States, tax rates on dividend income, and so forth.
One of the examples I heard time and time again is that General Electric, which is a large employer in my riding, earned about a billion dollars last year and paid no taxes. I don't think anybody was suggesting it did anything illegal, but I do think it's an illustration of a tax code that could be, and frankly should be, simplified.
I think if we're going to try to bring this committee back to something that would be an actionable item—because I think you've correctly pointed out that we've touched on so many issues that I'm not quite sure how we would actually put anything into effect—doesn't it makes sense if we start from the ground and ask how we actually start with a functional tax system, whereby we can actually have the outcomes we want, if people are concerned about tax avoidance? The U.S. tax code is so complex and there are so many exceptions to the rule that I think that's why you need more people at the IRS, because these rules are complex and wide-ranging.
What would you say to that?
Caplin and Drysdale, New York University, School of Law, As an Individual
Well, you've said a lot. Let me start out by saying that I have always admired, insofar as I understand it, the Canadian system. It does seem to be a lot better from a policy standpoint, and I've participated in various policy discussions in Canada about the Canadian system.
Our system is no model for anything. Let's be very clear about that. But we have the factor of politics, and of course tax is just a white-hot subject in the United States and has been for pretty much my entire professional lifetime. I have told people that if you put me in a room with seven people of my selection, which would include a number of business people, I could come out of that room with a functioning tax system that would be fair and a lot simpler, but that's not the way our Congress operates and I have no influence on that whatsoever.
You're quite right in your suggestion, in what I take to be your suggestion, that the more complexity you have in the law, the more opportunity there is for tax avoidance. But this hearing is not focused specifically on avoidance generally but on tax havens specifically, and in that area I do have some specific ideas for what the United States could do to improve its performance, even given the Internal Revenue Code as it stands—that is, to address tax havens as a specific subject.
Conservative
Dean Del Mastro Conservative Peterborough, ON
You mentioned a couple of times that not all transfers are equal. Obviously I agree with that. Corporations frequently transfer money for investment in various countries; they do so in a way that, again, makes their operations more efficient, and that means they are more effective in hiring people.
I guess the question is this. You've cited a number of different places and asked which countries we are talking about.
Which countries, in your view, are we talking about? I think that's very important. There's a difference between a no-tax and a low-tax jurisdiction.
Obviously there is quite a bit of difference, so where should we be zeroing in on?
Caplin and Drysdale, New York University, School of Law, As an Individual
That's the hardest question of all.
I think we all know what the clear havens are. They range from the Cook Islands in the Pacific, which is not used much by our people, down to the Caribbean, where there are multiple islands. There are lots of zero- and very-low-tax places in the world.
In my experience, those places are not used so much by corporations. Another distinction that needs to be made here, by the way, is between individual avoidance or evasion and corporate avoidance or evasion. They're really two different subjects.
You're not going to find most of your public corporations steering huge amounts of capital through the Cayman Islands, because they fear the reputational risk among other things. But if you're going to get serious about havens, you have to at least ask yourself what you are going to do about Ireland, what you are going to do about Singapore, what you are going to do about Hong Kong, and what you are going to do about Luxembourg, because those jurisdictions are used by the multinationals and there's a lot of money coming out of the developed countries and going into those.
I think the starting place is to identify what you're talking about, and again, I think it probably is not a great idea for any one country to try to do it on its own. I really think that is a best practices kind of question.
Conservative
The Acting Chair Conservative Dave Van Kesteren
Thank you.
Mr. Cardamone, we're out of time, so maybe you can get in on another round.
Next up is Ms. Sgro.
Liberal
Judy Sgro Liberal York West, ON
Thank you very much.
Again, the information continues to be very valuable.
I think very often we try to do too much. Focusing specifically on tax havens would probably be the way to go. So as we talk about different ways of just how things can be successful, clearly FATCA gives you some real cause for dismay.
But you also mention the importance of developed countries exchanging information on an ongoing basis. Since 2004 Canada, and the U.S. of course, have been part of the Joint International Tax Shelter Information Centre. I see that you're familiar with it. You have the U.K., Australia, France, China, South Korea, and Germany set to join.
I gather from your comments that this kind of working group is probably the best way to go.
Caplin and Drysdale, New York University, School of Law, As an Individual
I think something like that ought to be replicated among developed countries, but perhaps not with always the same countries in the group.
My comments reflect a certain feeling that the way in which the OECD has been going, which has been to broaden its membership, makes it less useful to a developed country than it used to be. I've said that many times recently.
I would like to see working groups get together in a much less formal way, because my concern is competition among countries. I think countries competing with each other will drive down tax rates, particularly corporate tax rates, to the point that countries are going to starve themselves of revenue.
Liberal
Judy Sgro Liberal York West, ON
Mr. Cardamone, do you want to add anything to that? Is that the way we need to go?
Managing Director, Global Financial Integrity
I think he's right. There is a race to the bottom as far as tax rates go, and it is something that needs to be addressed on a multilateral basis.
The G-8 is a perfectly good place to try to do it. That's not the only place, of course, but it's always better to...[Technical difficulty--Editor]...these things on a multilateral basis than any one country, no matter how large they are, trying to go it alone.
Liberal
Judy Sgro Liberal York West, ON
That's been mentioned a couple of times. Maybe that is an avenue for us to go.
Mr. Gillespie, the role of the UN on this committee that they have, the one with experts on international cooperation on tax matters; we know that's an important issue, but what additional mandates should they have. and what resources do you think that committee needs in order for it to have any teeth and any success in the direction it's going in?
Project Director, Halifax Initiative
Well, the G-77 plus China have proposed for a number of years that.... Essentially, it's a committee, and they have proposed that it become a commission with representation from different interests around the world. They feel that the OECD does not represent their interests. They also feel that the tax committee currently is dominated by developed countries and that it should be more democratic and representative.
I'm not sure I agree with Mr. Rosenbloom's assertion that there should be a small group of countries getting together to try to sort out all of these difficulties. I think there needs to be a democratic process where all interests are at the table. One of the most contentious issues, of course, is the OECD's transfer pricing guidelines, which developing countries do not see as workable or in their interests.
Developing countries feel that the current system restricts their taxing rights. So they want to be at the table and they want to have a say. Now, that's already happening in small groups. I mean, the BRICs are debating these, of course, and coming up with different proposals. However, I think it's really important there be a forum, a space, where developing countries can feel their interests are being asserted.