Finance Committee on Feb. 7th, 2013

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you very much. I appreciate that.

[The Acting Chair, Conservative, Dave Van Kesteren]

Thank you, Ms. Glover. I'm sorry, you're out of time.

Welcome back, Mr. Mai. You, sir, have the floor.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you very much, Mr. Chair.

First of all, thank you very much, all colleagues from the finance committee, for actually looking at this issue.

As well, thank you, Ms. McLeod, for having worked with us in terms of putting this forward, and also for your kind words; I've heard about them.

Thank you to the witnesses for being here today.

I'll start with you, Mr. Gillespie. I'm not sure if it was covered before, but we've brought forward the fact that we need to know how much, for instance, Canada is losing in terms of tax havens, tax evasion. For other countries, the U.S., Sweden, U.K., and Mexico are actually looking at numbers, trying to figure out how much they are losing.

Do you think it's something we should push for, and if so, do you have an amount of how much money we might be losing in Canada in terms of tax havens?

[Peter Gillespie]

Let me respond to the second question first.

Before you arrived, I was explaining that my organization really is focused on the international questions, not on Canadian domestic tax law or tax practices.

In response to your first question, when James Henry was here, who you met—he was the lead researcher on an enormous study—he suggested that Canada follow the lead of many other countries to estimate and publish what the tax gap is. Many countries, the United States for example, provide an estimate of what tax revenue authorities think they're missing. So his recommendation was that, indeed, Canada should follow that practice.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Why do other countries do that, and why is it necessary to do that?

[Peter Gillespie]

I think this is a public accountability issue. I think citizens should know as much as possible what government is raising in terms of revenues, just like citizens should know what governments are spending those revenues on. I think it's an accountability and transparency issue.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

If you go more at the international level, you've looked at the OECD frameworks with respect to the OECD model in terms of reporting. Can you maybe tell us a bit about it, or what the flaws are with respect to—

[Peter Gillespie]

The OECD model for...?

[Hoang Mai, NDP, Brossard—La Prairie, QC]

In terms of attacking tax havens when we talk about the framework that the OECD has put forth with respect to reporting and agreements.

[Peter Gillespie]

We spoke about that earlier, about the bilateral tax information exchange agreements. I think there was a general consensus amongst all of the witnesses that these are fairly weak instruments.

We have made the point that a much more robust approach would be a multilateral information exchange, modelled perhaps on the current model in the European Union. As I was explaining, these bilateral agreements are rarely used and frankly not very useful. They've been seriously criticized by virtually everybody I know.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you very much.

Mr. Rosenbloom.

[H. David Rosenbloom]

I have a specific suggestion that might actually make some sense for you to think about. I think it would make sense in this area—and probably other areas, but let's limit it to this—for a relatively limited group of developed countries to get together, maybe on an ongoing basis, to discuss these issues.

We have a lot of tax competition among countries. One of the reasons that the havens are able to subsist is that countries are lobbied by their own entities, which say that they're facing competitive pressures, etc.

So I think it would make a lot of sense—and I'm talking about fewer than ten countries, although I don't name the countries—for countries with similar kinds of issues to get together.

I don't think you can leave this to the OECD. The OECD is expanding its membership, and as it expands its membership, it becomes more and more of a lowest-common-denominator organization. You certainly can't leave it to the UN for the same reasons.

So for the developed countries of the world, to the extent that we're talking about domestic tax evasion, I think there ought to be some kind of organization. It doesn't have to be huge or cost a lot of money, but I think that ought to be an initiative worth taking.

[The Acting Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Mai.

We now go to Mr. Adler.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

I want to thank all of the witnesses for being with us today.

I do have a few areas I'd like to pursue. The first one is about the risk to global financial instability from the use of tax havens.

As we know from the financial crisis of 2008, a lot of the toxic assets of U.S banks contributed a lot to the subprime mortgage crisis. We also know that a lot of public U.S. debt is held in some of these tax havens.

Could you comment, in light of those two and other similar issues, on the risk to global financial instability, and what that would pose to an economy such as Canada's, which has really excelled and has done very well vis-à-vis G-8 countries?

I'll put it to Mr. Rosenbloom first, and then perhaps Mr. Cardamone could follow up.

[H. David Rosenbloom]

I'm not sure I'm qualified to answer that. I'm not an economist, and these macro effects are just things I read about with interest.

The only thing that I would comment on, that your question prompts me to observe, and that is I think quite interesting and worth thinking about, is the effect of huge amounts of money being siphoned out of the United States and into Ireland. Ireland, as we know, has suffered severely in the economic downturn. There was a huge bubble in Ireland.

I think the implications of what the Irish did over the past 15 or 20 years by having low tax rates, which attracted investments from abroad, a lot of them from the United States, is well worthy of study.

Apart from that, in broader terms, I'm not really in a position to comment meaningfully on your question, sorry.

[Mark Adler, Conservative, York Centre, ON]

Okay.

Tom, do you have any thoughts on that?

[Thomas Cardamone]

I'm also not an economist, and this is outside my normal focus, but I do recall that during the depths of the financial crisis in the United States, when banks were being bailed out or banks were acquiring other banks, there was a moment in which liquidity within the banking system almost seized up. There was so much unrecorded risk held offshore by some of these institutions that when they were being bailed out or acquired, it was just a completely opaque system. The bank doing the acquiring was completely unaware of what the risks...[Technical difficulty--Editor]...the bank they were buying out.

I think that in itself can probably influence a lot of decision-making on what should be allowed in the future in terms of offshore holdings by major financial institutions and how transparent those holdings are to the public and to regulators.

[Mark Adler, Conservative, York Centre, ON]

Yes. Agreed.

I'm also interested in FATCA. I know that there were a few unintended consequences of FATCA, and it is really insulting to a lot of other countries what FATCA has seemed to accomplish.

Mr. Rosenbloom, you were speaking before on FATCA. Could you comment on the negative consequences of FATCA and why it is a poor piece of public policy?

[H. David Rosenbloom]

Yes, of course.

The worst aspect of FATCA is what it did to the United States. It basically deflected large numbers of our resources into writing these incredibly detailed rules for something that's not going to produce a lot of revenue. It never made much sense to me to take people off corporate tax audits and have them writing rules for the rest of the world.

I also have severe doubts about how FATCA is going to play out. We're going to get tons of information from all over the world, but exactly who is going to read that information? When last I looked, they had one individual up in a warehouse in Detroit looking through our foreign bank account reports.

You know, I just doubt that we'll go on spending all these resources indefinitely on this.

Now, I'm sure you're not focused on that. I think most of the rest of the world is focused on the intrusion into other countries' processes, etc. I appreciate that FATCA's a very.... Nobody ever did a cost-benefit analysis on FATCA. There's a huge amount of cost required of financial institutions around the world, and there's a lot of foreign policy, foreign relations, and negative effects of FATCA, but to me it's kind of a stupid piece of legislation just within the U.S. context.

On the other hand, I want to say—and I'm a late convert to this idea—that it has gotten the world's attention in a way that nothing else previously did.

[The Acting Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Rosenbloom.

I'm sorry, Mr. Cardamone, we're out of time. Maybe somebody else will pick up on that.

Go ahead, Ms. McLeod.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

I certainly will open the floor, because I'm very interested, Mr. Cardamone, in what you have to say on FATCA.

[Thomas Cardamone]

I think it...[Technical difficulty--Editor]...focused the world's attention on this issue. I would warn against prejudging the results and the impact of this piece of legislation.

While it may...[Technical difficulty--Editor]...it is purely a transparency request. It's not regulatory. It doesn't tell banks how they should operate, just that they should report the information that they have. It's a very simple...[Technical difficulty--Editor]...information exchange piece of legislation. Whether we have the ability at this point to use that information remains to be seen. But that can always be addressed later on.

I think the fact that it...[Technical difficulty--Editor]...focused the world's attention on this issue in and of itself is a benefit. I look forward to seeing how it is implemented as time goes on.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

I would actually like to take the opportunity to build on that thought. I've heard comments from many that there should be this multilateral exchange and free flow. To some degree, I always saw the TIEAs as being precursors to something like FATCA.

Really, can you talk about how this multilateral free flow is different from FATCA so that I can perhaps understand it a little bit better, and what you're envisioning with multilateral free flow versus what the American legislation is trying to do with FATCA?

Does anyone want to tackle it?

[Thomas Cardamone]

All that FATCA has to do with is...[Technical difficulty--Editor]...holders in foreign banks, and those foreign banks have to report back to the United States Internal Revenue Service. It's multilateral in that any foreign bank that has American account holders in it has to report back to the U.S.

That's a different system from the TIEA arrangement that we were discussing...[Technical difficulty--Editor]. Those are bilateral agreements between governments, suggesting that information upon request will be provided.

We're suggesting that there should be...[Technical difficulty--Editor]...multilateral approach to government-to-government agreement, much like what is in place with the European savings tax directive.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

I recognize that TIEAs are bilateral on request. FATCA, then, becomes an automatic one-way. So is the natural evolution not just a multilateral two-way?