Finance Committee on Feb. 7th, 2013

[Peter Gillespie]

Absolutely. There are many opportunities to do that.

Just to follow up on my colleagues' comments, one of the limitations of tax information exchange agreements is that often a country that is trying to track down information in another jurisdiction has to have a very well-developed case. They have to know the name of the person before they can make their request. No fishing expeditions are allowed, in a sense.

So they are a very, very limited tool, and we have been advocating, you're right, for many years that a multilateral process should be put in place. The European Union has a model that apparently is working, although there are challenges to that model. Switzerland is not part of that, for example.

But yes, I think this is the only approach that's workable.

[Judy Sgro, Liberal, York West, ON]

Are there specific areas there that you think we should be focusing on?

[Peter Gillespie]

I don't understand the question.

[Judy Sgro, Liberal, York West, ON]

In a sense, for the whole issue of a multilateral approach, are there any specifics you want to add to that?

[Peter Gillespie]

This needs to be debated at the G-20. I hope Canada would take that forward into the G-20.

There's a big debate about the tax agreements in Europe, for example, between the U.K. and Switzerland. There are real concerns among tax activists that in fact what is happening in those—they're called Rubik agreements—is that anonymity prevails. The Swiss government is saying that they will provide almost a withholding tax to the U.K. for British residents who have accounts in Switzerland, but it's all anonymous. The names will not be shared.

[The Vice-Chair, NDP, Peggy Nash]

Thank you very much, Mr. Gillespie.

Now over to Mr. Hoback.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Chair.

Welcome, gentlemen. It's nice to see you here this morning.

Again, there are so many things to talk about. When you talk about tax evasion or tax havens, where do you start and how do you focus on one thing?

I think I'm going to talk about the transfer tax. Do you have any advice you can give to us as to how to properly handle that?

When you look at transfer taxes, there are many reasons that companies go about pricing different products in different countries. The assumption that they use cost of production as a tool for pricing is not a fair assumption anymore. You'll see companies that will look at the market in a certain area, let's say in the U.S., and say, “Based on the competition, we need to be priced at this level.” They take that same product into Brazil, look at the competition, and say, “Now it can be priced at this level.”

What suggestions do you have for us to look at when it comes to transfer taxes and stuff like that?

Maybe I'll start with you, Mr. Cardamone.

Mr. Rosenbloom, I'd be interested in your comments on that, too.

[Thomas Cardamone]

It is a very difficult problem to address when you're talking about intangibles like services or software. How do you price those particular things? It's a growing issue. It's one...[Technical difficulty--Editor].

I want to say at the beginning that transfer pricing is a legal mechanism. It's the abuse of that process, abusive transfer pricing, that's the problem.

It comes down to, at this point, the audit teams deciding how aggressive the firm has been and whether it's stepped over the line. It certainly is a difficult...[Technical difficulty--Editor]...but I would probably defer to Mr. Rosenbloom, a tax attorney, who could probably talk about it a little bit more clearly than I can.

[The Vice-Chair, NDP, Peggy Nash]

Go ahead, Mr. Rosenbloom.

[H. David Rosenbloom]

Yes, I am quite familiar with transfer pricing. I've taught full semester courses on it for several years. I haven't done it recently, but I do a lot of transfer pricing work myself.

Let me first of all describe what we're talking about. Transfer pricing refers to the price charged between commonly controlled entities. The reason we have a concept of transfer pricing is that when you're dealing with related entities, related persons, there's no market friction. You can't rely on the fact that one person wants to get the most and the other wants to pay the least because they're all under the same economic control, and therefore there is the availability of the possibility of manipulating prices for tax purposes. That's why we have transfer pricing.

Transfer pricing has a two-edged sword to it. Transfer pricing in tax law refers to the verification process and the rectification process. We go in and we verify, and then if we find the price to be inappropriate, we rectify.

I think there's a growing awareness, at least in the United States, that the basic problem in this area is that the world long ago—and with the leadership of the United States, I might add—got into something called the arm's-length method. So in determining an appropriate transfer price, both for the verification and rectification approaches, we ask ourselves what price would have been charged between these related persons if they had been unrelated. That's what the arm's-length method does. It asks, what would have been the price at arm's length?

That's probably the wrong question. We probably need to go much more in the direction of a method that is easier to apply, much less factually weighted and requiring almost an economics Ph.D. to apply appropriately, and go to something that's simpler and does rough justice in the area.

That's a very brief statement. Tons could be said on this.

One of the problems, frankly, in my opinion, is that the United States led the way into arm's-length pricing, and the OECD has become a religious convert in this area. They think that arm's length is just the most wonderful thing.

I think the world is slowly backing away from arm's length and toward a more formulary approach of setting prices between related parties. We can't go all the way to formulary, but I think this is an area that is changing. It is changing for the better, but what everyone needs to do, it seems to me, is engage in the process of rethinking where we've been for probably more than 50 years now. Thank you.

[Randy Hoback, Conservative, Prince Albert, SK]

How much time do I have, Chair?

[The Vice-Chair, NDP, Peggy Nash]

You have about 10 seconds.

[Randy Hoback, Conservative, Prince Albert, SK]

I'll leave it there, then.

[The Vice-Chair, NDP, Peggy Nash]

All right. Thanks very much....

Sorry?

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

Mr. Cardamone wanted to say something.

[The Vice-Chair, NDP, Peggy Nash]

I think we're out of time. Perhaps we'll capture Mr. Cardamone's other comments in a later question.

Mr. Caron, over to you.

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

Thank you, gentlemen, for your very good presentation. Your ability to put this information in layman's terms deserves congratulations. It's a very complex area. I only have five minutes, but I have a lot of questions for you.

My question is for Mr. Rosenbloom.

Mr. Rosenbloom, you mentioned in your five observations.... You were pretty strong in your statement that the response of developed countries so far has been pathetic.

I'd like you to be able to tell me what you think, how you would qualify the efforts so far of the G-8 and G-20 in this matter, because we very often hear that industrialized countries or members of the most developed countries are actually undertaking some important steps in that regard.

So far, what has been done? Is it heading in the right direction? What else should be done from the most developed countries?

[H. David Rosenbloom]

I applaud the involvement of political leaders in the whole tax area. I think tax is critical. You can't have a democracy without a functioning tax system, so I'm all for the G-8 and the G-20 being involved.

However, at the current stage, we're in a very highly technical area here. If I had one thing to recommend to this committee in the area under the heading of tax evasion and tax havens, I would say to be very careful about precisely what it is you're talking about. Even in the few minutes we've been talking here, we've talked about multiple subjects. I think developed countries could strengthen their rules in regard to tax havens and protect their own tax bases. That's where my statement was going.

I don't really know Canada's laws, but I know that in the United States there are some very simple things we could do, which we have resisted doing—presumably for political reasons—that would protect the U.S. tax base against tax havens. That's a very different question—I want to be clear, a very different question—from what we can do to protect the tax base of Tanzania or Zambia. That's an entirely different story, and both of them are probably different stories from exchange of tax information.

All of them are important, but putting them all together in one pot doesn't help to solve any one of them, in my opinion.

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

Separate studies between, say, evasion and tax havens, and then corruption, and then international shelters, and then eventually maybe aggressive tax planning—those are all separate issues.

[H. David Rosenbloom]

They're very related—no doubt they're related—but if you put them all together and try to resolve them all with any one group or single approach, you're not going to end up solving any of them.

It seems to me that a committee of the Parliament in Canada is going to be most able to do something about the Canadian tax system and perhaps operate in an international forum, but those are two different approaches. It does seem to me appropriate to think separately about each of them.

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

I have a question for Mr. Gillespie.

You deal with a lot of these issues in your analyses, and I think the Halifax Initiative did a study in 2010 that states the following. The text is in English:

The biggest problem with the OECD approach, however, is that it applies to individuals, not to multinational corporations which are responsible for the majority of tax losses in Northern and Southern countries alike.

In the last meeting, we heard from officials from the Department of Revenue.

Can you hear me?

[Peter Gillespie]

You keep switching back and forth.

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

I'll say it in English then.

That was a quote from the Halifax Initiative from 2010.

Now, we received at the last meeting public servants from the Canada Revenue Agency and the Department of Finance, who actually said that there was no unbalance, that their approach to individuals and corporations was actually balanced.

What is leading you to actually say—if you are still saying the same thing after 2010—that the approach they have is actually unbalanced?

[Peter Gillespie]

I don't think I've ever said that, and I don't think the Halifax Initiative has said that. There are many other groups in Canada that are raising these issues. My organization has really focused on the developing world. We have not commented on Canadian tax administration.

[The Acting Chair, Conservative, Dave Van Kesteren]

You still have another thirty seconds in your turn.