Finance Committee on Feb. 7th, 2013

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

Actually, I'll leave time for Mr. Cardamone to respond to what Mr. Rosenbloom said.

Mr. Cardamone.

[Thomas Cardamone]

Thank you.

It was a brief comment on the role the G-8 and G-20 are playing, and whether it's been positive or not.

They have made some positive steps forward with something called the entity identifier program that the G-20 has directed the Financial Stability Board to implement. This would create a beneficial ownership for people involved in financial transactions...[Inaudible--Editor]...down the road as far as providing more information on who owns legal entities.

The G-20 has also linked the activities that take place in tax...[Inaudible--Editor]...haven development in poor countries. So they understand the linkage and the corrosive impact tax havens have on development.

Those are two...[Inaudible--Editor]...they've done positively. If they would address country-by-country reporting and an automatic exchange of tax information, I think that would be a long...[Inaudible--Editor]...towards where we're trying to get, which is a transparent global financial system.

[The Acting Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Caron.

Mr. Jean.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you very much, Mr. Chair.

Thank you to all the witnesses today.

Mr. Rosenbloom, I'm interested for you to expand somewhat on, first of all, the simple things that you suggest may be a solution for Canada that would, I think, be very similar to what you propose for the United States. As well, perhaps you could define for me, in simple terms, the difference between the formulary approach versus the arm's-length approach, and some of the negative repercussions of proceeding on the arm's-length approach.

[H. David Rosenbloom]

Let me start with your second question, because I can do that fairly easily, I think.

Let's say you have two related entities, A and B. A provides some kind of value to B, whether it's goods or services or loaned money, or whatever it provides, and B pays A for that value. What transfer pricing does under the arm's-length method is ask whether the amount that B paid A for that value is the correct amount, and it asks that in terms of “What would B have paid A if B and A had not been related?” That's the arm's-length method.

The problem with that is that it is highly factual, particularly when the value has any kind of intangible element to it. Think of a Toyota Motor Corporation in Japan selling Toyota vehicles into a distributor in Canada. The Toyota brand is worth a huge amount of money, but there's not going to be much information on the arm's-length amount that it's worth. So you're at sea, and it really does require some very sophisticated thinking to analyze whether the price that the Toyota distributor pays for those vehicles is the correct price, because a large amount of that price is attributable to the brand and the trademark.

The arm's-length method leads you into a factual swamp where countries of the world try to do the best they can.

A pure formulary method, which I don't necessarily advocate but which a lot of people have, would say forget about the price between Toyota Motor Corporation and the Toyota distributor in Canada; let's look at how much is made from the manufacture of the vehicle to the sale. So you factor out the intercompany transaction, you take the total profit of the sale of the vehicles, and then you divide it up by some formula. Some states of the United States have done that. California uses property, payroll, and sales. So they put in the enumerator of the fraction, property, payroll, and sales in California, and in the denominator property, payroll, and sales worldwide.

There are problems with that formula. I don't want to overstate how good it is, but it's arguably a lot easier to do than to ask yourself what would Toyota, the distributor, have paid for the vehicles if it hadn't been related to the manufacturer? The arm's-length method, the pure arm's-length method, just leads us into these huge never-ending disputes about facts and it does really require an economics Ph.D. to apply this stuff.

Let me go back to your first question. In my country—again, I cannot speak to Canada—we need rules that separate out the havens. I want to remind the committee that the hardest question here is who are we talking about? I understand we're talking about Cayman Islands and the Bahamas and Bermuda, but are we also talking about Ireland and Singapore? Let's face it, if we are, we're into another political world when we start talking about those countries.

In any event, once we decide who we're talking about, I think there ought to be special rules. We shouldn't have the same transfer pricing rules, whatever they are, for both the Cayman Islands and for France. It doesn't make any sense to me. If you have two developed countries where the related parties are situated, you have a very different situation from that where one of those countries is in a tax haven.

So I think countries ought to examine their laws and provide special rules. Transfer pricing is just one area where you could have special rules that are targeted to tax havens. We could do it in the United States if only we would get a little creative—and of course if our political system was functional.

Thank you.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Is there any more time, Mr. Chair?

[The Acting Chair, Conservative, Dave Van Kesteren]

You have about a minute left, Mr. Jean.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Mr. Cardamone, do you have any comments in relation to that and what Mr. Rosenbloom has said, particularly in relation to a better methodology than the arm's-length formula? I understand this would include lifting the corporate veil in either scenario, the corporate veil being the economic veil of the country. Is that fair to say?

[Thomas Cardamone]

He's right in the sense that the formulary method is being proposed by some, and it's got a long way to go, decades away, to get to it. Something needs to be done between where we are now with the arm's-length method and the formulary method.

That's why we are suggesting that the country...[Technical difficulty--Editor]...reporting method provides significant information that would shed some light on corporate activity, so that if it is...[Technical difficulty--Editor]...trade between company A and company B, and company B is in a tax haven, everyone will be aware that's exactly what's taking place.

So it's not more regulation on the companies...[Technical difficulty--Editor]...transparency on what the companies are doing. That transparency, and the information that's garnered from that transparency, can be quite effective in combatting abusive transfer pricing.

[The Acting Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Jean.

Go ahead, Mr. Côté.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you very much, Mr. Chair.

I would like to thank Mr. Hoback for addressing the issue of transfer prices because I share the same concern. It's quite interesting.

Mr. Gillespie, I would like to go back to the reference to one of your analyses, the one that my colleague, Mr. Caron, read.

Given that tax losses could be attributed more significantly to multinational corporations, do you have any idea what percentage it might represent with respect to losses due to individuals? Are we talking about something that is double or triple compared to what individuals are losing in tax revenues?

[Peter Gillespie]

Well, thank you. Tom is the expert because Global Financial Integrity in fact has actually estimated this.

Correct me if I'm wrong, Tom, but GFI says that about 60% is related to commercial tax evasion, with lesser amounts related to individuals and corruption. I believe GFI has said about 30% is probably criminal activity.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you very much.

My next question is for Mr. Rosenbloom.

Let's continue with transfer prices. You spoke a lot about this. I think your judgment was very clear in that respect. But I would like to go a little bit further with this topic.

Among other things, you mentioned the case of the Internal Revenue Service against Altera. You judge this type of practice very severely. We aren't talking about legality per se, but how could we qualify this, given that these are, in effect, legal proceedings? Could we talk about tax avoidance or tax evasion? Is it more a question of behaviour?

[H. David Rosenbloom]

That's a very fair question. In my experience, most publicly owned corporations do not often engage in criminal behaviour in the tax area. What they're doing is by and large legal; the problem is that the laws allow them to take fairly aggressive positions.

The biggest constraint, in my opinion, on publicly traded corporations, and even some private corporations, is reputational risk. None of these folks want to see their names in the Wall Street Journal, believe me.

That's the biggest thing going on right now. I will say this: I'm all in favour of more information about ownership of entities. I agree with Mr. Cardamone on that. By the way, the U.S. is clearly one of the worst offenders, partly as a result of our federal system. There's only so much that our federal government can do to restrain the states, and corporate ownership is a question at the state level. That's a whole other subject.

I would make this point relating to two separate subjects. Having all the information in the world about the ownership of entities is not going to solve the problem that the laws are too lenient toward the use of tax havens. We could have complete information on ownership and still face some serious tax evasion—using tax evasion in a very broad sense, to equate it also with tax avoidance.

I don't think we're talking criminality, by and large; we're talking about taking maximum use of the existing laws.

[The Acting Chair, Conservative, Dave Van Kesteren]

You have about half a minute, sir.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

That's very short. I'll end there.

[The Acting Chair, Conservative, Dave Van Kesteren]

Thank you.

Ms. Glover.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you, Mr. Chairman.

I want to thank the witnesses as well.

Mr. Rosenbloom, I think you summed up something that I have been curious about for quite some time. Some people think we ought to study this continually and spend money on research and whatnot. I think you summed it up when you said we can do all the research we want, but if we don't have legislation and rules in place, nothing is going to come of it.

Did I interpret your last statement correctly?

[H. David Rosenbloom]

Absolutely. This is a rule-based system. This isn't just a lot of concepts and research: we have to have rules.

[Shelly Glover, Conservative, Saint Boniface, MB]

I might add that I happen to be a police officer on a leave of absence, so the enforcement part of this I think is important. We had some witnesses here from the RCMP and from CRA talking about how important it is that they have not only the research but the tools and the legislative measures to proceed with the enforcement. So I appreciate that you made that comment.

Some people believe that the more rules we put in, and the bigger the book gets on rules, that's not necessarily welcome. In the case of tax evasion and tax avoidance, though, do you agree that sometimes you just have to have a large number of rules to stay one step ahead of the people who are trying to take maximum advantage of the way the code is written?

[H. David Rosenbloom]

Well, yes. Again, I'm influenced by the U.S. experience, but I think we make a huge mistake in trying to put a one-size-fits-all rule out there so that we treat these tax havens the same as Japan. To me, that's tying one arm behind our back.

The other thing we do in my country—I can't speak for Canada—is we systematically starve the tax administration function of resources, which makes it very difficult in a very complex modern world to enforce the laws. That's an independent problem.

If someone wanted to do tax reform in the United States, my first choice would be to give some more money to the Internal Revenue Service.

[Shelly Glover, Conservative, Saint Boniface, MB]

Very good. Thank you.

Here in Canada we've added a number of CRA experts on the files, roughly 40% more since we came into power in 2006, so we look forward to continuing in that vein.

Mr. Cardamone, Global Financial Integrity wrote a report in December called Illicit Financial Flows From Developing Countries: 2001-2010. One of the recommendations put forward by your entity was, and I'm going to quote it, “harmonizing predicate offenses under anti-money laundering laws”.

In 2010 this government put forward a budget that made tax offences predicate designated offences under the proceeds of crime and money-laundering regime of our Criminal Code. I'd like to get your input. Do you think this is a good measure? It's going to enhance powers of search and seizure, and the ability to retain proceeds of crime.

I'd like to hear from you: do you think we're on the right track here?

[Thomas Cardamone]

Yes, very much so. I think that's a wonderful development. It puts another tool in law enforcement's tool box to go after tax...[Technical difficulty--Editor]...and it also is in compliance with what the financial action task force in Paris produced in a new set of recommendations just about a year ago that made tax evasion a predicate crime for money laundering.

So it's very much in line with...[Technical difficulty--Editor]...and I think it's a great development.

[Shelly Glover, Conservative, Saint Boniface, MB]

Excellent. Thank you for that input.

I note that at the beginning of our session here, Mr. Cardamone, we cut you off. I was into what you were saying from your speech.

Do you have more to say? I want to give you the opportunity to finish what you were saying. If you have more listed on your documents, I'd be very happy to hear from you on that.

[Thomas Cardamone]

Thanks very much for the opportunity.

I actually only had about 15 seconds remaining in my remarks, so I completed what I was going to say.

I do want to add one thing. Mr. Rosenbloom is correct that there is no one size fits all, and no silver bullet, in trying to curtail illicit flows of money or tax evasion. But the culmination of...[Technical difficulty--Editor]...measures that we've been recommending—automatic exchange of tax information, country-by-country reporting, beneficial ownership information—combined will create a...[Technical difficulty--Editor]...upon which more transparency will be in practice, and more information that limits the ability of...[Technical difficulty--Editor]...and criminal entities from hiding and laundering their money.