Finance Committee on Feb. 14th, 2013

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

This is the 105th meeting of the Standing Committee on Finance. Pursuant to Standing Order 108(2), our orders of the day are a continuation of our study of tax evasion and the use of tax havens.

I'd just identify for all of our colleagues, all of our witnesses, that we are being recorded today by, I believe, two broadcasters. Both CTV and CBC are here; we welcome their interest in this topic as well.

We do have five individuals with us here today.

First of all, we have the Canadian Bankers Association, two individuals with that organization, the vice-president, Marion Wrobel, and the director, Darren Hannah. Welcome to both of you.

We have Canadians for Tax Fairness, and the executive director, Dennis Howlett. Welcome.

We have by video conference from Cambridge, from the U.K., Mr. Richard Murphy, the director of Tax Justice Network.

Mr. Murphy, can you hear me okay?

[Richard Murphy, Director, Tax Justice Network]

I can. Good morning.

[The Chair, Conservative, James Rajotte]

Welcome to our committee this morning. Thank you.

We welcome Professor Arthur Cockfield as an individual. He's in Austin, Texas, this morning. Welcome, Professor Cockfield.

[Professor Arthur Cockfield, Professor, Faculty of Law, Queen's University, Fulbright Visiting Chair in Policy Studies, University of Texas, As an Individual]

Thank you.

[The Chair, Conservative, James Rajotte]

You each have up to five minutes or so for an opening statement.

We'll begin with the Canadian Bankers Association, and then we'll have questions from the members.

We'll start with CBA, please.

[Marion Wrobel, Vice-President, Policy and Operations, Canadian Bankers Association]

Thank you, Mr. Chair.

Good morning. We are pleased to be here today representing the Canadian Bankers Association and our 54 members, including domestic banks, foreign bank subsidiaries, and foreign bank branches operating in Canada. We welcome the opportunity to talk about taxation, and in particular how our strong, stable banks contribute to Canada and the Canadian economy.

Throughout the recent global financial crisis, Canada's banks remained strong. None needed a bailout and not one was in danger of failing. Today our well-managed, well-regulated banks continue to contribute substantially to the economic health of this country: employing more than 270,000 Canadians across the country; contributing approximately 3.4%, or $55.5 billion, to Canada's GDP; paying $11.1 billion in dividends to shareholders; providing financing to 1.6 million small and medium-sized businesses; and paying $8.7 billion in taxes to all levels of government.

Banks pay all taxes due on their business income in Canada and other countries where they do business. Like many other Canadian businesses, banks are increasingly becoming export-oriented, growing their business operations abroad, with well-established subsidiaries in countries across the globe.

By competing globally and earning foreign income, banks not only bolster Canada's international reputation; they also generate important economic benefits here at home. These benefits include highly skilled, high-paying head office jobs and higher profits from which dividends are paid to Canadian shareholders.

It's important to remember that most Canadians are shareholders in Canada's banks through the Canada and Quebec pension plans, their employer pension plans, RRSPs, mutual funds, and direct investments.

We are pleased to have this opportunity to participate in the continuation of the finance committee's study on tax evasion. I would like to reiterate a couple of points we made during the CBA's appearance on this topic in the last Parliament.

First, Canada's banks do not promote tax evasion by their clients in Canada or in any other country. In fact, banks have comprehensive corporate governance regimes to ensure that the products and services they offer are not used for the purposes of evading taxes. Banks fully comply with the letter and spirit of all laws, regulations, and reporting requirements designed to detect and prevent tax evasion.

Second, Canadian banks do not evade taxes. They firmly adhere to the laws in Canada and in other jurisdictions where they carry on business, including those designed to deter illegal activities such as tax evasion and money laundering. Banks are subject to regular oversight by Canadian tax authorities and the banks' prudential regulator, the Office of the Superintendent of Financial Institutions.

As mentioned, CBA member banks have comprehensive governance and compliance regimes to prevent tax evasion. These regimes include management and board committees to oversee a bank's risk management practices; management and board committees to oversee regulatory compliance with applicable laws, including tax laws, securities laws, and other rules imposed by banking supervisors; “know your client” rules; and employee codes of ethics.

Banks are also subject to legislative requirements designed to control money laundering, which includes the proceeds of tax evasion. These requirements include reporting suspicious transactions, cash transactions above $10,000, and international electronic funds transfers of $10,000 or more; account record-keeping, including intended use of an account; and ascertaining the client's identity, including beneficial ownership information.

Banks take these responsibilities very seriously. Tax evasion is bad business, and reputable financial institutions want no part of it.

In terms of measures to prevent tax evasion, let me conclude by briefly commenting on these measures that have been taken to prevent tax evasion.

CBA members fully agree with the emphasis that the G-20 leaders have placed on tax transparency and the exchange of information as the best vehicle to combat tax evasion. This approach is working. The OECD's global forum for tax transparency now has 118 countries as members. As of December 2012, 90 countries have already substantially implemented the OECD's standard for tax transparency, which includes provisions to allow a country like Canada to obtain information about specific taxpayers if it has reason to believe the person is evading taxes.

Canada has taken a leading role in this initiative. Canada has built on its already substantial network of tax treaties by concluding tax information exchange agreements with 18 jurisdictions and is currently negotiating agreements with 12 others. Furthermore, Canada has already signed 90 tax treaties, almost all of which are fully compliant with the OECD standard.

We are pleased that the Canadian government has made this a priority, and we encourage the government to pursue more such agreements.

Thank you for your attention. We would be pleased to answer any questions from members of the committee.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Mr. Howlett, please.

[Dennis Howlett, Executive Director, Canadians for Tax Fairness]

Yes. Thank you for the opportunity to address this finance committee.

Today I'd like to speak to five points.

The first point I want to make is that the size of the tax havens problem, we believe, is much bigger than you might think, and it is growing. We are recommending that the federal government publish an official estimate of the size of tax evasion and avoidance problems. We feel that if policymakers and political leaders realize how grave the situation is, it will spur them to take more decisive action.

I acknowledge that this is not an easy thing to do. It's partly why we want the government to do it, because it's hard for us to do that. We don't have access to the same kind of information.

However, let's look at some of the information that is available. There was a World Bank study done in 2010, entitled “Shadow economies all over the world”, which estimated that Canada had a shadow economy of 15.7% of GDP, which is right in the middle of the pack of the OECD countries. Using figures from this World Bank study, the Tax Justice Network calculated that Canada's total tax revenue lost to all levels of government was $79 billion a year. Now, this figure is not limited just to tax havens. It includes GST fraud and all the other kinds of tax evasion, but the key point I want to make is that tax havens are one of the key factors that help facilitate tax evasion.

The Tax Justice Network also published another exhaustive study last July, entitled The Price of Offshore Revisited. It put the estimate of wealth hidden in tax havens at between $21 trillion to $32 trillion. Assuming, conservatively, that global offshore financial wealth earns a total return of just 3% a year, and would have faced an average marginal rate of 30% in the home country, this unrecorded wealth may have generated tax revenues of between $189 billion to $280 billion per year. Given that Canada's economy is 2.8% of the global economy, we can estimate, based on this, that Canada may be losing between $5.3 billion to $7.8 billion a year to tax havens.

Statistics Canada figures confirm that tax havens are a huge and growing problem for Canada. A report last year on Canadian direct investment abroad, by country, shows that now 24% of Canadian direct investment overseas in 2011 went to the top 12 tax havens, up from 10% in 1987. This totals more than $170 billion.

While there could be a debate about what this might translate into in terms of tax revenue lost, there is no question it would amount to billions of dollars.

The second point I want to make is that tax havens and secrecy jurisdictions facilitate crime, impoverish developing countries, and undermine the integrity of the tax system.

The problem with tax havens is not just limited to the loss of Canadian tax revenue. Tax havens play a key role in facilitating organized crime, the illegal arms trade, bribery and corruption, and the financing of terrorism. It is the secrecy of tax havens, not just the low tax regime, that is the main problem in terms of crime.

Banking secrecy rules in many of the tax haven countries allow criminals to set up accounts without having to declare the beneficial owner and move huge sums of money in and out without any scrutiny. This is the perfect system for money laundering. If the government is serious about its tough on crime agenda, it needs to take much stronger action to curb the use of tax havens. Jailing the street-level drug dealer for a few more years will do nothing to curb the drug trade if tax havens are free to help ensure that crime pays, at least for the kingpins.

By making it easier for larger companies and wealthy individuals to avoid paying their fair share of taxes, tax havens also undermine the integrity of the tax system itself, which relies on the principles of voluntary compliance and everyone paying their fair share of taxes. They also create an unfair advantage for large multinational corporations over medium and smaller businesses that don't have the same capacity to take advantage of tax havens.

[The Chair, Conservative, James Rajotte]

Mr. Howlett, you have about one minute remaining.

[Dennis Howlett]

Okay.

The third main point I want to make is that the capacity of the CRA to go after tax cheats using tax havens needs to be increased significantly. While tax havens will require a concerted international effort, there is much more that Canada could be doing itself. The CRA internal audit document revealed that tax practitioners believe that the CRA is not doing enough to catch or prosecute tax evaders. I expect we will learn more about what the real CRA capacity is in the upcoming Auditor General's review of the CRA.

The other point I want to make is that automatic information exchange would be a much more efficient way to go after tax havens than the bilateral tax information-sharing agreements.

Finally, Canada should be supporting suggestions of upgrading the UN tax committee to an intergovernmental body and be providing it with adequate resources. Tax havens are a serious problem for Canada and the global community. The Canadian government can and should be doing much more to tackle tax havens. It's an encouraging sign that this committee has taken up this study.

We trust that the finance committee will make some strong recommendations for action, and we hope the government will take these recommendations seriously.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now hear you, Mr. Murphy, with your five-minute opening statement, please.

[Richard Murphy]

Thank you for asking me to speak this morning. I'm sorry I can't be with you in person.

Tax havens have an enormous impact on the world. They have by and large been ignored by academic researchers, whether in the fields of tax accounting or economics. The result is that the issue is still not as widely understood as it should be. It has fallen to the NGO community to remedy this fault. I've been working on such research for a decade now. As one consequence of that, I am the co-author of one of the most cited academic books on this subject published by Cornell University Press.

Largely as a result of that work by NGOs, some of which Dennis Howlett has just referred to, the dangers of tax havens are now being appreciated. As the OECD has conceded this week, tax havens threaten the credibility of the world's corporate tax systems. They also now agree that tax havens create unlevel playing fields that distort markets, and that must inevitably lead to the misallocation of economic resources at cost to us all. You have, however, asked me to talk about tax havens and tax evasion.

Tax evasion is criminal activity. In the case of tax havens, it relates to the process of withholding information from a tax authority to which it is due, to ensure that tax owing to that authority is not declared or paid. Tax havens readily acknowledge that a decade ago they were at the core of much, but not all, tax evasion. Some tax evasion does not involve them. Quite clearly, paying the builder in cash has always gone on, and it will do so whether or not we solve the problem of tax havens, but serious, organized tax evasions do occur offshore and frequently. It's my contention that this remains the case now, as it was a decade ago, although tax havens, or secrecy jurisdictions, as I would prefer to call them, deny this.

I define tax havens or secrecy jurisdictions as places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation they create is designed to undermine the legislation or regulation of another jurisdiction or country. To facilitate the use of that regulation, secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

I stress that it's not low tax rates that define a tax haven. Low tax rates are the legitimate choice of governments that can balance their books without resorting to higher rates. It is secrecy, and the fact that it is provided for the benefit of a person not resident within its domain, that defines a tax haven. That secrecy takes many forms. It includes not having to record the real ownership or management of a company with regulatory authorities. It comes from no accounts being required to be placed on public record, or even to be made available to authorities, because a no-tax regime does not require tax returns. It comes from tier upon tier of structuring in one secrecy jurisdiction after another to create impermeable opacity, often combining trusts, companies, and foundations. It can come from Swiss-style banking secrecy. It can also come from non-cooperation, whether that be outright refusal to accept information exchange agreements or by ensuring that, as the French have found, when information exchange requests take place—and they happen in tiny numbers, I would stress—the information that is supplied is of limited or no value at all. They discovered that was the case in more than 50% of all inquiries they made.

All these things happen, and it is not by chance; it is by design. The intention of tax havens is straightforward. With the aim of luring cash to their banks to support a local financial services sector that appears to create prosperity, secrecy jurisdictions sell their right to legislate for the benefit of those who do not live there and who wish not to pay their taxes where they're due, including in places like Canada.

The cost is enormous. Dennis Howlett has outlined some of the numbers. Most of that research I have been involved with. We do think there could be a minimum of $21 trillion U.S. of assets held offshore for the purposes of evading tax. The tax lost could exceed $200 billion U.S. a year. That is almost double the total worldwide aid budget, to put it in context and to link it to worldwide poverty. This cost, I stress, is imposed deliberately with the assistance of the world's financial services community, which is present in almost all tax havens.

The important point, though, is that this issue can be solved.

[The Chair, Conservative, James Rajotte]

You have about one minute, Mr. Murphy.

[Richard Murphy]

I suggest two simple solutions would work. First, we must have automatic information exchange of data on who has an interest in a bank account in a tax haven. We don't even need to know the income earned, just that someone has an interest in a bank, in a bank account, or some other structure in a tax haven. That's the smoking gun that will let your tax authority pursue the tax evader.

Second, we must have mandatory disclosure of the ownership of all companies and trusts on public record worldwide, in developed countries, in developing countries, and in tax havens. That's the minimum price of using these structures.

Do those two things and you will not solve all tax evasion, I readily admit, but I guarantee you will substantially increase your tax yield, and if that's what you want to do, I strongly recommend those two courses of action.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation, Mr. Murphy.

We'll now hear from Mr. Cockfield, please.

[Prof. Arthur Cockfield]

Thank you for the kind invitation. Again, I'm sorry I couldn't be there today. I'm in Austin, Texas, this semester, visiting the University of Texas. I'm not at my home base of Queen's University. I hope the winter is going well in my hometown of Ottawa. I don't miss it, but anyhow, good luck. I know that it's a very tough winter this year.

I thought I would start by briefly outlining the distinction between tax evasion and tax avoidance, recap some of the background in Canada to try to gauge the extent of the problem, and then speak briefly about why it's a very difficult problem to fix.

Richard Murphy just touched on this. Of course, tax evasion in Canada is a criminal offence. It normally constitutes the purposeful withholding of information from the government concerning income or asset streams.

On the other hand, international tax avoidance is legal in the sense that it's non-criminal. Companies try to lower their global tax liabilities while complying with all laws, both Canadian law and the law abroad.

In my last testimony before this committee—the committee's hearings have been going on some time, and I congratulate you for your ongoing efforts—I mentioned some of the efforts here in Canada to gauge the extent of the problem. We have the Auditor General's reports from 2001 and 2002, wherein she reviewed a number of different aggressive offshore tax planning structures, along with revenue estimates of hundreds of millions of dollars of losses in annual revenues to Canada as a result of these tax avoidance strategies.

In terms of tax evasion, we have had a variety of scandals in recent years. A bank in Liechtenstein revealed through stolen data that a number of Canadian clients had anonymous accounts there. There was, of course, the UBS Swiss Bank scandal, when the U.S. Senate investigation revealed that UBS maintained a “Canada Desk” and would fly folks from Switzerland to Toronto to advise high-net-worth individuals on tax evasion strategies.

We have ongoing increased efforts by the CRA to increase audits: the so-called unnamed persons litigation. There's been an uptick in that activity. There's been an increase in revenues accessed through these audits of $3.7 billion since 2006, and also an increase in the voluntary disclosures by Canadians. In 2009, for instance, there were 3,000 disclosures and a recovery of $138 million.

The bottom line, as both speakers indicated, is that we really don't know in terms of tax evasion how much revenue is being lost.

The U.S. Senate investigation suggested that Americans may be evading $40 billion to $70 billion per year. If we take one-tenth of that, because of course we have one-tenth the population, I think we get to a figure similar to the one Mr. Howlett mentioned, which is somewhere between $5 billion to $7 billion.

But again, the reality is that nobody has a clue because, as Mr. Murphy mentioned, all of this occurs in secret—the evasion activities, at least. Folks, of course, don't want to disclose their identities or their holdings offshore when they're stealing money and committing criminal offences.

Turning to the international tax avoidance problem, the committee is likely aware that the OECD and G-20 released a report this week that called for enhanced international cooperation surrounding this issue. It's a very difficult issue to fix. Why? Well, sometimes I characterize Canada's international tax policy as being schizophrenic in nature.

On the one hand, we encourage firms to go abroad and to save tax moneys. We have a whole bunch of special rules that give breaks to our multinationals; we want them to go global. Tax academics find it a highly suspect policy goal to subsidize these wealthy multinationals. In any event, that's what our tax laws do. On the other hand, we want to have fair taxation between domestic firms and foreign firms. We have certain rules to encourage fairness there. But we have these two competing rules: we want to collect revenues from these multinationals, but we also want to give them tax breaks.

I'd like to leave the committee with one suggested reform in this area. It's something that I recommended to the Advisory Panel on Canada's System of International Taxation in my report for the Department of Finance and that panel back in 2008, which is to require our resident corporations to file with their tax return a schedule disclosing their consolidated worldwide revenue and income before taxes, as reported in the firm's financial statements. The schedule will additionally disclose a proportion of domestic and foreign-source revenues and income.

Here's the problem. The CRA gets a tax return by a Canadian multinational. It will disclose the Canadian taxes payable, but it won't disclose any information about the various foreign activities. In Canada, firms are not permitted to file consolidated worldwide income tax returns. This is not my idea. It's a reform proposal that you hear a lot about from the tax and accounting community, and I think it would be a good idea for Canada. It would give the CRA a lot more ammunition to go after these aggressive international tax planning strategies.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation, Mr. Cockfield.

We will go to members' questions, and we'll start with Ms. Nash for a five-minute round, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Mr. Chair, and welcome, gentlemen, to the finance committee. Thank you for your testimony.

The numbers that are being raised surrounding tax evasion and tax havens are absolutely astounding. At a time when governments are struggling to find the resources to deal with, in Canada, an infrastructure deficit of over $100 billion, rising student debt, and many other problems, and struggling to balance our own books, it seems astounding that we would not make tackling tax havens an absolute priority.

Let me start with Mr. Wrobel from the Bankers Association. We've heard the OECD this week call for tough new rules to deal with tax evasion and tax havens. We've heard some witnesses call for that today. Do you agree that we need to have disclosure and eliminate the secrecy or reduce the secrecy that we're facing today, especially in the international banking sector, and that we need to have tough new rules to deal with tax havens?

[Marion Wrobel]

Let me start by essentially reiterating what we said in our opening statement. We do not support tax evasion and the Canadian banking system does not support tax evasion. We don't encourage our customers to evade taxes, and we recognize that there is an issue there.

But as we try to deal with a tax evasion problem, what we view as a problem, it's important that we be able to distinguish tax evasion from legitimate business activities of firms that operate in a global environment, including banks and commercial firms that have to be competitive. So while tax evasion is an illegal activity that we do not support—we encourage governments to take steps against that—as we go through these proceedings, let's make sure that we distinguish that from other forms of activity.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you for that. Yes, I think we're clear that legitimate and legal tax avoidance is something that some would say is good prudent planning, but we're looking at well-known tax havens that have very small economies. Canadians, for example, have $25.8 billion invested in the Cayman Islands and over $53 billion invested in Barbados. That's massive compared to their economies.

I know my time is so limited. I do want to ask Mr. Murphy this. We heard witnesses from the Canadian finance department earlier tell us that they don't estimate the size of tax evasion or tax havens and what that cost could be to Canada. They have no idea what that could be, and they don't gather that data. Other countries do.

Can you explain why they wouldn't gather that data? That's my first question.

My second question is, what role can Canada play at the meeting this weekend in Moscow to push for tougher measures internationally to crack down, as the OECD recommends, on tax evasion and tax havens?

[Richard Murphy]

I am always bemused by governments that will not estimate what I call their tax cap, the difference between the taxes they should raise and the taxes they actually raise, based upon their domestic legislation.

We have that problem in the U.K., where the estimates of our governments that are available online and the difference is a factor of about three. They say it's $32 billion and I say it's $90 billion. We have that issue now in Europe, and I provided the European Union estimate.

Now let's be clear. These are estimates. Nobody can claim they're right. But if you have an enormous problem, you're not going to tackle it unless you have some idea of the scale and therefore the resources that you need to direct at it. I believe there is a collective mindset amongst tax authorities to deny the scale of the problem because they see it as some implicit criticism of their behaviour. It isn't. There is an issue out there that they need to accept and address, and they need to demand from you the resources to tackle it. I think that's the number one point.

What can you do to tackle tax evasion? Most importantly, you can demand automatic information exchange from tax havens to Canada. You can follow the precedence of the U.S.A. with its new FATCA—Foreign Accounts Tax Compliance Act—legislation and say that basically as a condition of your being able to bank in Canada, we will demand that if you operate branches in other places, you must supply us with information on the Canadian resident people who have accounts in tax havens, and we need that information.

This is a valuable precedent. It's going to have an enormous impact in Europe, and we're already seeing that because you can break some of the barriers to progress here. It's already being used by the U.K. to demand information from its tax havens, which previously it's been denied. So I think you need to look at that as the major way of going forward.

In addition, you need to set precedents and make sure that you have your own house in order with regard to making sure that beneficial ownership and accounting data is properly recorded in Canada on public record, so that when you demand it from tax havens, they can't turn around and ask, “Why are you asking for information from us that you don't actually have available in your own domestic authorities?”

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Nash.

We'll go to Ms. McLeod, please.

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

Thank you, Mr. Chair.

Thank you to all the witnesses.

I think by virtue of the fact that we have been grappling with this issue for a number of years, and continue to aggressively tackle it, it shows that the government does recognize that it's important. Obviously, like all countries, I believe we have the opportunity to do a better job, but I think we've also made some remarkable progress in the last few years.

I do have a couple of points I want to quickly pick up on. Mr. Howlett made some comments about Statistics Canada and investment overseas.

Mr. Wrobel, we know tax evasion is an issue, but I think we just need to reconfirm that Canadians do have legitimate interests overseas. Can you just quickly respond to that?

[Marion Wrobel]

The number was cited about investments in places like the Cayman Islands and Barbados. Canada is a relatively small economy. To achieve economies of scale in our commercial firms and in our banks, we have to grow outside of our boundaries. In doing so, we have to compete globally. We have to find ways to make sure we are competitive.

A lot of these foreign investments are channelled through some jurisdictions to enable those firms to obtain financing on competitive terms, terms that are competitive with other institutions operating around the world, so that they can be successful. That's really one reason why they go that particular route.

In doing so, they enhance their own profits, which eventually flow back to Canada. They create jobs in Canada. As these dividend profits are distributed to shareholders, they are taxable in Canada, so they are incrementally enhancing tax revenue jobs in Canada and income in Canada.