Finance Committee on Feb. 14th, 2013

[Prof. Arthur Cockfield]

Yes. As a first point, we would call all of those moneys you mentioned with respect to foreign investments in Barbados and the Caymans perfectly legitimate. Those are moneys fully disclosed to our government. That's the multinationals, involved in aggressive transfer pricing and other sorts of cross- border structures. So that's one thing.

To the TIEA issue, our government only announced TIEAs back in the 2007 federal budget. It has been signing them in recent years. Through informal discussions with CRA and Finance people...the TIEAs are just starting to get going. I and others are quite skeptical about whether they will help protect the Canadian income tax base, for a host of reasons that we could get into, if you'd like. The TIEAs really haven't kicked in yet in Canada.

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

Mr. Cockfield, I want to ask you one quick question. You mentioned earlier that the whole tax evasion issue is difficult to prosecute because you have to demonstrate a guilty mind. What some other countries have done is take it out of the Criminal Code and go to administrative penalties, in order to make the test easier to prosecute.

Can you comment on that? Is that the direction Canada should be going in?

[Prof. Arthur Cockfield]

You would hate to give up on the traditional justice system, but it's my understanding that we haven't had a successful criminal prosecution for tax evasion in Canada in the last decade. I would defer to the CRA and Finance experts on that issue, but we haven't been able to successfully prosecute. So maybe this is a helpful reform effort for Canada; at least we'd see some action.

Now, of course, some of the folks whom CRA and the Department of Justice go after settle; that may explain why we don't have a successful conviction. But an administrative penalty is a very interesting and I think potentially helpful idea.

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

I'd like to turn my time over to Mr. Côté.

[The Chair, Conservative, James Rajotte]

Mr. Côté, you have one minute left.

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

Excellent, Mr. Chair.

Mr. Howlett, in the recent OECD report that my colleague, Mr. Murray, referred to, there is a reference to a recent report from the J.P. Morgan bank that compares multinational companies with a wealth of intellectual property, such as GlaxoSmithKline, to companies whose activities are mainly restricted to the United States. The example I'm going to use is a business called La Fée des Grèves, a fish smoking company in Beauport—Limoilou.

According to this report, the multinationals have an average effective tax rate of 22.4% over 10 years, whereas for the same 10-year period, companies working with a domestic market have an effective tax rate of 36.2%.

According to your information, is this situation similar in Canada?

[The Chair, Conservative, James Rajotte]

Give just a brief response, Mr. Howlett, please.

[Dennis Howlett]

There are a couple of things.

One is that there is a problem of a race to the bottom in corporate tax rates, and this is a global problem. Canada is actually contributing to that problem. When I was in Washington last year, congressmen there were complaining that Canada is becoming a tax haven.

We found that the lower corporate tax rates actually don't work that well in terms of stimulating the economy. They haven't helped much, but they contribute to that global problem of lowering tax rates and then creating more and more competition between countries. That's one thing. You don't want to get too out of line with the overall rates, and that creates a problem, as you point out.

I think ultimately we need a global solution. There is a lot more that Canada could do by way of enforcement, but ultimately we need something like the unitary tax that Mr. Murphy talked about as a way to fairly tax corporations on a global basis and apportion their profits according to their economic activity in different countries. This is already done in the U.S. on a state level; it could be applied globally, and that would be the system we need to aim for.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Côté.

I don't know if I'm going to get into the whole competitive tax rates stimulating the economy issue. I certainly disagree, but I think we'll leave that debate for another day.

I want to ask the Canadian Bankers Association a question. Mr. Cockfield made a recommendation on consolidated reporting by corporations. As an association, do you agree with that recommendation?

[Marion Wrobel]

Consolidated tax reporting?

[The Chair, Conservative, James Rajotte]

Yes, the recommendation he made in his presentation. Do you agree with that?

[Darren Hannah]

I know that the government has undertaken a review of consolidated tax reporting in Canada. Can we move to a system of reporting within Canada for a consolidated tax across a group-wide basis? We think reporting within Canada across a group-wide basis is a good thing. It's administratively simpler.

[The Chair, Conservative, James Rajotte]

Do you agree with Mr. Cockfield's recommendations?

[Darren Hannah]

I'd have to hear exactly how he framed his recommendation. I'm talking about consolidated reporting within Canada.

[The Chair, Conservative, James Rajotte]

He was talking internationally.

[Darren Hannah]

That's a different issue.

[The Chair, Conservative, James Rajotte]

You can get back to me on that, then.

Mr. Murphy, in your presentation you outlined tax evasion and tax havens very well. You said that it's not about the level of tax; it's about secrecy, it's about non-cooperation, it's about not providing information or providing limited information. I appreciate your providing that outline.

One of the bigger questions I have.... Obviously you want more information. You talk about automatic exchange of information, which I think is broadly supported, but how do you ensure that you balance that with the right of privacy of individuals? It seems to me that you have to find that line between the two. I want you to comment on that, because to find people who are evading tax, obviously you are going to have to access information. In accessing that information, you will have to respect personal privacy. So how do you find that line there?

[Richard Murphy]

I think that's an important question. My big concern is—and we've heard a lot of discussion this morning about what is in the bank's records about who owns an account, where it's owned, and who the owner of a corporation is. The big problem we have is that that information is in the bank's files and it isn't available to a tax authority, or if it's available, there's considerable difficulty.

Speaking purely practically, we also heard about the problem CRA has with checking information supplied to it. Once we come down to, for example, sending portfolio investment information from the States to Canada, let alone from the rest of the world to Canada, we are talking about massive amounts of information.

My recommendation is that we make this as simple as possible. The desire is not to check every tax return or every record; that's impossible. What we want to create is a deterrent effect. So we need to have the information exchange that creates maximum deterrence at a minimum cost, minimum risk, to privacy. That would be disclosure of who the warm bodies are—the real human beings who have interests in an offshore bank account, an offshore trust, an offshore company—to the territory where they are a tax resident.

As I say, I'm not interested in disclosure of the amount of income. There's risk in that information exchange, but it will give the domestic tax authority, the CRA, the right to say that you aren’t disclosing an offshore source of income on your tax return; we're told you have an interest in this bank account in Jersey, the Isle of Man, Cayman—wherever—and we want to ask you to explain that.

It also makes the tax information exchange agreement work, because suddenly there is the smoking gun to make an inquiry, which is completely absent and it makes them impossible to use at present.

That minimal exchange would make the whole international system work and create the deterrent effect, which I believe could be exploited to improve taxpayer morale and the belief that everyone is going to be paying, which is essential to a proper outcome of this.

[The Chair, Conservative, James Rajotte]

I appreciate that.

I have a couple of minutes left. I want to follow up as well on determining the amount. You said in your presentation that the U.K. government estimated $30 billion. You've estimated $90 billion, which is obviously a massive difference in numbers.

I see the benefit in trying to determine a number, in the sense of the process of trying to determine a number, and that investigation will obviously reveal some benefit. I guess my concern, though, is that when you start putting numbers out there—and you put out a $90 billion number and the government puts out a $30 billion number—it becomes more a debate about whose number and who is right, and why the projection is off here and there, rather than about the information gleaned from trying to find out what that number is.

[Richard Murphy]

The U.K. government has spent a lot more money trying to discredit my number than it's ever invested in actually trying to get the number right, and that's an unfortunate use of funds.

There is a fundamentally different approach between the two of us. They take the tax returns they receive and try to calculate the error rate within them. I actually look at the total economy and the level of activity within it, and then look at the total recorded level, which is fundamentally working from a GST level and saying that if GST is going to be avoided—it's VAT here, but GST in your terms. If the VAT is being evaded, then actually the income tax, the payroll taxes, the profit taxes, and everything else will be lost, because GST is on the top line of the profit and loss account.

I'm an accountant, so I do what's called a top-down approach; they do a bottom-up approach. Their approach has to be flawed because they don't include all the people who fail to send in their tax return in the first place; therefore, their number is bound to be smaller than mine. Somebody who completely skips the system isn't in their estimate. So they have it wrong.

The Financial Times in the U.K. called those numbers completely made up, and I would tend to agree with that analysis. We have to be more sophisticated than they are, but we also have to be aware that we are not estimating, and that's as good as we'll ever get.

[The Chair, Conservative, James Rajotte]

I appreciate that.

I'm going to move to the next round, with Mr. Brison, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you, Mr. Chair.

Professor Cockfield, in your previous appearance before this committee you encouraged Canada to ratify the OECD Convention on Mutual Administrative Assistance in Tax Matters.

In what ways does the convention go beyond an OECD model tax information exchange agreement?

[Prof. Arthur Cockfield]

That's correct. Canada actually signed the agreement in 2004, and as I mentioned in the previous hearing, for a bunch of strange political reasons I think the government intended to ratify this agreement, but the implementing legislation simply hasn't passed through.

The reason it's important is that this is a multilateral agreement to share cross-border tax information, versus the bilateral TIEAs, tax information exchange agreements. I don't think it's a magic bullet to fix all the problems with respect to international tax evasion, but it's just one more cooperative measure where Canada can be part of this broad multilateral sharing of taxpayer information. I think it is a very helpful reform, but again, it's not going to solve any of the problems, and certainly TIEAs won't solve the problem either.

[Scott Brison, Liberal, Kings—Hants, NS]

But you would recommend to the committee that the government implement the legislation, or at least move forward with that enabling legislation.

[Prof. Arthur Cockfield]

Yes.