Finance Committee on Feb. 14th, 2013

[Marion Wrobel]

I would say that the operations in all of those jurisdictions are subject to the similar kinds of laws in the United States and in Canada. Reporting anti-money-laundering is an international initiative.

Other requirements might be somewhat different from one jurisdiction to another. The key is that the institution in the jurisdiction in which it's incorporated follows the laws of those jurisdictions. Sometimes the laws of those jurisdictions include privacy laws, so there is a bit of a fine balance there.

But there are a number of global initiatives for which the reporting requirements would be pretty similar from one jurisdiction to another.

[Randy Hoback, Conservative, Prince Albert, SK]

In that situation, even if we were to come in with a variety of transparency laws here in Canada, they may not be enforceable in other jurisdictions if we don't have that type of tax agreement with that jurisdiction. Is that fair to say?

[Darren Hannah]

I think what you're alluding to would be for Canada, in effect, to try to do its own variant of FATCA, and for a number of reasons that have been articulated, that simply hasn't worked.

[Randy Hoback, Conservative, Prince Albert, SK]

Mr. Cockfield, from the U.S. perspective, do you think FATCA has worked as well as originally anticipated?

[Prof. Arthur Cockfield]

It hasn't been implemented yet. I think the implementation date was delayed until January 1, 2014. I think the joint committee estimated it will raise $8 billion, which isn't really a whole lot of revenue considering the global spread of this new law and the compliance costs that are going to have to be incurred by Canadian and other foreign banks. So the jury's still out on FATCA.

[Randy Hoback, Conservative, Prince Albert, SK]

It's interesting. I have an elderly couple in my riding who will be subject to that. She hasn't lived in the U.S. for probably 45 years. They are retired farmers, and they have nothing to do with money laundering or hiding any assets or anything else, but because of the penalties that are involved in disclosure and the uncertainty of the penalties, it creates a lot of stress. If you asked them about FATCA, they would say it's none of their business. These are legal Canadian citizens who have done nothing wrong.

So how do you get that balance right? I guess that would be my question.

[Prof. Arthur Cockfield]

It's a very difficult problem. I hear from these folks all the time who are law-abiding Canadians. Some are so-called accidental Americans; maybe their parents were there on vacation. Anyhow they don't owe any U.S. taxes, but they may owe hundreds of thousands or potentially millions of dollars in penalties. That's the worst part of FATCA, I think.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Hoback.

We'll go to Mr. Rankin, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Chair.

Thank you, everyone, for your testimony today. I would first like to ask a question to Mr. Howlett and then a second one to Mr. Murphy and others.

I think everyone would agree that we have a responsibility as Canadians to protect our tax base. I'm reading your report, Mr. Howlett, and on page 3 you cite a report, at footnote 8, by the CRA in which an internal audit document revealed, and you quote:

...tax practitioners believe the CRA is not doing enough to catch or prosecute tax evaders and that those engaging in non-compliant behaviour believe that the risk of getting caught for evading taxes is remote.

That study you cite is from 2010. Are you aware of any subsequent studies? Are you aware of whether the situation has improved in recent years?

[Dennis Howlett]

I have talked with some CRA staff on an informal basis. The stories I hear would confirm that the situation has not changed. I've heard stories that CRA is so understaffed that it can't even open up some of the automatic information they get from the information exchange with other countries. Some of that information is not even being looked at.

Also, there is a problem of turnover. When they try to negotiate a settlement with a large company or an individual, the law firms representing those companies offer, in the end, to hire away the CRA staff at multiple times their salary. That kind of thing happens.

It is still a serious problem. I would agree it would seem that the international division has not been affected by the layoffs that were announced for CRA, but I really question whether the resources have been increased adequately to deal with the huge and growing problem.

[Murray Rankin, NDP, Victoria, BC]

Mr. Murphy, this is a question for you, if I could, sir.

You cited the OECD report that was released just a couple of days back, arguing for a stronger international cooperation effort with respect to corporate taxes, arguing that multinational corporations get breaks because of their ability to use tax havens vis-à-vis smaller companies. Do you think there is sufficient attention to multinationals in various countries?

In other words, is the CRA in our country going after the low-hanging fruit when it goes after individuals, voluntary disclosure, etc., and ignoring the perhaps more difficult but likely more lucrative efforts it would find if it were to go after the multinationals?

[Richard Murphy]

My experience is not in Canada, so I can't answer for the CRA. I can answer in the U.K. context, and some other European country contexts, which I know.

I would certainly say my experience here is that they're doing exactly as you've described. There is a much higher probability of being audited and investigated if you're a small company rather than a large company. We have a history in the U.K. of making what appear to be somewhat cozy deals with large companies, perhaps the exception, curiously, being GlaxoSmithKline, but by and large, we have had a history that has given rise to a lot of public anger.

We've had our House of Commons holding a lot of hearings into companies such as Google, Amazon, and Starbucks, despite which, and despite everything that is being said about the G-8, nothing they have done, which has given rise to a lot of public anger, will be anywhere touched by the arrangements on tax avoidance that I believe are being brought forward by our U.K. government. To get this right, we're dependent upon changing the rules on things like “permanent establishment”, which is a concept within the OECD double tax agreement. That has been heavily abused.

I discuss this extensively, by the way, in a book that you can get on Monday. It will be published by then. This is an ongoing issue that we really need to address.

[Murray Rankin, NDP, Victoria, BC]

Could I ask others to answer that question, such as Mr. Cockfield, for example?

[The Chair, Conservative, James Rajotte]

Very briefly, please. We have about 30 seconds in this round.

[Prof. Arthur Cockfield]

Oh, okay.

Yes, I agree that there's insufficient prosecution, especially for offshore tax evasion. It's very tough with the mens rea, the guilty mind requirement.

I don't think our CRA has been easy on multinationals. If anything, the audit rate is higher for the businesses, as I understand it, than these individual prosecutions for international tax evasion. I think the CRA has had more resources given to them in the last half-decade. They could use more. There's no question about it.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Rankin.

We'll go to Mr. Van Kesteren, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

Thanks to all of you for appearing before us.

I want to set the record straight, just briefly. I think this is important. Our government has increased the number of CRA experts on the file by roughly 40% from the last year of the Liberal government.

Since 2006, the CRA has audited thousands of cases and has identified more than $4.5 billion in unpaid taxes through our efforts on aggressive international tax planning. This compares to $173 million in the last year of the Liberals.

Volunteer disclosure related to offshore accounts has nearly tripled since 2007. Thanks to the efforts of this government, we are party to over 100 tax agreements. We need to have that fact established.

There's something else that I want to talk about just briefly.

Mr. Howlett, did you say the estimates are that we are losing approximately $5.3 billion to $7.8 billion a year? Could I have just a brief answer? I have to wrap up.

[Dennis Howlett]

Yes.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Okay. I want to put that into perspective.

Not to minimize this, but I did some quick calculations. I come up with about 1.5% to 2% of our budget. To draw a comparison, we lose about that amount to our tobacco industry, which I'm not suggesting is where we should be gaining revenue, but we have taxed our tobacco so high that it is now more lucrative to sell tobacco than it is marijuana.

The reason I'm going in that direction, Mr. Cockfield, is that I think I heard you mention something. Maybe you can just give me a brief answer on this. How does this compare, this $5.3 billion to $7.8 billion, to tax cheats such as roofers who don't pay their GST? Just briefly, do we have any estimates on that?

[Prof. Arthur Cockfield]

I don't know the answer offhand. I just suggested that from my understanding a much greater problem would be the domestic non-compliance tax gap, not the international one.

[A voice]

Yes, agreed.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Okay. The reason I'm going in this direction is that I'm wondering if there is a.... I wish we had some economists here, because I'd love to see the breakdown. I have it in my mind, but I don't have the actual statistics of where our tax revenue comes from.

Is there a correlation between countries that have large numbers of tax cheats and high taxes? I say that because we have in this country a federal government that has reduced corporate rates to 15%, and we've encouraged provinces to follow suit so that we can start to see a tax rate that goes around 25%.... I think what I got from Mr. Wrobel, to some extent, is that most people will pay their taxes.

I think we all saw the news about the French actor who decided to become a Russian citizen because I think the French government....

Mr. Murphy, I'm going to go to you with this question because you have some incredible problems in Europe with some cash issues that governments are needing.... I guess I would ask you, who's the bigger crook? Is it the government trying to get 70% out of this French actor, or the guy who says, “Listen, I'm not going to pay that, so I'm going to another country”?

[Richard Murphy]

Well, I'm a democrat. I believe in the power of the ballot box. President Hollande, I think, went with a mandate to impose that tax, so I can't see how I can say he's a crook when he actually got an electoral mandate to impose it.

So I don't see that issue at all, and never have done. I do think the person who has moved has the right to move, if he can legitimately do so. I would make residence a much stickier issue than it is at present, and my opinion on that is something the U.K. government could certainly listen to. But we do have problems in Europe, and I've looked right across Europe, at all European countries, at levels of tax evasion, and I would say there is no correlation between tax rates and tax evasion.

There are cultural—

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Mr. Murphy, I don't have much time.

Mr. Cockfield, would you agree with that?

I said that represents about 1.5% to 2%. If you look at other jurisdictions across the world, is there a correlation, do you think, between high-tax-gouging countries and those that ask for a reasonable rate?

[Prof. Arthur Cockfield]

I don't know the answer offhand. As Mr. Murphy indicated, some countries, for whatever cultural, historical, or political reason, such as Italy, Spain, Russia, and Mexico—I hope nobody has heritage in these areas. There is a lot of non-compliance even though in certain of those countries the tax rates are not high at all, especially Mexico, for instance.

So I'm not sure if there is a correlation. As soon as you get up to, say, 90% and above, then certainly we would see a correlation. Let's keep in mind that up into the 1950s, for instance, the highest rate here in the United States was something like 90%. So historically rates were higher than they are today.