Finance Committee on Feb. 14th, 2013

[Mark Adler, Conservative, York Centre, ON]

This morning the Chancellor of Germany, Angela Merkel, gave a speech in Germany in advance of the G-20 finance ministers meeting in Moscow.

She said, and I'll quote:

It's not right that giant global companies have huge sales here [in Germany], in all of Europe, in the United States and elsewhere and then only pay taxes somewhere in a tiny tax haven.

That's why we're going to fight to finally put an end to tax havens at the G8 meeting this year in Great Britain. The whole world will have to fight for it, otherwise we won't accomplish that.

We also know that the OECD, just earlier this week, gave an urgent call for overhauling corporate tax rules.

First, Mr. Cockfield, what would you say is driving this determination?

Second, although you only have a minute or two to talk about this, if the G-20 finance ministers came to you and said, “Design a regime that would accomplish this for us”, what would that regime look like?

[Prof. Arthur Cockfield]

We're dealing with the issue of international tax avoidance and the usage of tax havens. This is a very tough problem. As I mentioned, the Canadian tax laws have a multitude of provisions that subsidize, effectively, international income. We don't give a break normally to the domestic income generated by our multinationals, but we do not tax the profits of the active business of our multinationals earned abroad.

I agree with the OECD and the G-20 that the best course would be enhanced cooperation and then some kind of worldwide agreement on more restrictions on domestic tax laws that permit these subsidies. The OECD tried this in 1998 through its harmful tax competition project, later renamed the harmful tax practices project. I think they made a lot of progress there. But the business lobby is very powerful. They will not like any reform efforts that cut down on their ability to use these very favourable tax provisions on the argument that they need it to compete on a global basis.

So you've got your work cut out for you.

[Mark Adler, Conservative, York Centre, ON]

Mr. Cockfield, tell me, what's in it for the tax haven?

[Prof. Arthur Cockfield]

Currently, as mentioned, they operate more or less as a conduit. Take Barbados as an example. We've had a treaty with Barbados since I think 1981. It's our third-largest destination for foreign direct investment going abroad. This is a wonderful country of about 300,000 people. It's not necessarily, obviously, a consumer market. Our companies base holding companies there so that they can bring the profits from international sales back to these holding companies. They sit there, and these profits can be brought back to Canada on a tax-free basis.

So they're used by our multinationals to lower their global tax liabilities—

[Mark Adler, Conservative, York Centre, ON]

Sorry to interrupt, Mr. Cockfield, I get that part, but what's in it for Barbados?

[Prof. Arthur Cockfield]

Well, Barbados has a thriving financial industry that collects millions of dollars in fees. From my experience in working in Barbados at the University of the West Indies, it's a very sophisticated tax-advising group. That's their livelihood. It's roughly 15% of their GDP, the financial industry, and it's a very important part of their economy.

It's the same with respect to certain other countries. Of course, the biggest tax haven by far in the world—a half to one-third of the world's tax haven moneys—is Switzerland alone, but important other players exist in the Caribbean, the Isle of Man, and in other places, of course, throughout the world. They make a lot of money off this.

[Mark Adler, Conservative, York Centre, ON]

How do we disincentivize these jurisdictions?

[Prof. Arthur Cockfield]

There have been discussions in Australia, in particular, to give them some incentives—either outright direct grants, make it easier for folks in certain countries to attend Australian universities—to reduce their tax haven financial industry work. To me, that's not very realistic.

Again, if you think about it, you're a banker in Barbados, this is your livelihood, and you've probably made some relatively decent money through this work. So why would you give it up? This is important work. For a major player like Switzerland, their raison d'être is to serve as one of the big financial centres for the world. But we're part of the problem. Mr. Murphy mentioned London. A lot of the world's illegal moneys are deposited in London bank accounts, maybe rerouted through the Cayman Islands or somewhere else.

So the whole world is a problem. We're all benefiting. Certainly the banking industry, in particular, derives massive benefits. I'm talking about the Canadian banking industry, which has affiliates all throughout the world, particularly in all of these tax havens I just mentioned. A lot of money is being made.

[The Chair, Conservative, James Rajotte]

Unfortunately, you're out of time, Mr. Adler.

Thank you very much.

Mr. Côté, you have the floor.

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

Thank you, Mr. Chair.

Mr. Cockfield, I would like to ask you a question about transfer prices involving corporations.

Last fall, the Supreme Court heard the case of Canada versus GlaxoSmithKline Inc. The Department of National Revenue alleged that the company had abused the practice of transfer prices between companies. Glaxo Canada was purchasing ranitidine, the active ingredient in the drug called Zantac, from its Swiss subsidiary. The prices varied between $1,500 and $1,650 per kilogram. At the same time, generic drug companies were purchasing the same product on the international market at prices varying between $200 and $300.

GlaxoSmithKline Inc. won its case before the Supreme Court on the grounds that the difference between the price paid on the international market by generic drug companies and the price paid by Glaxo Canada to its Swiss subsidiary was justified because of the intellectual property that led to the launch of Zantac and the right to use of Zantac.

In its ruling, the Supreme Court stated the following:

Section 69(2) requires the court to determine whether the transfer price was greater than the amount that would have been reasonable in the circumstances, had the parties been dealing at arm's length. If transactions other than the purchasing transaction are relevant in determining this question, they must not be ignored. Section 69(2) does not, itself, offer guidance as to how to determine the “reasonable amount” that would have been payable had the parties been dealing at arm's length.

In your opinion, is this simply a problem of defining what this famous competitive pricing is? If not, is it the method itself that is ill-adapted, as Mr. David Rosenbloom, a witness who appeared before this committee, stated last week?

[Prof. Arthur Cockfield]

Transfer pricing, of course, is a very complex issue. Just out of interest, I'll mention that here in the U.S. they had a similar transfer pricing case against Glaxo—a very similar structure with the Swiss affiliate and Zantac, and so on—and Glaxo settled this matter and paid the U.S. government $3.4 billion. This was roughly 10 years ago, to give you a sense of the dollars at stake.

Again, on a similar cross-border structure, we lost the case at the Supreme Court, as you just mentioned.

The case was based on section 69. That's now section 247 of the Income Tax Act, so that provision has actually changed. Unlike certain countries, Canada has chosen to go the very short version of the transfer pricing laws and so-called arm's-length pricing laws. The CRA produces an administrative bulletin, an information circular, that backs up these laws in great details and suggests how the law ought to be interpreted.

We can question whether that case is particularly relevant, because the law has changed since old section 69.

My recommendation elsewhere is that our Income Tax Act should more carefully prescribe what is meant by fair market value that is an arm's-length transaction to discern the appropriate transfer price between related entities based in different countries.

Glaxo is a very controversial case. Some folks say the government just didn't use the proper argument, and that's why the case was lost. In other words, the courts interpreted the section properly, but it wasn't argued that well before the initial Tax Court of Canada as well as the subsequent appeals.

Anyway, Glaxo is a real controversy. I think the transfer pricing laws could be tweaked to do a better job.

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

Very well.

I would like to put one last question to Mr. Wrobel on the bilateral information-sharing agreements.

The Organization for Economic Co-operation and Development has been very critical of this method and has been supporting a multilateral approach as we head in to the Moscow meeting to consider this issue. Do you support a multilateral approach?

[Marion Wrobel]

Again, my colleague is the right person to answer that.

[Darren Hannah]

Absolutely. From our perspective, Canadian banks operate on an international platform, to the extent that you can have international harmonization as opposed to bilateral arrangement. That's a good thing.

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

Very well.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Mr. Murphy, do you want to comment very briefly on Monsieur Côté's questions?

[Richard Murphy]

I think the transfer pricing issue is an extremely complex one. The problem with transfer pricing is that it is fundamentally intellectually flawed, because you're trying to tax each company as if it were independent of all others inside the same group of which it's a member. But the reality is that they are only members of the group because they make more profit that way. Therefore, you guarantee that you will undertax the profits of a multinational group by applying arm's-length transfer pricing. The inevitable consequence is that some money will always float off untaxed to a tax haven. It is actually a system that cannot be tweaked to be put right. It is beyond redemption.

We need to move towards a unitary basis for taxation for international multinational companies, and we need to move to an accounting system called country-by-country reporting, and I declare an interest as I designed it, which would actually provide information for each country where a multinational trades—what its trade is, what its profit is, and so on—so we can actually apportion profits fairly.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Hoback, please.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Chair.

Thank you, gentlemen, for being here this morning. It's probably this afternoon for you, Mr. Murphy.

This study has been very interesting because it has many dynamic aspects to it—different branches, different levers—that come into play here.

The one I'm going to explore with you guys is a combination of how we can make the system better and what tools we need to provide CRA, the RCMP, and the banks to get better reporting processes and actually more convictions and more disclosure, or voluntary disclosure by threat of convictions.

I'm looking at the mandatory disclosure of ownership of companies and individual accounts. I know you guys have talked about that.

I'm just kind of curious. In the banking sector, when a company sets up a bank account, do you know who the shareholders are?

[Marion Wrobel]

We'll get back to you in writing on that.

[Randy Hoback, Conservative, Prince Albert, SK]

I'm curious, because if you have a multinational company, you will have shareholders coming in and out of that ownership with different classes of shares. I don't think they're showing up on your ownership sheet. How would you report that? That would be my question there.

The need for transparency is something I think everybody would talk about as being important. How do you properly do that, and in what fashion do you do it to make it manageable so that it's actually useful? The other thing you can do is give too much information, but if it's of no use, it doesn't accomplish anything.

Mr. Howlett, you talked about CRA closing loopholes. One thing we've done is to give CRA more tools so they can close some of those loopholes. I agree with you that we need to close more loopholes, and we need to keep looking at new technology, such as payment by phone, and how that's going to impact money moving around the world. It may not even go through a bank at some time in the future. It may go through cellphone companies or other companies that are handling those types of transactions. So you need to have that technology always being updated by CRA and the RCMP.

[Dennis Howlett]

Could I just respond to one question here?

I don't question that Canadian banks are probably pretty careful in terms of beneficial ownership accounting in Canada, but I would question what they do in their subsidiaries in tax haven countries. Even if they conform to the rules in those countries, they may not need to collect that information there, even though I'm sure they do here in Canada.

[Randy Hoback, Conservative, Prince Albert, SK]

You actually read my mind, because I was just going into a situation where you have a Canadian bank operating in Canada and operating in the U.S. under the same name. I set up a bank account in the U.S. and I thought it would be very easy to move money back and forth. I found out they are two totally separate entities when it comes to actually working with either one of those banks.

Mr. Hannah, how would you accommodate that? In operations from country to country, how do they report that type of information among themselves?

[Darren Hannah]

I'm sorry, you're going to have to rephrase the question because I'm not following.

[Randy Hoback, Conservative, Prince Albert, SK]

We have different processes. If there is a Canadian bank that has subsidiaries around the world, what are the obligations for those subsidiaries to report back to the Canadian branch on things that may be of suspicion, such as large amounts of money moving around or...?