Evidence of meeting #106 for Finance in the 41st Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was evasion.
A video is available from Parliament.
NDP
Peggy Nash NDP Parkdale—High Park, ON
Mr. Saint-Amans, just to clarify, you're saying it's difficult to measure tax avoidance, but for tax evasion and the use of tax havens, it would be possible to try to measure the gap. Is that your understanding? Or have I got you backwards on that?
Director, Centre for Tax Policy and Administration, Organization for Economic Co-operation and Development Donor Assistance Committee Peer Review Team
No, I personally have a lot of difficulties measuring gaps. What you can do—what the U.S. and the U.K. are doing—to measure the tax gap is not focus on international economy but on the domestic, the underground economy and all that. That's what is measured through a tax gap. It's not only the international; it's the overall.
As regards the international only, I'm not sure you can come up with any figure, including on the fraud, on the evasion, precisely because you do not know the amounts that are hidden somewhere. So you have very strong hypotheses, assumptions, that you need to make when you measure a tax gap. This is an interesting avenue, again very difficult, but you don't need it to find or to take the measures, the actions appropriate to put an end to the phenomenon.
Conservative
The Chair Conservative James Rajotte
Thank you. Thank you, Ms. Nash.
We'll go to Mr. Van Kesteren, please.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
Thank you, Chair.
Thank you all for being here. This is a very interesting discussion.
If I had just tuned in, I would get the impression that there is this enormous, enormous problem worldwide that corporations are cheating governments. We had a witness in last week who estimated that in Canada it's approximately $5 billion to $7 billion. Now that's a lot of money, but when we put that in perspective to our overall budget, and if we take something like tobacco sales, for instance, from which we've pretty much lost the revenue because of the high price of tobacco or the high price of taxation, it's about the same. I think tobacco sales are about $4 billion.
I want to steer this committee and I want to make sure that, as a committee as a whole, we keep this thing in perspective. Not to say that we can't and shouldn't go after tax evaders—and I think a number of you have made that very clear—but I'm wondering...
I guess I want to direct my first question to Mr. Saint-Amans. From the OECA perspective, first of all, is there an estimate worldwide of how much tax is being lost through tax evasion? Have there been studies to determine which countries are most effective? Finally, have there been studies done to see if there is a correlation between that and what happens when taxes are raised?
In this country, we've lowered our corporate tax, and I think most corporations—again, some of the testimony we've heard bears this out—understand that they need to pay taxes. Is there a correlation when nations or jurisdictions raise their taxes to a point where people start to cheat more?
First of all, to the OECA.
Conservative
Director, Centre for Tax Policy and Administration, Organization for Economic Co-operation and Development Donor Assistance Committee Peer Review Team
Thank you very much for these questions. Again, we do not have any estimates. The only estimate we have is based on microdata. We reported to the G-20 last year that the progress in terms of transparency has yielded $15 billion euros over the past three years to some G-20 countries. It's not a rough estimate because it comes from the agencies, but it's pretty small indeed compared to the figures we can find here and there. As you've said, what is behind that is not only the money you collect but the fairness that you introduce in the tax system. If some can hide without any risk and can avoid or evade, then this has an impact on the level of compliance in the country. There is a question of fairness and of undermining the trust in the fairness of the tax system.
Finally, is there evidence of correlation between the rise in the tax rates or the tax base and evasion? The answer is no. There is none, except the empirical evidence, except maybe in the area of indirect taxes on VAT. It is generally accepted, although I cannot refer to a precise survey, that 22%, 23%, and 24% of VAT has a massive impact on compliance with the tax. Obviously the more you ask from the taxpayers, the more likely they are to try to evade taxes. This needs to be put in the context of the efficiency of the government and what they get in exchange for the taxes they pay. That's where you can explain that the level of compliance in some countries with high taxes, such as the Nordic countries in Europe, is much higher than in some other countries where the tax level is lower.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
I just have a quick question, then. We have lowered our corporate tax. We've also hired more inspectors to do the proper job. Are those the two things that you would suggest are the best things that we can do as a nation to combat this problem?
Director, Centre for Tax Policy and Administration, Organization for Economic Co-operation and Development Donor Assistance Committee Peer Review Team
What I can describe is the trend, and the trend indeed is to lower the rates of corporate income tax. And that's an OECD recommendation. To favour investments you need to have reasonably low rates for corporate income tax, and on the other hand to improve compliance. This is why we, the OECD member countries, have launched this initiative. The U.K. is leading this project, supported by Germany, France, Canada, Australia, New Zealand, and many other OECD countries to fight double non-taxation, because we fear that this will undermine the very existence of corporate income tax and we will have this distortion among domestic companies and international companies. It's better to have low rates but make sure that their effective tax rate is comparable to the statutory tax rate.
Conservative
Liberal
Scott Brison Liberal Kings—Hants, NS
Thank you very much, Mr. Chair. Thank you to each of you for joining us today.
Earlier today, the The Economist report was referenced called “Tax havens: The missing $20 trillion”. There's an interesting article in that report titled, "The OFCs’ economic role: The good, the bad and the Ugland. Havens serve clean as well as dirty money". I appreciate your advice on this because Canada's foreign investment is an important source of economic and political influence for our country, and it's really important that we as legislators understand how we can differentiate between, for instance, transactions that are about achieving tax neutrality and those that are about tax cheating.
Your Excellency, investments in places like Costa Rica, Latin America, and the Caribbean are very important as you develop, diversify, and grow your economies.
In December 2011, China invested $900 million to modernize one oil refinery. There's a growth of Chinese investment throughout Latin America and throughout the Caribbean in many of these countries that are deemed OFCs. Is it important that we differentiate that which is legitimate Canadian investment for the right reasons—to develop an economy and also as good investment for Canadian investors—and not diminish that or create barriers to that investment that could effectively reduce our influence and role in these very important developing economies and potentially create an opportunity for others who may be less transparent than our own investors ultimately? I reference the Chinese as potentially among that category.
Your Excellency.
Luis Carlos Delgado Murillo
Personally, I think that one of the tools that I have to measure the effectiveness of those foreign investments is how many jobs, new jobs, are in the economy. That's perhaps one of the reasons, because your country and my country are doing the best to grow the economy—but not only to grow the economy but as well to create more jobs. So perhaps personally, again, my answer is that I feel comfortable if we can measure the effectiveness of this activity with how many new jobs are created with this investment.
Liberal
Scott Brison Liberal Kings—Hants, NS
But specifically, how can we differentiate between that legitimate investment, and even that investment that is designed to achieve tax neutrality in OFCs, versus outright cheating?
How can we differentiate that? Because I think that's a very important question for us in terms of how we proceed.
Professor, Rotman School of Management, University of Toronto, As an Individual
That's a very important question, and I think it really comes down to the whole issue of transparency and disclosure of information. You think about the impact of deploying these global strategies on real economic activity; the work that I've done has looked at the impact on Canada. What the evidence clearly shows is when Canadian multinationals use the offshore jurisdictions to deploy global strategies, there are positive impacts on Canada.
Coming directly to your question, these are very difficult studies to do. The question is, will these positive benefits be the same in environments where there's a lack of transparency in contrast to environments where there's more transparency, and so on? The evidence tends to indicate that when there is more transparency, then the legitimate use of these offshore centres to deploy global strategies is the motivation.
Liberal
Scott Brison Liberal Kings—Hants, NS
So is FATCA the best game in town in terms of.... Not to make perfection the enemy of the good, but is that what we ought to be focused on? Is that the best way?
Barrister and Solicitor, Morris Kepes Winters LLP Tax Lawyers, As an Individual
I think the United States is in a unique position because it taxes its citizens based on citizenship. So if a U.S. citizen lives in the Bahamas, they still have to file a report of U.S. return. Same thing in Canada.
The problem with FATCA is that essentially it's the extraterritorial application of U.S. law. In other words, Canada is allowing the U.S. to get information directly from a Canadian financial institution about a Canadian resident. But short of that, you'd have to have a multilateral FATCA in order to achieve and get the results and get the information that the government would need in order to pursue the—
Barrister and Solicitor, Morris Kepes Winters LLP Tax Lawyers, As an Individual
Yes, but it becomes a little bit like pushing mercury. Outside of the G-20, even if you implemented a FATCA for the G-20, there might be a 21st, a 23rd country that would not comply with FATCA. There are probably financial institutions that are not complying with FATCA because they may not want to carry on business in the U.S.
Canadian banks do carry on business in the U.S. and the penalty for not complying with FATCA is severe.
Conservative
Conservative
Mike Wallace Conservative Burlington, ON
Thank you, Chair. It's my pleasure to be back here at Finance. It's a little bit of a déjà vu because I recall when I was still on the committee previous to the past election, we were studying tax evasion programs then. I think it's interesting the committee is still looking at it. But anyway, I appreciate the presentations today.
I do have a couple of questions. I'll start with our lawyer friend. There's a question that I had previously. To me, when somebody says tax avoidance—I buy an RRSP, I'm technically avoiding tax by delaying it, by paying it when I retire. So I'm more interested in the evasion aspects. But your profession was somewhat criticized by a professor from Oxford. As a tax lawyer, and a taxer, what is your actual responsibility to the people of Canada? If somebody comes in your office, and says “we would like to do this”, what is your legal responsibility in terms of advising clients? I don't want specifics, but give me a general, if you could.
Barrister and Solicitor, Morris Kepes Winters LLP Tax Lawyers, As an Individual
Lawyers have an obligation to their clients, first and foremost, to be advocates for the client in a situation of either litigation or criminal matters. We have an obligation to be frank with our clients and to provide them with legal advice; in other words, to interpret the law, for example.
Lawyers have an ethical duty to the state: we have an obligation with respect to the courts. We are considered officers of the court. We cannot mislead a tribunal or a judge. That's essentially the obligation to the state.
However, confidentiality and solicitor-client privilege would prevent a lawyer from calling the CRA to report that a client has come into the office. We obviously cannot advise a client how to break the law; we have to tell the client that “this is the law”. But I do not have a duty to the state to ensure that the client files a tax return or reports his income.
It is similar to someone asking about drinking and driving. I can tell people what the penalties are for drinking and driving and I can tell them that they shouldn't do it, but I can't stop somebody from drinking and driving.
It's the same thing with tax avoidance. I can legitimately design a plan for a client and advocate for that client as to the legality of the plan, but I cannot contribute to a fraud or tax evasion or be a dupe of a client.
Conservative
Mike Wallace Conservative Burlington, ON
When the professor quotes a study done in Australia or wherever that was sent out to a number of law firms and reports the response, are you surprised at the response: that you got paid more if you kept it quiet, and so on?
Barrister and Solicitor, Morris Kepes Winters LLP Tax Lawyers, As an Individual
As my initial action, I was reminded of that point in Shakespeare's Henry VI , part 2, when Dick the butcher says to Smith the weaver that if he were king he'd kill all the lawyers. That was my initial reaction to this, that it's always “blame the lawyers”.