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.
Conservative
Brian Jean Conservative Fort McMurray—Athabasca, AB
In relation to what was mentioned previously, to measure the amount of tax evasion—I'm not a grain farmer, but I do fish—it's sort of like going fishing and telling you what I'm going to catch before I throw my line in the water. Wouldn't you agree with that?
Professor, Rotman School of Management, University of Toronto, As an Individual
Yes. I think you could come up with better measures than just a simple guess.
Conservative
Brian Jean Conservative Fort McMurray—Athabasca, AB
Exactly. In fact many methods would give you a more accurate scenario, but the truth is that what we need to do is to be more particular in relation to how we combat it itself and hope that we come up with a solution as far as the amount of the money overall goes. Would that be fair to say?
Professor, Rotman School of Management, University of Toronto, As an Individual
Absolutely. I'm quite concerned that in reaction to stories like the one about Starbucks and so on, a policy that is too aggressive to address these issues misses the wider benefit that offshore financial centres can play for a country like Canada as we continue to expand globally.
Conservative
Professor, Rotman School of Management, University of Toronto, As an Individual
I think absolutely it could hurt us.
Conservative
Brian Jean Conservative Fort McMurray—Athabasca, AB
So we have to be careful where we draw that line on the ground.
Professor, Rotman School of Management, University of Toronto, As an Individual
Yes. There's a study by the Department of Foreign Affairs that looks at Canada's reach into the BRIC economies, into these emerging markets, and it shows that we are lagging behind other OECD countries in terms of our penetration of these other markets. We're too tied economically to the U.S. and Europe and Japan, and hence Mark Carney has been quite critical of Canadian companies and wants us to be more international.
My research shows that using these offshore financial centres allows us to offset the risks associated with going to these unfamiliar markets.
Conservative
Brian Jean Conservative Fort McMurray—Athabasca, AB
Okay.
Some people have said that the CRA has an inability to pursue the complex offshore cases. I know that in Britain they've established a task force for a high net worth unit to pursue these. In Australia they've set up units to handle offshore tax avoidance. Would you suggest that's something Canada should do, that the government should move forward with?
Professor, Rotman School of Management, University of Toronto, As an Individual
I don't want to go outside my area of research, but specifically any revenue generated in Canada should be subject to Canadian taxation. And anyone who uses any of these methods to avoid taxes legally due in Canada is committing tax evasion and should be prosecuted for that.
Offshore financial centres should not be used to shelter income legitimately earned in Canada. It should be legitimately taxed in Canada. So if I'm a company in Canada earning money, I should pay taxes that are legally due. If someone is using an offshore centre to hide that, that in my opinion is going too far.
But then it becomes very complicated. The question I deferred on earlier had to do with transfer pricing. When you have these very aggressive transfer-pricing strategies that allow companies to move profits from one jurisdiction to another, I think that's where the issue is. I don't think the issue is with offshore financial centres.
Conservative
Brian Jean Conservative Fort McMurray—Athabasca, AB
In fact that was going to be my next question. If they suggest it's too complex, wouldn't it be better to simplify the process itself and get cross jurisdictions such as the United States and other major financial powers to agree to some other form of taxation?
Professor, Rotman School of Management, University of Toronto, As an Individual
Without saying too much, because you're going into an area in which I haven't done formal research when I talk about transfer pricing, I would tend to agree with you.
Conservative
Brian Jean Conservative Fort McMurray—Athabasca, AB
Mr. Kepes, would you suggest that it would be advantageous to Canada to pursue that? In the meantime we are going through and negotiating agreements, and we've been quite aggressive in these bilateral agreements with other countries and will continue that. Would it be to our advantage to look at the other options to make a simpler and less complex set of variables that would lead to more efficiency and fewer free rides?
Barrister and Solicitor, Morris Kepes Winters LLP Tax Lawyers, As an Individual
There are actually enough laws and regulations for the Canada Revenue Agency to get the information they need. If there's a transaction going through Barbados or Ireland or wherever Canada has a double tax treaty, there is already legislation on exchange of information and there are provisions in the treaty to provide that information. My concern, I'd call it—and I do this for a living—is that I just don't see the results or the efforts on the evasion side on the ground. I know the Canada Revenue Agency has increased the number of auditors, for example, in their tax avoidance area. They have hundreds of auditors looking at tax avoidance. They have centres of excellence dealing with international transactions. But I don't know if that's translating to what's known as the special investigations or the enforcement division within the Canada Revenue Agency. That's their internal police department.
Conservative
Brian Jean Conservative Fort McMurray—Athabasca, AB
We have seen a tremendous increase, a threefold increase, in the amount of money we have identified over the last six years over previous years.
Barrister and Solicitor, Morris Kepes Winters LLP Tax Lawyers, As an Individual
That's true, and the Canada Revenue Agency's website has a page devoted to convictions where they show the last three months of convictions. Maybe this would be something for the committee to get information on in terms of the referrals that are coming from the RCMP or FINTRAC, or even, on the convictions page of the CRA, how many of them actually involve offshore...?
There may be an issue—whether it's resources or training or just plain desire—that it's easier to get the low-lying fruit than it is to get those complex international tax evasion transactions. They're just very hard to find. I sympathize with the committee. And I sympathize with the CRA, to be honest. It's not like finding a body in a room where you can do forensics and you know that a crime has happened. Tax evasion, by definition, is deceit.
Conservative
The Chair Conservative James Rajotte
Thank you.
Thank you, Mr. Jean.
We'll go to Mr. Rankin now, please.
NDP
Murray Rankin NDP Victoria, BC
Thank you, Chair.
Thank you to the witnesses who've appeared.
I would like to focus my questions on Professor Collier and Mr. Kepes, and talk a little bit further about transfer pricing.
Professor Collier, you talked about multinationals making profits on voluntary activity, if I have your quote. The magazine The Economist, to which you referred us, talks a lot about possible reforms of the transfer mispricing, and it gives two suggestions. One is referred to as unitary taxation, which would aim to tax activities where they actually occur, it says, not where some tax adviser has shifted them, and companies would produce a single set of accounts on their worldwide profits and that's where the taxation event would occur, in that jurisdiction where the activity occurred. That's one idea they have.
The second idea I'd like your views on is the requirement that multinationals disclose the name, location, financial performance, and tax liability of each of their subsidiaries, and the role that the tax havens have played.
Do you think either or both of those ideas would help us address the issue of transfer mispricing?
I'd like to ask Professor Collier first, and then Mr. Kepes, please.
Professor, Economics and Public Policy, Blavatnik School of Government, University of Oxford, As an Individual
I think the starting point is indeed transparency in reporting. I think that would take us a long way.
If I can cite it, the British accountancy profession has recently done a report on this. It concluded that in the end the best enforcement was transparency: that companies had to get themselves in a position whereby they could defend and justify publicly what they had done, and that if they couldn't justify it publicly, then they probably shouldn't be doing it. So if they took the transparency or corporate reporting showing whether there is a reasonable correspondence between the distribution of reported profits and the distribution of genuine economic activity, that is something that transparency could itself police.
If transparency isn't enough, then what are the alternatives? The alternatives are basically some system that overrides the company's own choice of how it divides up profits between jurisdictions and in the end assigns profits on some other basis. It's very hard to do that. It's very hard to get agreement on doing it.
Where I think you possibly could get agreement—and this is where the G-8 and G-20 are important—is in fact in this distinction between reasonable tax competition between, say, Canada and America, both centres of genuine economic activity, and abuse by tax tables, which are not standards of genuine economic activity but which come in with zero tax. The mutual zero tax is a situation that we very definitely want to avoid, whereas competition between centres of real economic activity in their tax rates is entirely legitimate and, indeed, healthy.
I think the full unitary taxation approach is not going to happen anytime soon, but I think there may be a halfway house in which first you get transparency, which polices things, and second, where there are blatant abuses, despite transparency, there is some agreement amongst the major centres of real economic activity that they will jointly police the abuse of the system that transfers profits to places that don't have real activity.
Conservative
NDP
Murray Rankin NDP Victoria, BC
As well, Mr. Kepes, if you could, I know that there was a case, the GlaxoSmithKline case, about transfer pricing last year, and I know that there's been some reaction to it. Perhaps you could speak to that in your answer.
Barrister and Solicitor, Morris Kepes Winters LLP Tax Lawyers, As an Individual
Your questions are excellent. The unitary tax would require a complete rejigging of the international tax system in terms of how that's based. I think it's worthy of study. I think it would be very difficult to implement. I think you'd need to have an almost global tax-collecting entity to be able to make those allocations among countries, as opposed to leaving it up to each country. The State of California tried to implement something like that for their state tax, and there was a hue and cry, let me tell you.
On the transfer pricing in Glaxo, the Glaxo case represents two things. Number one, it was a huge loss for the Canada Revenue Agency. On the other hand, it did provide a certain amount of certainty to Canadian companies and multinationals with respect to the Canadian law. That is because the Supreme Court of Canada essentially decided that the Minister of National Revenue should not supplement or replace a business person's commercial reason for having a transfer price or entering into a commercial transaction with that of the Canada Revenue Agency.
In other words, the fundamental issue in Glaxo was that there was an additive to their Zantac stomach ache remedy, and it was possible to buy that additive from a generic drug company for, let's say, a tenth of the cost. The Canada Revenue Agency reassessed Glaxo and said that the fair market value must be what the generic company sells that additive for. Glaxo went all the way to the Supreme Court to have the Supreme Court say no, that's not true, in spite of the fact that the generic company could be selling an additive for 10¢ a pound. The fact is that the related entities of Glaxo provided additional value added with respect to that additive, which justified that fair market value price. As I said, it's a loss for the Canada Revenue Agency, but it did provide a certain amount of certainty within the transfer pricing area.
Transfer pricing in and of itself is really only transactions between related companies, such as, for example, a Canadian parent or a Canadian subsidiary, typically of a U.S. parent company. It's a decision on what the proper transfer price is. There are mechanisms between Canada and the U.S. as to what happens if Canada decides that the price should be higher and the U.S. says no, that they think the price should be higher on their side. There are mechanisms to take that into account.
Conservative