Thank you very much for inviting me to speak to the committee.
As for my own credentials, I'm a professor of economics at the University of Oxford. I specialize in international economic issues, especially in the poorest countries. Prime Minister Cameron asked me to be the adviser on Britain's G-8, leading on tax issues. Britain is the host of the G-8 this year. In fact, I'm invited to the OECD on Friday to talk about the same set of issues.
I'd recommend, incidentally, last week's issue of The Economist magazine, which had a 12-page feature on this very issue. If you missed that, The Economist gives you a pretty good overview of tax havens and their importance.
Both avoidance of taxes and evasion matter. Avoidance is a matter of abuse of the law. Evasion is a matter of concealment. Canada, like other OECD countries, has become a victim of both of these phenomena.
Most of my work is on poor countries, which have been victims of these things for a long time, for much longer. This is the rare case where, in fixing our own problems, in putting our own house in order, we actually benefit the poorest countries in the world as well. It's even more of a problem for them than it is for us, so I congratulate the committee on focusing on this.
I'll start with some comments on tax avoidance. Of course, laws have intents and objectives, as well as legal language, so smart lawyers on the other side of course will be finding ways to meet the letter of the law but not comply with its objective and its intent. That is a continuing process, and the tax tables reflect the phenomenon, whereby very smart and very highly paid lawyers have managed to get quite a bit ahead of the intent of the law. It's now important that we do a catch-up process.
There is no once-and-for-all fix. It's like how the body fights disease: you have a constant struggle of changing the locks as the germs innovate and the body defends. That's what a legal system has to do to try to keep pushing back against these smart lawyers who innovate.
What is the heart of tax avoidance on the international scene is the misallocation of economic activity, the pretense of the signed ownership of an activity in a zero tax environment when the real activity is taking place somewhere else. This has become very prominent, certainly in Britain because of the case of Starbucks that has recently come to light: the company has paid virtually no tax in Britain. It appears to run as a charity, but it does pay very substantial payments to a subsidiary company in the Netherlands Antilles, which happens to be a zero tax environment.
Starbucks pays tax on its activity in Britain in a country that happens not to levy any tax. For next year, Starbucks has offered to pay more tax voluntarily despite the fact, and indeed because of the fact, that it's selling less coffee. This paying more tax on selling less coffee demonstrates the astounding divorce between real activity and profits. For an international company, profits could become a voluntary activity.
As the previous speaker said, companies like Starbucks are competing against local firms that don't have that opportunity, such as, in Britain, Costa Coffee. The tax tables are introducing an element of unfair competition.
There are more than 700 independent tax jurisdictions in the world. Most of those jurisdictions cannot be locations for significant real economic activity. The fact that a lot of activity appears to be taking place in those places is just a demonstration of abuse, of tax avoidance.
Going from tax avoidance to tax evasion is about concealment, and the heart of concealment is setting up companies where the beneficial ownership, that is the true owners of the company, cannot be ascertained. This is a relatively recent phenomenon and it has grown to extraordinary proportions. The epicentres of this are the lawyers in advanced countries working in partnership with branch offices in tax havens.
There was a recent study by a British university in Australia sending out 7,000 e-mails to legal service providers, organizations that will set up legal companies. These 7,000 e-mails asked the law firms around the world to set up companies in which beneficial ownership could not be ascertained, and various degrees of incriminating information were placed in the e-mails. For example, we'll pay you more if you'll keep it all completely secret. The success rate of these e-mails, the proportion saying, yes, we'll do it, was 40%, and it went higher than 40% in the e-mails that offered extra payment for complete secrecy. So there is a very serious problem here. It is extraordinarily easy to set up these shell companies, which can then set up bank accounts so money can be hidden—