Finance Committee on June 17th, 2013

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Again, just to confirm, this is following the general structure that is recommended and that the OECD advises. We're really heading down a path that of course is complicated, but what we're talking about today is a piece of legislation that the finance department has negotiated, that the CRA will administrate, and that is an important tool in the tool box. Is that a good summary?

[Alain Castonguay]

Absolutely.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

But one tax convention cannot be all things for this very difficult battle.

[Alain Castonguay]

Obviously, we will be able to request information, and that will certainly improve our ability to apply our tax laws and deter those who think they might avoid the fisc by putting money in Hong Kong.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

I think our conversation today is focused a little on the tax-evasion component of this. I think we haven't focused so much on supporting the confidence of people as they do business in other countries. We live in a global world and, that's another important element in terms of this particular treaty. Is that accurate?

[Alain Castonguay]

Absolutely. In the case of Hong Kong, we have a vibrant bilateral economic relationship and this will absolutely help make it easier in terms of cross-border trade and investment.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you.

[The Chair, Conservative, James Rajotte]

Colleagues, I know there are further questions for the officials, but as I described at the beginning, the officials will move away from the table; they will listen to the witnesses; and then they will come back for clause-by-clause consideration, at which time members will have a further opportunity to clarify issues with the officials.

Right now I am going to suspend for a couple of minutes. We will bring our other witnesses forward. We will have their opening statements, and then there will be questions from members. Thank you.

[The Chair, Conservative, James Rajotte]

I call this meeting back to order. I want to thank our witnesses for appearing on very short notice. The committee appreciates that very much. With respect to our study of Bill S-17, we have five witnesses before us.

We have Brigitte Alepin. Welcome again.

We have Professor Arthur Cockfield from Queens University.

From the organization Canadians for Tax Fairness, we have Mr. Dennis Howlett. Welcome back.

By video conference from Washington, D.C., we have Mr. David Rosenbloom.

Mr. Rosenbloom can you hear me okay?

[H. David Rosenbloom, Caplin and Drysdale, New York University, School of Law, As an Individual]

I can. Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you for being with us here today.

And from Paris, France, we have Mr. Alain Deneault.

Mr. Deneault represents the Réseau justice fiscale Québec.

Welcome, Mr. Deneault.

[Alain Deneault, Researcher, Réseau justice fiscale Québec]

Good morning, and thank you.

[The Chair, Conservative, James Rajotte]

We will start with Madame Alepin.

Ms. Alepin, you have five minutes for your presentation.

[Brigitte Alepin, Chartered Accountant, Tax Expert, Tax Policy Specialist, Author, As an Individual]

Good morning. Thank you for the invitation. It's a privilege to be here today to talk about the merits of Bill S-17.

I do not support Bill S-17 because it represents an additional step toward the implementation of a global tax system where wealthy corporations or individuals can legally benefit from tax havens and avoid paying their fair share of taxes.

With the support of tax-optimization strategies, the Canada-Hong Kong tax treaty, for example, which Bill S-17 refers to, enables the legalization of a partially or totally tax-free corridor between Canada and a number of Asian countries.

This tax privilege does not come under the specific sections of the treaty, but relates to the simple fact that the Canadian tax system doesn't tax income from subsidiaries of Canadian multinationals in countries with which Canada has signed a tax treaty or an agreement to exchange tax information.

Given that the corporate tax rate is 16.5% in Hong Kong and about 25% in Canada, the Canada-Hong Kong treaty does more than avoid double taxation. It provides a 40% savings to Canadian multinationals that will export revenue to Hong Kong.

In addition, tax plans are already being developed to legally increase this 40% tax savings to a total tax exemption.

In a recent special report presented by Tax Analysts, an international think tank intended mainly for tax practitioners, the renowned Montreal tax specialist, Nathan Boidman, explains that revenue made in Hong Kong could be 100% exempt from Canadian and foreign taxation when subsidiaries set up in Hong Kong collect interest income, earnings gained from licensing or when corporate structures set up in Asia include a number of jurisdictions and where the revenue only passes through Hong Kong.

Thousands of tax agreements similar to the Canada-Hong Kong treaty currently exist between countries, so much so that they are being manipulated strategically. It is now legal for the world's wealthy corporations to pay 2% tax, if not no tax.

To compensate for the erosion of the tax base caused by this tax exemption for revenue exported legally to tax havens or jurisdictions that are taxed less, other taxpayers, the workers, the SMEs, major corporations here, all these immobile taxpayers are the ones who have to pay. And if they try to partially or totally avoid paying Canadian tax by using tax havens, like the wealthy corporations or individuals do, it is considered illegal for them. Moreover, as indicated in the various provisions of Bill S-17 relating to the exchange of information, the Canadian government is serious about its mission to corner those offenders.

I do not support Bill S-17. However, I wonder if the effort made to implement these bills or even to contest them is the optimal way of stopping the implementation of this preferential tax treatment reserved for the wealthy. I might invest as much of our limited resources as possible in trying to replace international tax competition, which is the very essence of our current global problem, with some tax co-operation.

Thank you for your attention. I would be happy to answer any questions you may have.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Professor Cockfield, go ahead, please, with your presentation.

[Professor Arthur Cockfield, Professor, Faculty of Law, Queen's University, As an Individual]

Sirs et mesdames, thank you very much for this opportunity to come here to speak before your committee again.

I'll have some initial comments about the treaties with Namibia, Serbia, and Poland, but really I'll confine my comments to some of the areas of controversy that have arisen this morning with respect to automatic versus information-on-request exchanges.

I did review those three treaties that I just mentioned. They seem not controversial to me. They generally track the OECD model tax treaty. As Monsieur Castonguay mentioned, Canada has been a member of the OECD since its inception. We follow the OECD model tax treaty for the most part. While I did not conduct a detailed examination of the treaties, they seem to me to follow most of the other Canadian treaties in this area.

I would like to make a few comments about the other three treaties, though, with respect at least to the exchange-of-information provision. This is a very fast-moving area. In defence of the Department of Finance, very few countries historically ever agree to automatic information exchange, but really we've seen in the last six months an explosion of activity in this area.

In particular, in April it was revealed through the ICIJ, the International Consortium of Investigative Journalists, that they had received the largest data leak in history, involving over 2.5 million documents and a suspected 450 Canadian taxpayers, according to the CBC.

Incidentally, in my last appearance I couldn't speak about this, but since the CBC has publicly disclosed their investigation—and I have been retained by them since the fall to review aspects of the data leak—I can now share with the committee some of the findings, at least those that have been publicly reported. The ICIJ leak created a controversy, particularly in Europe. The EU commission is now pushing for automatic information exchange.

With respect to countries like Luxembourg and Switzerland, recently they've agreed to engage in automatic information exchange with countries like the United Kingdom. They call it a “Rubik agreement”. It's slightly different from historical agreements; it's complicated, but you either exchange information on an automatic basis or the non-resident taxpayer pays a gross withholding tax at a rate of 30% or 40%, depending on the agreement.

Similarly, the U.K. has managed, just in the last few months, to reach automatic information exchanges with some of the tax haven affiliates or former colonies of the U.K., like the British Virgin Islands—again, identified as one of the major tax havens in the ICIJ data leak—and other countries like the Isle of Man. So there's been this recent push in favour of automatic exchanges.

The three treaties that I'll now touch on very briefly are interesting. Hong Kong I think is still consistent with the OECD model treaty. It inserts wording that says they are not required to engage in automatic exchanges or spontaneous exchanges. It's a somewhat redundant statement in this new agreement in that, again, historically Canadian treaties, based on the OECD model, envisioned three types of information exchanges: automatic, requests on demand, and spontaneous. The Hong Kong treaty doesn't carve out the potential, at least, for automatic or spontaneous exchanges. Anyhow, it's just an interesting treaty amendment that I haven't seen in the past.

Luxembourg and Switzerland seem to have taken more care to ensure that Canada will not be able to exchange on an automatic or spontaneous basis. The problem with this is that the OECD model commentary, as it currently stands, indicates that article 26 follows those three routes. If we agree to at least the latter two tax treaties with Luxembourg and the U.K., we're no longer following the OECD model treaty.

But again, things are moving so quickly it's understandable that Finance may have felt pressure in the last year to conclude these treaties on the basis that it did.

Thank you, sir.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Mr. Howlett, please.

[Dennis Howlett, Executive Director, Canadians for Tax Fairness]

Thank you for the opportunity to share my views on Bill S-17.

The tax conventions and agreements included in Bill S-17 will be of very limited use in improving the recovery of taxes from those hiding their money in tax havens unless some key elements of the tax havens action plan proposed by British Prime Minister David Cameron at the G-8 summit are implemented. If Canada is serious about going after tax cheats who are using tax havens, then it should demonstrate this by fully supporting Prime Minister Cameron's action plan without trying to water down some of its key components.

In particular, the British proposals on beneficial ownership in multilateral automatic tax information exchanges are key to whether Bill S-17 will be a useful piece of legislation or a waste of time and effort.

Let me explain what I mean.

One of the problems with the tax conventions and agreements covered by Bill S-17 is that Canada needs to have quite a bit of information to begin with before it can request information under the current OECD bilateral agreement model that these agreements are based on, and we can clearly see this. If you look at the details in schedule 5 of Bill S-17, for example, you see all the steps that have to be taken in the case of Luxembourg to get the information Canada wants. It spells out quite clearly all the complicated steps involved.

It's similar to what the police have to go through to get a search warrant. As I'm sure Ms. Glover would be able to confirm from her experience, police have to have identified a suspect, and they need a fair bit of evidence in order to convince a judge to grant a search warrant.The challenge facing Canada Revenue Agency at the moment is that they have a very difficult time figuring out who their suspects might be and who they should be asking tax haven governments for more information on because of the banking secrecy that prevails in tax haven countries. How can Canada ask for information on a suspected tax evader if strict beneficial ownership rules are not applied? A tax evader can open trust accounts or set up shell companies in many tax havens without having to establish the ultimate beneficial owner. Without strong beneficial ownership rules in force, it's easy to hide your wealth offshore, and this facilitates not only tax evasion but also organized crime's money laundering, arms dealing, and financing of terrorism.

I am sure this government would not want to be accused of supporting such things.

The British G-8 tax haven action plan proposal on beneficial ownership calls for a public registry as well as much stronger rules to ensure the ultimate beneficial owner of any account. It's essential that beneficial ownership information be available in the public domain as opposed to being accessible only to police or tax authorities, because if it is available publicly it will be much easier for all countries to get access to this information. Multilateral automatic tax information exchange is the other key measure needed to make bilateral tax information exchange agreements useful. Proposals now under consideration at the G-8, G-20, and OECD would facilitate the exchange of basic information on account holders so that Canadian tax authorities would know when a taxpayer has not indicated on his or her tax return an offshore account in country X or Y, and then they would know who to go after, in terms of further investigation.

I know that the Canada Revenue Agency has come under a lot of criticism recently, including from our groups, but I actually have some sympathy for them given what they are up against. It's extremely difficult to undertake investigations on those who might be cheating on taxes using tax havens when they have very little to work with.

My final point is that there's a need to augment the capacity of the Canada Revenue Agency, especially given the recent leak of data that's now available to the Canadian government. The six or 10 additional people reported to have been assigned to a special unit will not be adequate to go through all the tax-leak data.

The CBC and the International Consortium of Investigative Journalists need to be commended for doing a major public service by exposing those who are using tax havens. It's imperative that Canada has the capacity to effectively follow up on that information.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Howlett, for your presentation.

We'll now go to Mr. Rosenbloom for his opening remarks.

[H. David Rosenbloom]

Thank you.

My name is H. David Rosenbloom. I am a tax attorney and a professor of tax law. My area of specialization is international, or cross-border, taxation. I am a member of Caplin and Drysdale, a U.S. law firm. I am also director of the international tax program at New York University School of Law. In the late 1970s, I was the international tax counsel in the United States treasury department. In that capacity, I was the chief U.S. negotiator of the 1980 income tax convention between Canada and the United States.

I thank the committee for this opportunity to offer observations on Bill S-17, an act to implement conventions, protocols, and agreements between Canada and various countries. All of these agreements are for the avoidance of double taxation and the prevention of fiscal evasion with respect to income taxes.

My comments are necessarily constrained by both my relative unfamiliarity with Canada's tax treaty policies and the extremely brief amount of time I have had to devote to a study of the bill. I am not a Canadian tax expert, and I was unaware of the bill prior to the afternoon of June 14. Furthermore, I have not been informed regarding the specific aspects of the bill on which I have been asked to comment.

My working assumption is that the committee may be most interested, not in the new conventions with Namibia and Serbia, parts 1 and 2 of Bill S-17, but rather in the convention with Poland and the agreement with Hong Kong, parts 3 and 4; with the protocol to the existing convention with Luxembourg, part 5; and the supplementary convention with Switzerland, part 6.

These last two parts deal with the subject of information exchange. Parts 3 and 4, on the other hand, are a convention and an agreement with jurisdictions, Poland and Hong Kong, that have been used by investors from other countries to invest outside those jurisdictions.

I thus confine these initial comments to the newly proposed exchange-of-information provisions with Luxembourg and Switzerland, and the agreements with the intermediary jurisdictions, Poland and Hong Kong.

I begin with information exchange. The protocol to the convention with Luxembourg appears consistent with the current practices of the Organisation for Economic Co-operation and Development and with the pending protocol to the income tax convention between the United States and Luxembourg.

There are some differences among these texts, but they are of a technical nature, and I assume of relatively little interest to the committee. I have some reservations about the efficacy of such provisions for achieving useful information exchange, but I cannot see them doing any harm.

The supplemental convention with Switzerland, on the other hand, relieves a requesting country from the need to provide a specific name to the requested country in order to obtain information about a person and in order to identify the person in possession of that information.

Since the requesting country is often in need of the name—that is the reason for the request in the first place—a requirement that the name be given in order to obtain the requested information might often render the information exchange provision nugatory. Thus, this supplementary convention responds to a real problem, and despite my abiding skepticism about information exchange via tax convention, I can see no substantial objection to it.

The agreement with Hong Kong and the new convention with Poland are a different and much larger and more complicated matter. A major concern with jurisdictions that lend themselves, and their treaty networks, to investors from elsewhere is the possibility that their conventions become in effect agreements with the entire world.

In the United States, we think that most tax conventions are bilateral in nature and that the benefits they confer should be confined to persons with a genuine connection with one of the treaty partners.

One means of implementing this policy is to simply not enter into conventions with jurisdictions that serve as intermediaries, especially if there is no demonstration of a genuine risk of double taxation. Regrettably, the United States has not always followed this route. We have, for example, conventions with Bermuda, Cyprus, and Barbados, to name but three examples of jurisdictions where the need for a U.S. tax convention would not appear compelling.

Apart from the strategy of not negotiating conventions with certain jurisdictions, the United States relies on certain measures both within the text of its conventions and drawn from its general jurisprudence to combat treaty shopping. A limitation on benefits article requiring a genuine nexus between the party claiming benefits and the treaty partner is now standard in all modern U.S. tax conventions. And the economic substance doctrine, recently enacted into statutory law but of lengthy vintage in our courts, has served as a potent weapon against at least some types of treaty shopping.

I note that paragraph 3 of article 26 of both the convention with Poland and the agreement with Hong Kong represent an abbreviated version of what has become, in the United States, the “limitation on benefits” article. The article 26 provision, which also appears in the conventions with Namibia and Serbia, effectively precludes foreign-owned entities from enjoying a more beneficial regime in the treaty partner than do domestically owned entities. This is where early versions of the U.S. limitation on benefits provision began, but the provision has since gone much further. Whether it has always been effective is an open question.

I conclude by citing a provision of this type that actually seems to work. It appears in the U.S. convention with Cyprus, and it contains two substantive rules of general relevance: first, that U.S. benefits are available only to Cypriot entities that are owned to a large extent, both legally and economically, by genuine individual residents of Cyprus or, in some limited circumstances, by citizens of the United States; and second, that such benefits are allowed when it is determined on a discretionary basis that the establishment, acquisition, and maintenance of the entity and the conduct of its operations did not have as a principal purpose obtaining benefits under the convention. The provision is general and, some might say, unacceptably vague. Yet for that very reason it seems to have succeeded in thwarting attempts by third-country investors to use the Cyprus convention to obtain inappropriate treaty benefits in the United States.

I would add two thoughts on the basis of what I have heard thus far in this hearing. I throw them out for further elaboration. One, I do suggest to the committee that you carefully distinguish between concern about corporate-level tax avoidance, the use of tax havens by multinational companies, and transfer pricing, things that concern the multinational company on the one hand, and things that concern individuals taxpayers on the other. For the most part there we're talking about offshore accounts, the use of offshore trusts, etc. I think we're talking about two related but distinct problems, and I think there ought to be different responses.

[The Chair, Conservative, James Rajotte]

Mr. Rosenbloom, if I could just get you to conclude very briefly, we'll go to our final panellist and then we'll go to questions.

[H. David Rosenbloom]

Very well. I'm very happy to respond to any questions the committee may have.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your opening presentation.

Mr. Deneault, you have the floor. You may start your presentation.

[Alain Deneault]

Thank you, Mr. Chair.

Before I start, I would like to say something to the technicians. I am getting the simultaneous interpretation in English whenever people speak French. I do not need it and, moreover, I hear it when I am speaking. Please do not provide me with the simultaneous interpretation in either English or French.

Ladies and gentlemen, thank you for your invitation.

I would like to remind you that, internationally, mainly in the West but not exclusively, we are seeing an increased awareness of the importance of fighting not only against tax fraud, but also against the effects of tax havens, those states that make legal access possible. The people, some researchers and civic organizations are well aware of it. The OECD has established standards for action for its member countries, including Canada. Those measures are timid of course and often very unsatisfactory, but they still encourage public awareness and political awareness. We can congratulate ourselves for these advances and highlight the contributions of all the people of good will who participated.

That said, the measures proposed in the bill being studied today as part of the tax information exchange agreement with Canada are clearly ineffective. The OECD model, which Canada uses, is very often inoperative. The Swiss ambassador to Canada explains in his statement, which is included in the bill, that the request for information submitted by a Canadian officer to Switzerland under this agreement would be subject to a very heavy interpretative protocol. And I quote the ambassador: “...these are important procedural requirements that are intended to ensure that fishing expeditions do not occur,...”.

This is as much as saying that a tax haven like Switzerland will lift bank secrecy only if you have the information you want to begin with. In other words, it has to be a case like that of the former French budget minister Jérôme Cahuzac, where the Swiss authorities confirmed that he had an account in Switzerland only when everyone already knew about it. In other words, bank secrecy is lifted only when people already have the information, the way it was with Jérôme Cahuzac. So we are in the same place we were in 2004, a situation criticized by the French parliamentarian Vincent Peillon. He said the: “This type of logic does not allow us to provide assistance until the evidence is already in the hands of investigators”. We are therefore a long way from the automatic exchange of information required to really put an end to bank secrecy.

Furthermore, the tax agreement between Canada and Hong Kong seems problematic. It does not deal just with personal income but also corporate income. Article 5 of the agreement specifies that only Canadian companies that have real economic activity in Hong Kong are included in this category. This ensures that there is no tax on income that has already been taxed in Hong Kong, such as when a Canadian subsidiary transfers its revenue to Canada.

However, considering that many companies in the West are in Hong Kong to take advantage of the low taxes and low salaries there, the convention will enable Canadian companies that have industrial operations in Hong Kong, paying only the minimum taxes, to transfer the revenue from their activities to Canada without paying taxes on it. Politically speaking, it comes down to Canada recognizing Hong Kong as a tariff-free zone, allowing the relocation of companies and hurting workers around the world. Rather than a strictly administrative measure, we are seeing a symbolic display of strong political support.

In terms of the tax information exchange with Hong Kong, Canada does not have the tools to do what it wants. According to the law, in very specific cases, it can only obtain information that the Hong Kong government already has. Let me quickly cite the convention:

3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation: (b) to supply information which is not obtainable under the laws...

In other words, the law states that Hong Kong will give information only if it has that information and is able to obtain it. But Hong Kong's trust law is laid out in such a way that the government does not have any information on the activities of the trusts or the real beneficiaries.

Let me read you a reference that explains the way trusts work in Hong Kong:

Documents do not have to be registered and there are no statutory requirements in Hong Kong for a trust to make annual returns, submit audited financial statements, etc., unless it is carrying on business in Hong Kong.

In other words, the position of the Hong Kong administration does not recognize who the beneficiaries of the trusts created there are. As a result, it never provides any information we may request.

Today, it is recognized that there are extensive consultations in favour of the automatic exchange of information. We can hope that a mechanism like that will lead to international standards that will encourage the principle of neutrality among international tax authorities.

Thank you. I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

Mr. Rosenbloom, can you hear the English translation of the French?