Finance Committee on June 20th, 2019

[The Chair, Liberal, Wayne Easter]

Pursuant to a motion at committee and Standing Order 108(2), the committee will study the report of the Parliamentary Budget Officer on the tax gap.

We have with us the Parliamentary Budget Officer, Mr. Giroux; Mr. Mahabir, Director of Policy; and Mr. Bernier, Financial Adviser and Analyst.

Just for your information, we only have until about 10 minutes to 12:00. A member of Parliament, Mr. Warawa, has passed away. There's going to be a tribute in the House at 12:00, so we'll have to be there for that. My apologies for cutting it short.

I believe, Mr. Giroux, you have an opening statement.

[Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Yes. Good morning, Mr. Chair, vice-chairs and members of the committee. I don't know if I should say “Good morning” or “Good afternoon”, but I'll stick with “Good morning”.

Thank you for the invitation to appear before you today to discuss our latest report, “Preliminary Findings on International Taxation”, which was published earlier today.

Today I'm joined by Mark Mahabir and Govindadeva Bernier, who will help in responding to your questions.

Our report presents PBO findings on international taxation. This report stems from the initial request of one of your colleagues in the other House, Senator Downe, in 2012. Following this request, PBO pursued its efforts to estimate the tax gap.

As you may know, the tax gap is the difference between the amount of tax that would be paid if all tax obligations were fully met in all instances and the amount of tax that's actually collected by the tax administration authority.

Part of the tax gap can be attributed to unintentional actions, such as errors, ignorance of relevant tax rules, or inability to comply. It can also arise from intentional actions, such as tax evasion or failure to pay taxes. One part of the tax gap that is not often measured, because of the difficulty of estimating it properly, is that attributed to tax avoidance, which is legal but contravenes the objective and spirit of the law.

Our report examines financial flows between corporations in other countries and those in Canada. These flows and transactions can reduce taxable income in Canada by shifting income and profits to certain jurisdictions, thus reducing the amount of taxes paid by corporations in Canada.

The report provides the magnitude of financial flows and transactions involving jurisdictions that are offshore financial centres, but does not quantify the amount of taxes that could be collected if such practices of profit-shifting were no longer permitted. For example, in 2016 there was a net outflow of funds from Canada of $200 billion to offshore financial centres. Similarly, the total value of all revenue from and expenses to those same jurisdictions by Canadian corporations was $996 billion. If just a small proportion of such transfers and transactions were used to reduce taxable income in Canada, the amount of tax revenue that could be collected would be in the billions of dollars.

Finally, we also examined financial metrics for large multinational corporations with operations in Canada. For example, when total earnings before taxes and revenues were attributed to Canada, based on Canada's GDP relative to the GDPs of the countries in which those multinational companies operate, the attributed revenues and earnings were higher than those reported on Canadian tax returns by those corporations. This suggests that earnings reported in Canada are not commensurate with the economic activity of those corporations in Canada.

Mark, Govindadeva and I would be pleased to respond to any questions you may have regarding our preliminary findings on the international taxation report or other PBO analyses. Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Giroux.

We will go to seven-minute rounds. If we stick to our time frame, we can do rounds of seven and five minutes, and one three-minute round after that.

Ms. Rudd.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Thank you for coming. I know time is tight these days. We really appreciate your coming. I have two questions.

Certainly I and many of us have had the pleasure of reading a number of your reports, and your predictions are pretty accurate. The details in those reports help us make wise decisions. In your report, you talk about 2014 and the tax gap and the underground economy. The numbers tell one story.

I have two questions. I wonder if you could quickly just tell us how you see the underground economy now compared with where it was 20 years ago and in 2014, and where you see the challenges that lie ahead. I'll ask that first one, and then I'll quickly come back to the second one. Thank you.

[Yves Giroux]

Okay. I'll answer that first question quickly.

The scope of the report today was to look at international taxation of corporations. We did not look at the underground economy now or 20 years ago. That said, based on my previous experience when I was in the public service, the underground economy is inherently very difficult to measure—people don't want to be found, obviously—but with the advent of new technologies and the shift to more electronic payments as opposed to cash transactions, one can reasonably assume that the underground economy is not necessarily more prevalent than it was 20 years ago, for that very reason. You now see more and more businesses accepting electronic transactions only, and not cash anymore. You see that among individuals as well. It's not uncommon for acquaintances and friends of ours to have only plastic in their wallets.

For that reason, one would lean towards believing that the underground economy is not necessarily more prevalent, but we have not done any study on that. It's more of an intuition than based necessarily on hard evidence.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Thank you. I think airlines, as an example, have certainly gone to plastic and no cash.

[Yves Giroux]

Yes.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Your office also made some projections tied to climate plans. You did confirm in your report that eight out of 10 Canadians are better off under our plan. I have two questions for you. Have you considered evaluating the Conservative pamphlet that came out yesterday? Have they asked, or are you thinking about putting some numbers to that for comparison's sake for Canadians?

[Yves Giroux]

We did indeed confirm in a report tabled in late April, if I'm not mistaken, that the government's plan to return the proceeds from the price on carbon would indeed benefit the vast majority of households. So 80% of households will be better off in the four provinces that are currently subject to the backstop.

With respect to the climate change plan unveiled yesterday by the Conservative leader, the Leader of the Opposition, we have obviously not had time to look at it closely. If the Conservative Party asks us to cost any of the components of that plan under our new mandate to cost electoral platform commitments, we would be happy to do so.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Thank you very much. I appreciate that.

[The Chair, Liberal, Wayne Easter]

Mr. Kmiec.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Thank you, Mr. Chair, and also for shortening the meeting so that we can give our final statements at the passing of Mark Warawa.

Mr. Giroux, thank you very much for coming in. I know we've met many times before. You and your staff do great work, and I really appreciate all the effort that goes into it. In a fit of cross-party co-operation, though, I will pass my time to my NDP colleagues so they can ask questions.

[The Chair, Liberal, Wayne Easter]

Okay.

Mr. Julian or Mr. Dusseault.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Mr. Chair, I first want to thank Mr. Giroux and his colleagues for their work.

I know that you've been working on this issue for several years and that, even though you had other data sources, it wasn't very easy to enlist the co-operation of the Canada Revenue Agency to access the data that you used to prepare this report.

My first question concerns electronic funds transfers. You addressed international electronic funds transfers and transactions between affiliates or related companies. However, from what I can see, for the European Union's black and grey list countries alone, electronic funds transfers total $628 billion.

Can you give us an idea of the countries on these lists and the value of the $628 billion in electronic funds transfers between Canada and these countries and between these countries and Canada in relation to the size of the countries' GDP?

[Yves Giroux]

For these detailed questions, I'll turn to Mr. Mahabir and Mr. Bernier, who can provide a list of these countries. I'd say that the scale of the electronic funds transfers to these countries is disproportionate to the economic activity in these countries or to Canada's economic ties with them. This suggests that the transactions are more than simply economic transactions for tangible property. These transfers are probably justified by tax matters.

With regard to the countries on the list, Mr. Bernier can give you some examples.

[Govindadeva Bernier, Financial Advisor-Analyst, Office of the Parliamentary Budget Officer]

Yes.

Thank you for your question, Mr. Dusseault.

We referred to the list established by the European Union in December 2017. The list is often updated. Countries are added, removed or moved from the black list to the grey list. Since most of our data predates the first list, we included all countries that were on the black list at some point. Although these countries have since improved some transparency practices, this wasn't necessarily the case at the time of the electronic funds transfers. At one point, up to 70 countries were on the list. I won't name them all here.

In May 2019, countries such as Belize, Fiji, Marshall Islands, Samoa, Trinidad and Tobago, Vanuatu and the United States Virgin Islands were on the black list. Bermuda, Barbados and Aruba have been on the list before. We often hear these names when we talk about tax havens.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

As Mr. Giroux said, the $628 billion in electronic funds transfers to these countries or from these countries to Canada are disproportionate to the real economic activity of these countries.

The same is true for offshore financial centres, which are covered in the other part of your study on electronic funds transfers. There are sink and conduit financial centres. Perhaps it isn't necessary to go into detail. Three trillion dollars pass through these offshore financial centres. We rarely say “trillion dollars” in French, but the amount is more than a few billion dollars.

Can you provide a typical example of an offshore financial centre? How much money goes through these financial centres and what does this mean in terms of the country's economic activity?

[Yves Giroux]

I can put the amount in perspective: $3 trillion, or $3,000 billion, is more than Canada's GDP. These transaction or cash flows—some transactions occur more than once a year in various inflows and outflows of funds—are completely disproportionate to the economic activity of the country in question.

We looked at countries such as Tonga, small islands in the Pacific with a tiny GDP. However, the value of transaction flows between Canada and Tonga is several times higher than Tonga's GDP. No economic reason or transaction in property or services can justify flows of this magnitude from Canada to Tonga or from Tonga to Canada. It's completely disproportionate, given Tonga's GDP and the transactions in tangible property or services that occur there.

Clearly, this is purely for financial or tax reasons. There may be legitimate financial reasons, such as better interest rates or a more secure banking system, but I highly doubt this. I think that, aside from these legitimate reasons, few reasons justify transferring so much money to such a small country, other than tax reasons.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Exactly. This is the result of the globalization of our economy and the fact that, with the emergence of the Internet, transactions to these financial centres take milliseconds to complete. The funds then move on to other countries, which become hubs of financial flows. The funds only pass through these countries for tax or financial reasons, as you just said.

The other finding—

[The Chair, Liberal, Wayne Easter]

Pierre, because Tom gave you their time, there were 14 minutes between the two of you. When you want to switch off and go to Mr. Julian, do so. You're at seven minutes now.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

The other part of this study concerns transactions between companies. These tables basically show that several countries considered tax havens are among the top 10 in terms of offshore transactions with Canadian companies that have affiliates or related companies that don't deal at arm's length. The United States is in first place. This won't surprise anyone, since the United States is our closest neighbour. Canada's trade with the United States is substantial and often valid and proper.

Luxembourg, a European country, is in second place. What is Luxembourg's economy or GDP? How can we justify the fact that this country ranks second in terms of the number of transactions conducted by Canadian companies abroad? Is it because Luxembourg's economy is growing? Is it because many oil wells are drilled in the country and there's an extraordinary amount of economic activity?

[Yves Giroux]

I'm not familiar with Luxembourg's oil activity, but I highly doubt it. I know that the country has had coal mines. To give you an idea of the scale, let's say that Luxembourg's population roughly aligns with the city of Gatineau's population, or with the slightly larger populations of Laval or Longueuil. The territory is quite small. While the economy is in fact booming, the population is small. Luxembourg is probably one of the richest countries in the world, per capita. However, this isn't necessarily the result of booming tangible economic activity.

I suspect that many transactions to and from this country are taking place because of a well-known fact. Luxembourg is often referred to as a “country of post office boxes.” Companies have addresses that consist of an office shared by several companies or that are limited to a single post office box. This situation is very common because Luxembourg is a tax-friendly country. That's the justification.

Mr. Mahabir can elaborate on this topic.

[Mark Mahabir, Director of Policy, Costing, Office of the Parliamentary Budget Officer]

As Yves said, there are a lot of holding companies in Luxembourg. There are also no withholding taxes on royalty payments and dividend payments. That's one of the reasons why we're having a lot of transactions with that jurisdiction.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

The first on the list of the top 10 countries is Luxembourg, whose population is the size of the city of Gatineau, but whose reportable transactions amount to $236.7 billion. There's also Switzerland, whose reportable transactions amount to $198.4 billion, and Ireland, which some people also consider a tax haven and whose reportable transactions amount to $172.4 billion. In Barbados, the reportable transactions amount to $48.2 billion, and in Bermuda they amount to $29.7 billion. The offshore transactions of these five countries on the top 10 list amount to about $685 billion. For the most part, the economies of these countries don't necessarily justify such a large flow of transactions.

Can you give us an idea of the situation in these five countries and the influence of double taxation agreements?

I don't know whether you focused on this issue in your study. I want to know whether the size of the transactions between Canada and these countries can be linked to the fact that we have double taxation agreements. These agreements may encourage the offshoring of profits, which can then be repatriated to Canada at a lower tax rate.

[Yves Giroux]

As part of the study, we didn't establish a causal link or correlation between the double taxation agreements with certain countries and the value of transactions reported on T106 slips in the case of transactions of related companies.

At first glance, it seems surprising that the value of transactions between related companies is higher in Barbados—given the size of its economy—than in Australia, which has a developed economy and fairly close ties with Canada. There are more transactions between Barbados and Canada than between Australia and Canada. The same is true for Bermuda, where the number of transactions is similar to the number in Australia. Bermuda is probably a very beautiful place to live and buy a second home. However, its economic activity doesn't even come close to Australia's economic activity.

Mr. Mahabir and Mr. Bernier may have more or, conversely, less information than I do on the relationship between tax treaties and transactions between related companies.