International Trade Committee on Nov. 17th, 2010

[Richard Montroy]

I will be brief.

I was not here on November 3, and I cannot really answer for Mr. Castonguay. However, I believe that Mr. Castonguay meant that not only must Panama sign 12 tax information exchange agreements, it must also meet the criteria set out by the OECD, which were approved by all countries, to ensure that it will indeed exchange the information. So not only must the ability to exchange information be written in black and white, there must be certainty that the country will exchange the information.

[The Chair, Conservative, Lee Richardson]

Mr. Allen.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Mr. Chair.

Mr. Montroy, a couple of simple questions.... I think Mr. Laforest actually asked it, but let me just get it clear. Presently we don't have a signed agreement with Panama to exchange information on a tax treaty. Is that correct?

[Richard Montroy]

That's correct, yes.

[Malcolm Allen, NDP, Welland, ON]

Was it July that you said a letter of request went to them this year?

[Richard Montroy]

Yes.

[Malcolm Allen, NDP, Welland, ON]

And this free trade agreement has been signed for a while. We're looking at implementation legislation here, not actually negotiating the agreement.

Was your department consulted at the beginning of this trade process about the tax treaty and the tax information sharing, or for any advice as to the fact that Panama was indeed on the grey list at that time?

[Brian McCauley, Assistant Commissioner, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency]

Finance has the lead, and they would have conducted all those negotiations and they would have been aware of any positions we have had. But we wouldn't be formally involved in the front end of any of those negotiations. Finance is well aware of the position of the administration of CRA.

[Malcolm Allen, NDP, Welland, ON]

Fair enough. Thank you.

I want to get back to Mr. Tucker because you had laid out in your opening remarks—understanding, of course, that when we have so many folks, there's not a lot of time.

Let me first say to Mr. Asnong and Mr. Lavoie that I'm not going to ask you any questions today, but let me just put on the record that I understand, coming from a rural component. I have pork producers in my riding. I understand the grief you folks have suffered over the last couple of years, and believe you me, we want to find a way to make sure we can help in every possible way we can with the producers to ensure that happens. So there are ways to do that and we're going to continue to do that.

But getting back to Mr. Tucker, because really this tax treaty and this tax-saving piece that Panama has is of critical importance. I agree with you, Mr. Tucker, in a sense—and I'd like you to articulate it in a fashion and use some examples—especially when it comes to, as we call it through the NAFTA agreement, the chapter 11 style of language that allows folks to sue when they feel they're being either abused or their ability to make money...etc. I know you wanted to use some examples and I'm going to give you the opportunity to do that with your answer.

[Todd Tucker]

Sure.

The first example I used was of course the instance of actually creating a mechanism to apply meaningful sanctions against Panama and transactions with Panama if Panama continues to refuse to clean up its act.

Under the FTA, that would be seen as a restriction on transfers, which then the Panamanian government or a company incorporated in Panama, which could include a Canadian company that had a Panamanian subsidiary, attacking then a Canadian regulation.... That's one of the examples.

Another example that is also common to the chapter 11 language from NAFTA is the minimum standard of treatment from article 9.06 of the Panama deal, which accords a customary international law minimum standard for the treatment of aliens. This sounds fine, but investor-state tribunals have been willing to consider the decisions of other investor-state tribunals when they articulate what the content of that standard means.

So you have runaway tribunals that are deciding that a regulation that a company was not expecting to come down the pipe could be a surprise and could interfere with the investor's expectations. Then you have other tribunals citing that decision as an example of the practice of governments. This is a very broad standard that could paralyze a wide range of regulatory actions, and it's one concern.

Another aspect of the agreement is article 9.15, which has a provision that allows Canada to deny the benefits of the agreement to a company that does not have substantial business presence in Panama. So a Panama-registered firm attacks a Canadian public interest regulation, and Canada has the ability to say that company does not have substantial business interest in Panama—it's a pure shell company—and we don't have to accord it the FTA treatment. However, the definition of substantial business activities has been interpreted in a very minimal way in past tribunals. So you've had investor-state tribunals decide that having as few as two employees and a bit of a paper trail in the country is enough to constitute a substantial business presence.

There are a lot of rules here. It's not a question of being for trade or against trade, or for trade agreements or against trade agreements. But there are provisions in this text--some of which are based on the NAFTA chapter 11 model--that could use some improving. I think that would go a long way towards alleviating some of the tax haven concerns that perhaps constituents are raising.

[Malcolm Allen, NDP, Welland, ON]

It seems to me this is one of the times when we look at a free trade agreement and quite often the arguments are about access to market and fair treatment and all the rest of it. Now what we have is a government, the Panamanian government specifically, that has set up a tax haven and has done so for a long time. It's ingrained in their system. We are willing at this point, it seems, if we don't get a favourable response to your letter of July...and the OECD is now saying they are not quite greylisted, but they're not quite where they need to be.

We're not sure why we're rushing in, in the sense of making sure these folks aren't at the point of complying with what the OECD is clearly asking, because at the end of the day, Panama was notorious for flying flags of convenience, as it used to be called, on ships, and we know what that led to when it came to what happened with folks who worked on those ships and what happened with money. I don't want to get into the narcotics money and all the rest of it.

From your perspective, what is the U.S. going to do to protect itself? You said earlier that you are from the States. What are they doing, and what do you see them demanding to protect themselves from this particular aspect of tax haven protectionism vis-à-vis trade?

[Todd Tucker]

One of the concrete demands that Congress has set in front of the Obama administration is that, at a very minimum, we require the completion of a tax information exchange agreement before the FTA is implemented. That is step one, and a majority of House Democrats and also a growing number of Republicans have called for re-examination of the investor-state system to ensure that companies operating in tax havens don't have special rights to go around the U.S. legal system to challenge U.S. anti-tax-haven measures. I think you'll see in the months ahead, including from a great deal of Republicans in Congress, an interest in setting those markers and making sure that happens before we move forward with the trade deal.

[The Chair, Conservative, Lee Richardson]

We're going to conclude with Mr. Trost, for five minutes.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

Thank you, Mr. Chair.

My question to the gentleman from Revenue Canada is fairly basic. I do my own income tax, but other than that I don't consider myself a financial whiz or expert.

Fundamentally, what is going to change with this treaty as far as the ability for you gentlemen and your department to enforce Canadian law and taxation down there, and also for the police to go after drug traffickers, etc., who launder their money in Panama? From your perspective, what will change? Will this treaty make it easier, harder? Will it have no effect?

[Brian McCauley]

Arguably, we just administer it, and I'm assuming that analysis has been done by the Department of Finance, which negotiates the agreement. They would be in a better position to comment on whether or not there are any implications for Canada's tax system.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

I'm not asking about the tax system; I'm asking about the enforcement. Correct me if I'm wrong, but it's not the Department of Finance that's going to call me up if I've created some fake receipts for a charitable donation. It's going to be you gentlemen. So when you go out there and do your work and have someone who is suspicious with some money going to and from Panama, is this treaty going to change the way you do your work with those people?

[Brian McCauley]

Our analysis to date is that it would be neutral.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

Okay, so it is neither a negative or a positive. It's neutral.

Let me ask you then, from your perspective, how serious and substantive—and again, the Department of Finance may have these estimates—would the tax problem be, from whatever estimates you have, for Canada, money laundering, etc., going through Panama? Do you have any estimates on those numbers? I know they'd be impossible to get as far as being very accurate, but what sorts of estimates have you been able to make?

[Brian McCauley]

We have none.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

You have none. Is there anyone in the government who does have those sorts of estimates?

[Brian McCauley]

I'm not aware of it, but again, I can't speak for the Department of Finance.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

I'll throw it out to any other gentleman.

I'm looking at Mr. Tucker. He's probably going to have a guess.

[Todd Tucker]

Sure. Exact estimates are hard to come by because in Panama you're not required to disclose who owns any of the corporations that have offshore corporate registration. Just to illustrate that point, last summer--

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

I'm only looking for an estimate. I don't need the illustration. Do you have an estimate of any Canadian fund amounts that would be involved in there?

[Todd Tucker]

Not for Canada. For the U.S., it's one of the top tax havens.