Thank you to the committee for the invitation to testify on this important issue.
Canada has been a global leader in ensuring that greater trade in financial services does not undermine wise prudential regulations. But this admirable record is at risk with the current investment text of the Canada-Panama trade agreement.
I have two central points. First, Panama is one of the world's worst tax havens. It is home to an estimated 400,000 corporations, including offshore corporations and multinational subsidiaries. This is almost four times the number of corporations registered in Canada. So Panama is not just any developing country.
Second, the Canada-Panama trade agreement should not be thought of primarily in the traditional terms, or solely in the traditional terms, of cutting tariffs. Instead, it should be seen for what it is, which is hundreds of pages of text that commit Canada and Panama to follow certain domestic policies. The pact would give new rights to the Government of Panama, and to the hundreds of thousands of offshore corporations located there, to challenge Canadian anti-tax-haven initiatives outside of the Canadian judicial system.
Let me elaborate on the first point. What makes Panama a particularly attractive location for tax dodgers and offshore corporations? Well, for decades, the Panamanian government has pursued an intentional tax haven strategy. It offers foreign banks and firms a special offshore licence to conduct business there. Not only are these businesses not taxed, but they're subject to little to no reporting requirements or regulations.
According to the OECD, the Panamanian government has little to no legal authority to ascertain key information about these offshore corporations, such as their ownership. Panama's financial secrecy practices also make it a major site for money laundering from places throughout the world. According to the U.S. State Department, major Colombian and Mexican drug cartels, as well as Colombian illegal armed groups, use Panama for drug trafficking and money laundering purposes. The funds generated from illegal activity are susceptible to being laundered through Panamanian banks, real estate developments, and more.
Panama's domestic legal regime is supplemented by a steadfast refusal, thus far, to engage in far-reaching tax information exchange agreements with its key trading partners. Up until last year, Panama had no international tax treaties of any kind. Now it is on track to have up to a dozen or more double-taxation treaties signed this year.
As a technical matter, these actions ensure that the country will be removed from the OECD grey list. But the OECD has recently recognized the inadequacy of its own listing protocols, and, with the support of the G-20, has implemented a more comprehensive peer review process to see how tax transparency is actually working on the ground. Although the OECD has released several of its three-stage peer review reports over the last few months, Panama's latest treaties did not help it meet all of the OECD's requirements. And these treaties place many restrictive conditions on the exchange of information.
Panama was the only country in the western hemisphere the OECD did not allow to graduate from the first to the second stage, a dubious distinction not accorded to even the famous Cayman Islands tax haven.
This takes me to the second major point. The Canada-Panama trade deal would worsen the tax haven problem. As the OECD has noted, having a trade agreement without first tackling Panama's financial secrecy practices could incentivize even more offshore tax dodging. But there's a reason to believe that the trade deal will not only increase tax haven abuses but will also make fighting them that much harder.
Chapter 9 of the Panama agreement expands the investor-state system under NAFTA, under which Canada has paid out hundreds of millions of dollars in legal fees and compensation to U.S. investors. Canada's defensive interests are many in the case of the Panama pact, because there are hundreds of thousands of U.S., Chinese, Cayman, and even Canadian corporations that can attack Canadian regulations by using aggressive nationality planning through their Panamanian subsidiaries. I can explain that more in the question session if people are interested.
What threat would this pose in practice? Let me give one example, and we can pursue others if there's interest. Let's say that after the Canada-Panama trade deal is ratified, Panama continues to be a bad actor on the tax haven front and Parliament puts in place legislation to give Panama a deadline to clean up its act or face sanctions. Canadian banks could be restricted from transferring money to their Panamanian affiliates. These could include Panama-registered banks operating in Canada, which could easily include a U.S. or third-country bank that has structured its Canadian investment through a Panamanian subsidiary.
But article 9.10 of the Canada-Panama trade act says that “[e]ach Party shall permit transfers relating to a covered investment to be made freely and without delay, into and out of its territory”. Moreover, both chapters 9 and 12 of the FTA have non-discrimination clauses that protect Panama-registered investors. Article 12.06 states that Canada will always allow Canadians to purchase financial services from banks operating in Panama.
Under the trade pact, either the Government of Panama or an investor registered there could challenge the Canadian measure. These are not speculative threats. Panama has actually threatened WTO cases against other countries' anti-tax-haven measures. Incorporations are increasingly being advised by the international trade law bar to structure their parent-subsidiary relationships in a way that allows them to take advantage of investor-state arbitration.
In sum, getting the current text of the Panama-Canada trade deal without getting Panama to first clean up its financial secrecy practices could make Canada's fight to establish a cautious and prudential standard for global financial services regulation even more of an uphill climb.