Tax havens allow rich individuals and corporations to avoid paying taxes by offering no or very low rates of taxation. These jurisdictions range from small, tropical Caribbean islands to old, aristocratic European principalities and countries such as Ireland and the Netherlands to U.S. States such as Delaware. In addition to low tax rates, they often include bank secrecy provisions, or a lack of transparency and exchange of information with other countries.
As the explosive Panama Papers revealed, tax havens have emerged as a wildly popular destination for big banks, multinational corporations, the super wealthy and their armies of lawyers and accountants. Our 2017 report on tax havens found the top 60 TSE companies had a total of 1,021 subsidiaries and related companies in known tax havens. According to Statistics Canada data, Canadian direct investment in just the 11 most popular Canadian tax havens remains over $299 billion. This does not include investment in other tax havens, which would bring the total to well over $300 billion.
How do tax havens cost Canadians?
While some of the activity associated with tax havens is legal under current laws, that’s a problem because it comes at a serious cost. Canadians for Tax Fairness estimates federal and provincial governments are losing out on between $10 billion and $15 billion a year in revenues from the reported use of tax havens by corporations. That’s enough to fund a national pharmacare program, affordable childcare, or free university tuition. The Canada Revenue Agency estimates that one corporation, Cameco, has evaded $2 billion in federal taxes alone from its use of tax havens. Tax havens also create a slippery slope as users can bypass financial regulations and regulatory watch dogs, launder money earned illegally through drug trafficking or organized crime, and hide from criminal laws and liabilities.
It’s difficult to measure the true extent of tax haven use. Schemes can be very sophisticated and often involve establishing a series of trusts, corporations, and other financial entities headquartered offshore that essentially launder money, making it difficult for authorities to trace transactions and identify the true owners of assets.
The wealthy benefit
Multinational corporations with subsidiaries operating in multiple countries can sell goods and services from one subsidiary to another subsidiary at a price far lower than the actual market price for these goods, and charge high rates for the use of trademarks and intellectual property in order to shift their declared profits to these low tax jurisdictions.
Tax havens help Canadian millionaires, corporations and banks avoid paying their fair share of taxes and cheap out on their duty to contribute to the upkeep of society and the common good. This deprives federal and provincial governments of billions of dollars of annual revenue while governments cut programs to balance the budget and pay down the national debt – shifting the burden onto the backs of hardworking Canadians.
When money is pilfered instead of reinvested into the economy, it’s especially damaging to developing nations, perpetuating the root causes of poverty, famine, disease, civil war, and terrorism. These countries lose far more in illicit financial flows out of their countries than they receive in international development assistance – and they have especially pressing needs for funding.
We know tax havens are a problem, so what can be done?
As a result of pressure from tax justice organizations, we’ve finally seen some progress in recent years. The OECD introduced its Base Erosion and Profit Shifting (BEPS) Action Plan, which includes automatic exchange of tax information, and country-by-country reporting of corporate tax and financial information. This were positive steps forward but much more needs to be done.
1. Reform international corporate tax rules: Our international corporate tax rules—which allow many of the largest corporations in the world to avoid taxes with impunity—are severely outdated, as even the head of the IMF now acknowledges. We need to replace it with a system that doesn’t allow multinational corporations to use subsidiaries to avoid taxes, that requires them to pay tax on the basis of real economic factors and that includes a minimum global corporate tax, as the Independent Commission for the Reform of International Corporate Taxation has outlined.
2. Increase transparency: Developing countries – and rich ones – must get the information they need to tax their wealthiest citizens properly. Canada should introduce a public registry of the real, or beneficial owners, of corporations and other assets, and should also publish a list of exactly how much tax large corporations pay.
3. Stronger enforcement: Government auditors, investigators, and lawyers need more resources and stronger laws to crack down on corporations and wealthy individuals who are gaming the tax system.
4. Punish enablers: Those who promote illegal tax evasion schemes—including accounting firms and lawyers—must also be penalized.
5. Tackle the problem: The Minister of Revenue should present Canadians with a clear action plan to investigate and prosecute international tax dodging