Tax havens make the rich richer and the poor poorer and diminish the resources available to run our economy and society. Governments need to act together and much more aggressively to stop the race to the bottom. Enforcement is not enough; the laws need to be changed. There are clear changes the Canadian government can make to stop corporate mis-use of tax havens and set a floor on tax payments by large Canadian corporations. Corporations and the accounting and legal professional associations can play a part too.
1. YOU CAN’T FIX WHAT YOU HAVEN’T MEASURED. The Government of Canada has shied away from a frank look at what Canada’s treasury is losing by allowing corporations to set up offshore structures to reduce taxes in Canada. The Parliamentary Budget Office has been denied access by the CRA to the data needed to calculate that tax gap. The Canada Revenue Agency should immediately begin the work to assess this aspect of the tax gap and report fully to the PBO and Canadians. There needs to be clear, transparent, public data on foreign financial flows, profits from Canadian operations, and effective tax rates.
2. UPDATE YOUR TREATIES. Canada should immediately commit to renegotiating the bilateral agreements and Tax Information Exchange Agreements (TIEAs) that facilitate tax haven use to avoid taxes. Those deals do not reflect the principles set down by the OECD and G20 to fight base erosion and profit shifting. Those TIEAs need to be updated to end double no taxation and set a floor on corporate tax payments including: clear requirements for companies to pay taxes where the activity takes place (economic substance), and to prevent the abuse of transfer pricing and interest charges.
3. UPDATE YOUR LAWS. Government auditors, investigators and lawyers need stronger laws to crack down on corporations who are gaming the tax system. Parliamentarians should enact Bill C-362 that requires corporations to prove “economic substance” of subsidiaries in tax havens for them to be counted as separate legal entities for tax purposes. A strong legal framework is needed to prevent and monitor transfer mis-pricing and cap interest payments to offshore subsidiaries. The law needs to hold facilitators of tax haven abuse and their firms accountable with stronger penalties. The government should also apply a 1 per cent withholding tax on Canadian assets held in tax havens.
4. REDIRECT NEW RESOURCES. The current government has earmarked increased funding for CRA programs to fight tax dodging. So far the bulk of that appears to be going toward investigating wealthy individuals. It is estimated that more than 65 per cent of losses to tax havens are from corporate tax dodging. The Minister of Revenue should present Canadians with a clear action plan to investigate and prosecute corporate tax dodging that involves the use of tax havens including the financial advisers who facilitate these covert transactions.
5. PUSH FOR HIGHER INTERNATIONAL STANDARDS. Canada needs to be an active participant in and supporter of much stronger international efforts to address base erosion and profit shifting. This means taking a leadership role on these issues through the UN, G7, G20, and OECD.
6. SHINE A LIGHT. A critical defense against illegal activities is transparency. Transparency can help increase public scrutiny of aggressive tax avoidance and increase public pressure on large companies that are actively avoiding paying their fair share. Canada, the provinces and territories need to establish a national public corporate registry of beneficial owners. There also need to be clear requirements for full transparency of relationships between companies, including public country-by-country reporting for multinational companies.
7. DO THE RIGHT THING: CORPORATIONS AS LEADERS. Corporate social responsibility should include paying a fair share of taxes to a country that provides for the health and education of a workforce, infrastructure and rule of law, and invests in research and innovation. Canadian corporate social responsibility networks should take the lead in setting standards for acceptable minimum effective tax rates.
8. DO THE RIGHT THING: TAX PROFESSIONALS AS LEADERS. Some tax professionals and legal advisors create corporate tax avoidance structures that break the spirit and the intent of the law. Professionals associations can provide leadership by taking a public position against the abuse of tax havens by Canadian corporations.