Proposed Law Will Do Little to Tackle Tax Havens

Canadians for Tax Fairness Executive Director Dennis Howlett made a presentation to the House of Commons Finance Committee about a proposed piece of legislation - Bill S-17. The government has said it is one of the tools that it wants to use to get a grip on money flowing offshore.  But Howlett has different advice.  Here is his testimony:

The tax conventions and agreements included in Bill S-17 will be of very limited use in improving the recovery of taxes from those hiding their money in tax havens unless some key elements of the tax havens action plan proposed by British Prime Minister David Cameron at the G8 Summit are implemented. If the Canadian government is serious about going after tax cheats using tax havens then it should demonstrate this by fully supporting Prime Minister Cameron’s action plan without trying to water down some of its key components.

In particular the British proposals on beneficial ownership and multilateral automatic tax information exchange are key to whether Bill S-17 will be a useful piece of legislation or a waste of time and effort.

Let me explain what I mean.

One of the problems with the tax conventions and agreements covered by Bill S-17 is that Canada needs to have quite a bit of information to begin with before it can request information from a tax haven government under the current OECD bilateral agreement model that these agreements are based on.

We can clearly see this in the following excerpt from the AGREEMENT with Luxembourg which is in Schedule 5 of Bill S-17:   

(2) The competent authority of the applicant State shall provide the following information to the competent authority of the requested State when making a request for information under the Convention to demonstrate the foreseeable relevance of the information requested to the administration and enforcement of the tax laws of the applicant State:

(a) the identity of the person under examination or investigation;

(b) a description of the information sought including its nature and the form in which the applicant State wishes to receive the information from the requested State;

(c) the tax purpose for which the information is sought;

(d) the grounds for believing that the information requested is held in the requested State or is in the possession or control of a person within the jurisdiction of the requested State;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information;

(f) a statement that the applicant State has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.

It is similar to what the police have to go through to get a search warrant. They need to have a suspect identified and they need a fair bit of evidence to convince a judge to grant a search warrant. The challenge facing the Canada Revenue Agency at the moment is that they have a very difficult job figuring out who their suspects might be and who they should be asking tax haven governments for more information on because of the banking secrecy that prevails in tax haven countries.

How can Canada ask for information on a suspected tax evader if strict beneficial ownership rules are not applied?  A tax evader can open trust accounts or set up shell companies in many tax havens without having to establish the ultimate beneficial owner.  Without strong beneficial ownership rules in force, it is easy to hide your wealth offshore. This facilitates, not only tax evasion but also organized crime money laundering, arms dealing and financing of terrorism. And these are not things, I am sure, the government would want to be accused of supporting.

The British G8 tax haven action plan proposal on beneficial ownership calls for a public registry as well as much stronger rules to ensure the ultimate beneficial owner of any account, trust or company. It is essential that beneficial ownership information be available in the public domain, as opposed to being accessible only to the police or tax authorities because it would make it much easier for all countries to get access to this information without the time consuming and cumbersome bureaucratic systems required to access this data.

Multilateral Automatic Tax Information Exchange is the other key measure needed to make bilateral tax information exchange agreements useful.  The proposals now under consideration at the G8, the G20 and the OECD would facilitate the exchange of basic information on account holders so that the Canadian tax authorities would know if a taxpayer has not indicated they have an offshore account on their tax return but country x or y reports they have an offshore account, they would be able to flag that person for further investigation.

I know that the Canada Revenue Agency has come under a lot of criticism recently for their ineffectiveness in dealing with tax havens but I actually have a lot of sympathy for what they are up against. It is extremely difficult to undertake investigations on those who might be cheating on taxes using tax havens when there are very few leads to work with.

This is the final point that I want to make. If the implementation of the tax agreements and conventions in Bill S-17 and especially if the G8 Summit does succeed in getting the ball rolling on better beneficial ownership and multilateral tax information sharing, and more tax data is made available to Canada, it is critical that Canada Revenue Agency have the capacity to deal with all this information effectively.

I am aware that the government has recently established a special unit to focus on international tax compliance but the announced 6 to 10 staff to be assigned to this unit is a completely inadequate response to the task at hand.

Indeed now that the government has access to the offshore leaks data released by the CBC in collaboration with the International Consortium of Investigative Journalists on over 500 Canadians with accounts in the British Virgin Islands, Cook Islands, and other tax havens, there is an immediate need to boost the CRA’s capacity to be able to go through all this data in order to catch those who may have been cheating on their taxes.

The deterrence effect of this offshore leaks data cannot be underestimated, and the CBC and the International Consortium of Investigative Journalists deserve credit for performing a huge public service in helping to raise the veil on a shadowy industry.

But for deterrence to be effective we need tax cheaters to fear, not only exposure, but also enforcement.

And the track record of the government in regard to convictions of tax evaders using tax havens has been very poor as has been revealed in the recent response by Revenue Minister Shea to a written question by Senator Downe.

Boosting the resources of the Canada Revenue Agency and prioritizing investigation of offshore tax evasion would be a wise investment as past experience has shown it will yield much more in additional tax revenue collected than money spent.

The deterrence value should also be taken into account. If wealthy individuals and multinational corporations fear they may be exposed or punished for tax evasion using tax havens then they are much less likely to engage in this socially irresponsible and criminal behavior.

So go ahead and pass Bill S-17. But don’t stop there. Unless further steps are taken, beginning with fully supporting British Prime Minister Cameron’s tax haven action plan at the G8 Summit, specifically his proposals on beneficial ownership and multilateral tax information exchange, then this legislation will not be of much use.

And unless the capacity of CRA is boosted further they will not be able to effectively deal with all the tax data that is made available – indeed that is already available thanks to the CBC and the International Consortium of Investigative Journalists.