Summary of Oral Submissions

Summary of Oral Submissions

by Arthur Cockfield, Queen’s University Faculty of Law

Tax Evasion and Offshore Bank Accounts

Standing Committee on Finance, House of Commons, Feb. 17, 2011

My oral submissions will touch on three areas:

(a) identifying the problem;

(b) assessing the extent of the problem; and

Tax Evasion by Canadian Residents

Generally, tax evasion involves the purposeful non-disclosure of income, potentially subjecting the taxpayer to fines and/or imprisonment. A Canadian individual or business can transfer monies offshore to a tax haven countrywithno income taxes as well as bank secrecy laws that facilitate tax evasion. In contrast, tax avoidance involves attempts to reduce tax liabilities while complying with all relevant tax laws. In many cases, the Income Tax Act expressly permits and encourages avoidance, including through the usage of tax havens (for example, tax rules permit double-dip financings, which incentivize Canadian multinational firms to base financing affiliates in tax havens). My talk will focus on tax evasion matters, and not tax avoidance.

Globalization and technology changeare two of the factors that are contributing to international tax evasion. Globalization encourages a deepening of economic linkages among countries, heightened international travel, and the greater provision of cross-border financial services. Technology change has reduced the cost of setting up offshore accounts, transferring monies abroad and encouraged the development of new financial products such as offshore credit cards.

Gauging the Extent of the Problem

I am unaware of any empirical works that attempt to assess the amount of assets Canadian individuals and businesses have placed in offshore accounts for tax evasion purposes. In any event, such studies would be inhibited by a lack of available data due to the illegal and secret nature of the activities. For comparison purposes,a U.S. Senate Permanent Subcommittee estimated in 2006 that U.S. residents are evading between $40 and $70 billion each year as a result of international tax evasion. There is also a wide range of estimates of total amounts maintained in the world’s tax havens: studies suggest there may be between $5 and $38 trillion in assets held in these tax havens.

On the one hand, international surveys of tax compliance indicate that Canadian taxpayers are among the most compliant in the world. There is nevertheless anecdotal evidence that Canadians are engaging in international tax evasion that is resulting in significant revenue losses:

(a) AuditorGeneral’s 2001 and 2002 report highlighted revenue losses resulting from aggressive offshore tax planning;

(b) Liechtensteinbank (so far 30 audits by CRA);

(d) HSBC Swiss bank (1,700 + Canadian account holders, each account min. of $500,000);

(e) increase in audits and unnamed persons litigation(in 2005-2006, 278 audits; 2009-2010, 1,251 audits);

(f) increase in revenues recovered from audits (in 2009, the CRA recovered $1 billion in unpaid taxes from international activities; $3.7 billion since 2006); and

(g) increase in voluntary disclosures (in 2009, 3,000 disclosures and recovery of $138 million)

Reform Initiatives

There are a number of initiatives, each with its own costs and benefits,that could be deployed to counter international tax evasion:

(a) ratify Council of Europe and OECD,Convention on Mutual Administrative Assistance in Tax Matters (signed by Canada in 2004);

(b) public education (with an emphasis on sanctions for tax evasion);

(d) reform Voluntary Disclosure Program (temporary reduction in interest penalties?);

(e) enhanced investigations via unnamed persons litigation (similar to U.S. efforts in late 1990s with John Doe litigation);

(f) enhanced information exchange via TIEAs or tax treaties (next step is review and audit of tax haven practices as jury still out on whether TIEAs will work);

(g) incentives to tax havens in exchange for meaningful cooperation;

(h)enhanced reporting requirements for those who participate or market aggressive tax avoidance (introduced in 2010 federal budget);

(i) withholding taxes on payments to tax havens (similar to 2010 U.S. reforms); and

(j) target tax havens via sanctions or denial of deductions (sovereignty problem).

Canada participates in a number of international fora that consider offshore tax evasion and avoidance issues, including the OECD, the Joint International Tax Shelter Information Centre, the Seven Country Working Group on Tax Havens, and the Pacific Association of Tax Administrators. Any significant reforms will require greater levels ofglobal cooperation. A comprehensive solution could involve a multilateral treaty, a secure extranet among participating tax authorities, and the imposition of a withholding tax on all payments to countries that do not participate in the automatic exchange of taxpayer information(along with common taxpayer identification numbers).

Final note on taxpayer privacy: An international survey of privacy expectation, conducted by the Queen’s Surveillance Studies Centre, show that Canadians are concerned about access to their personal information, especially by foreign businesses and governments. Canadian tax authorities must engage in ongoing delicate balance to protect Canadian tax base while preserving taxpayer privacy rights. A multilateral taxpayer bill of rights could encourage heightened information sharing among nations due to assurances that taxpayer information will be protected.

Prior Research

My views today rely on my international tax research as well as a review of other sources. See especially Arthur J. Cockfield, ed., Globalization and Its Tax Discontents: Tax Policy and International Investments (University of Toronto Press, 2010); Arthur J. Cockfield, Protecting Taxpayer Privacy under Enhanced Cross-border Tax Information Exchange: Toward a Multilateral Taxpayer Bill of Rights, vol. 42 University of British Columbia Law Review pp. 419-471 (2010); Arthur J. Cockfield, Examining Policy Options for the Taxation of Outbound Direct Investment (Ottawa: Advisory Panel on Canada’s System of International Taxation, Sept. 2008), pp. 1-85; Arthur J. Cockfield, Transforming the Internet into a Taxable Forum: A Case Study in E-Commerce Taxation, vol. 85 Minnesota Law Review pp. 1171-1266 (2001).