Tax avoidance has become an accepted part of doing business for corporations the world over.
But it isn’t just Google, Starbucks and Amazon working the system. Canadian corporations like Cameco and Gildan use complex, opaque practices to shift profits into low or no-tax jurisdictions. Whether it is short term thinking or just plain greed, the result is the same. They reward a small group of shareholders rather than invest in the country that provides the stability, resources and workforce that makes their success possible in the first place.
If you think low corporate tax rates buys corporate loyalty - you're mistaken.
So how do you stop Canadian multi-nationals from setting up subsidiaries in offshore tax havens so that they can avoid paying Canadian taxes? The short answer is that it is has been very difficult. The Canada Revenue Agency (CRA) has no idea how much this profit shifting costs. And Minister Kerry-Lynne Findlay doesn’t seem to be interested in finding out. The Parliamentary Budget Officer has started work on a "Tax Gap Estimate" of how much taxes are going uncollected but the government refuses to provide some key informaiton for him to be able to complete his report. Really strange for a government that espouses fiscal prudence. Because Canadian money in offshore tax havens hit at an all-time high of $185 billion in 2013. And when the CRA did decide to investigate the profit-shifting practices of Cameco, it discovered a scheme that used a Swiss subsidiary to avoid over $800 million in Canadian taxes. That case is still in Federal Tax Court.
Cameco is the tip of the iceberg.
Even though Canada has the lowest corporate tax rate in the G7, our top publicly traded companies use multiple tax avoidance tactics to shift profits. A popular practice is to sell a patent to an offshore subsidiary and then charging itself licensing fees to shift profits offshore enabling it to reduce its tax bill back home. Another set up involves the Canadian company doing the same thing with its brand name and logo. Also common is taking a loan from their own offshore subsidiary and then using the interest payment as a write off and reduce the amount of profit in Canada. They can set up offshore tax haven offices from where, on paper at least, products are marketed at a mark-up, keeping a part of its revenue beyond the reach of Canadian tax authorities. It is a bait and switch that keeps profit outside Canada. Instead of understanding that taxes are an investment in government services essential to business, such as roads, education and the legal system, corporate spin portrays tax as onerous and punitive. And the sad truth is that while many Canadians wouldn’t stand for their neighbours playing the system, there is a double standard for large corporations.
That attitude costs the rest of us.
Federal and provincial governments lose an estimated $7.8 billion in tax revenues each year because of tax havens. The scale of the problem gets larger while the federal government cuts back on health care, food safety, rail inspections, the CBC and more. True fiscal stewardship would recognize that staunching the flow of money offshore is a better solution than austerity. Canadian taxpayers pay the price when the CRA doesn’t follow the money. The 1100-page mess that is Canada’s Income Tax Act needs a lot of work. Even the all-party Parliamentary Finance Committee concluded that tackling tax havens was necessary. Two consecutive federal budget speeches addressed it as well. But so far, action has been underwhelming.
There are some hopeful developments, however. Earlier this year, NDP National Revenue Critic Murray Rankin proposed new legislation (Bill C-621) that would make it easier for government and the courts to crack down on those who are playing the system. Rankin’s bill focuses on proving “economic substance”. Corporations must be able to prove a transaction has economic purpose aside from reducing the amount of tax owed. Setting up a storefront office in Cayman Islands or Switzerland and then sending large invoices back to the Canadian head office charging “management” or “licensing fees” would no longer be acceptable.
Make no mistake - there are a lot of Bay Street lawyers getting very rich taking advantage of this existing blackhole in Canada’s Income Tax Act. Rankin consulted on this legislation with internationally-known tax expert Robert McMechan. The Ottawa-based McMechan is the author of a recent book, Economic Substance and Tax Avoidance. He points out that the U.S, Australia and the UK are among the countries that have drawn the line between legitimate tax minimization and unacceptable tax avoidance. Japan has also been very successful in preventing their corporations from using tax havens to avoid paying taxes. There’s no doubt that for most of us tax law is the stuff of glazed eyes. But what’s on the books can make or break a court case when the government goes after tax cheats. It is a multi-billion dollar problem for which the rest of us pay. Recognizing the role that these transactions play and making these changes is a good first step.
(This opinion piece appeared in The Tyee July 29, 2014)