16X9: Are Canadian companies exploiting a loophole in our tax code?

WACTH ABOVE: 16×9’s “Tax Dodge”

16×9 originally aired “Tax Dodge” on November 23rd, 2013

UPDATE: November 26th, 2013

The Auditor General’s annual fall report noted that the Canada Revenue Agency followed up on reports of Canadians with offshore tax havens in Liechtenstein. The Liechtenstein project took six years to complete and it collected $24.65 million in tax penalties and interest.

The report concluded that the Canada Revenue Agency “adequately conducted compliance actions for those named on the Liechtenstein list.” The Canada Revenue Agency ensured that taxes were paid by the taxpayers, but gave up the right to refer these cases for criminal investigation.

Are governments broke? They say they are, and are cutting their programs as a consequence. This year, for example, the Harper government cut environmental programs and defence budget citing lack of funds.

Yet at the same time, tax evasion and tax avoidance by corporations and the wealthy – especially using offshore tax havens – is rampant. It’s such a massive problem a recent report prepared for the G20′s finance ministers said governments face “global tax chaos” as they chase dwindling revenues from multinational companies unless the international tax regime is radically overhauled. What the G20 is witnessing is how governments around the world have made it easy for those with the means to profit from offshore tax havens.

Indeed, companies like GE, Starbucks, Amazon, Apple, Wells Fargo, Google, Microsoft, Bank of America, Exxon/Mobil, Chevron, Citigroup, Caterpillar, the entire pharmaceutical industry – let alone people like Mitt Romney – use a variety of ways to pay low to sometimes no taxes using offshore havens. For example, Apple has parked $102 billion in offshore havens while only paying $14 billion in U.S. federal taxes last year.

Earlier this year, 2.5 million files and 120,000 companies and trusts who use offshore tax havens were revealed by the International Consortium of Investigative Journalists (ICIJ) that caused an international furor.

Today, the Organization for Economic Co-operation and Development (OECD) claims that offshore banks globally hide some US$5 trillion to US$7 trillion from tax authorities, or about eight per cent of the world’s assets under management. Another estimate suggests as much as $32 trillion is being stashed in as many as 30 offshore accounts worldwide for one reason or another.

Now governments talk about the so-called “tax gap” – the difference between what they could collect and do collect – caused by the use of offshore havens. In the UK, this estimate ranges from £50 billion to £100 billion annually. Of that, about £20 billion sits in offshore tax havens. The Canadian government refuses to make an estimate of the tax gap in Canada.

“Our own estimates would lead us to conclude Canada is losing at least 7.8 billion dollars a year. And probably more like ten or twenty billion,” Dennis Howlett, the executive director of Canadians for Tax Fairness, an Ottawa-based NGO, told 16×9.

Tweet This Click to share quote on Twitter: "Our own estimates would lead us to conclude Canada is losing at least 7.8 billion dollars a year. And probably more like ten or twenty billion," Dennis Howlett, the executive director of Canadians for Tax Fairness, an Ottawa-based NGO, told <em>16×9</em>.

“That’s revenue lost to both federal and provincial governments.”

However, as 16×9 reveals in its story, Canadian companies can lower their tax burden quite legally. For example, if you move your factories or subsidiaries overseas to a low-tax haven, you can deduct the profits you make overseas from your Canadian tax bill. The rationale is you are being taxed in the foreign jurisdiction. Yet this is an incentive to move your operations to low-tax havens. For example, the Toronto Dominion bank made $6.5 billion in profit last year. But, because of overseas profits, it cut its tax rate to 15 per cent – almost half the Canadian tax rate. Moreover, in 2009, when the corporate tax rate was almost 32 per cent, TD paid only 7.6 per cent tax in Canada.

In the case of Montreal-based clothes manufacturer Gildan Activewear, which moved its last factory out of Canada in 2007, it has made enormous profits in recent years –$224 million in 2011 alone – but has not paid one cent of corporate taxes in the past four years. That’s because it deducts its overseas profits from its Canadian tax bill.

Read more: Gildan cuts its Canadian tax rate down to nothing in the past four years

Meanwhile, companies like Cirque du Soleil lower their tax burden by registering their lucrative trademarks in offshore havens like Luxembourg.

The consequences of governments allowing offshore tax havens to proliferate is best seen in Greece. Now entering its sixth year of recession, with the economy set to contract almost four per cent this year, Greece is the prime example of what happens when you don’t tax the wealthy and corporate sector. By 2010, the country had accumulated a staggering $1.2 trillion in debt while, at the same time, tax evasion was running rampant. In fact Greeks pay only an estimated one third of tax they actually owe, with an estimated US$74 billion not being collected, including as much as 45 billion Euros hidden in Switzerland.

Despite imposing massive austerity measures, including not paying doctors and nurses and laying off 200,000 civil servants, the Greek government has no interest in seeking money being held offshore.

Last year, Greek journalist Kostas Vaxevanis published a list of 2,000 wealthy Greeks who were hiding taxable savings in the Geneva branch of HSBC in his investigative magazine, Hot Doc. The list had been furnished in 2008 by the then French Finance Minister Christine Lagarde to the Greek government, who did nothing in regards to chasing after the money or the offenders (the list has since been labeled the “Lagarde List”). In fact, one former Greek finance minister, George Papaconstantinou, claimed that he had “lost” the list. He is currently being investigated by Greece’s parliament for altering the list by removing some of his relative’s names on it.

After Vaxevanis published the list, Greek prosecutors decided to charge the editor for doing so. Last November he was acquitted, before prosecutors then decided to have another run at Vaxevanis and recharge the editor. He now faces, this fall, a return date to court. “Logic would dictate that since taxes aren’t being gathered and the state is falling apart, taxes must be gathered,” Vaxevanis told 16×9 in an exclusive interview we conducted at his offices in Athens. “But what’s going on in Greece right now is the exact opposite.”

Yet evidence gathered by Canadian Senator Percy Downe in recent years shows the Canadian government is displaying similar behavior. For example, in 2006, an employee of the HSBC bank in Liechtenstein walked out of the bank with thousands of names of people who were socking their money away in the tiny European tax haven – of which 106 were Canadians who had hidden $100 million. With a tax debt owing of $22 million, Downe discovered two years later only $8 million in taxable income has been returned to Canada.

“The intriguing part for me is not one person has been charged,” Downe told 16×9.

Tweet This Click to share quote on Twitter: "The intriguing part for me is not one person has been charged," Downe told <em>16×9</em>.

“Not one person. And I’m not familiar with a world where somebody pays back eight million dollars but no offence has been committed and no charges have been laid.”

Asked about the consequences of not chasing this money, Downe told 16×9: “It means Canada is missing billions of dollars that we should have in our economy. It means that the government lacks the resources to do what they should be doing. It means that the rest of us have to pay more taxes.”

An encore presentation of “Tax Dodge” airs Saturday at 7pm on 16×9

Bruce Livesey is a Toronto-based investigative journalist and television producer who has written about offshore tax havens in magazines such as the Globe and Mail’s Report On Business Magazine, Canadian Lawyer and in his 2012 bestselling book Thieves of Bay Street, which examined fraud in the financial industry. A magazine story Livesey wrote on the Portus hedge fund scandal, which explored how offshore havens can be structured, won a National Magazine Award in 2013.