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June 8, 2014

Once again: Corporate welfare bums

Reuel S. Amdur

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When Pierre Karl Péladeau raised his fist and announced that he was running for the Parti Québécois because he wants Quebec to be a country, he forgot to add this: "My country includes Delaware." That is the tax haven where he hived off some of his corporate profits. At the individual level, Philippe Couillard deposited some of his earnings while working abroad in Jersey. Couillard, newly-elected Quebec premier, is a distinguished neurosurgeon who spent time working in Saudi Arabia.

One estimate is that ten per cent of all the money in the world is in tax havens.  Banks and other corporations set up dummy shell companies in tax havens to avoid taxes in their home countries, and Canada is one of the countries suffering as a result.  The taxes that the corporations and the rich avoid mean higher taxes and poorer public services for the rest of us.  For the most part, these operations are completely legal, but the guaranteed secrecy about banking transactions in some of the tax havens casts doubt even on that.

Professor Alain Deneault of the University of Quebec at Montreal spelled out the tax haven situation on April 2 at an event held by Gatineau Monde, in Gatineau.  The expression is more colorful in French: fiscal paradise.

Deneault told the audience that tax havens have certain characteristics.  They involve local legislation providing for no or very low taxes.  They turn law into “no-law” by eliminating legal provisions and regulations.  Local bankers cannot reveal transactions.  To do so would be illegal.  And they serve to alienate money from their national sources.  Tax havens vary to the extent that they do all of these things.  Thus, Delaware is not so opaque in its functioning as Vanuatu or Panama.

Essentially, a tax haven allows a company to set up a subsidiary to receive profits that would otherwise be taxed in the home country.  The home country, such as Canada, suffers from massive tax avoidance.

While we have noted that tax haven activity can be perfectly legal, the havens are also useful for illegal activities, due in part to the secrecy of banking information.  They can also be useful for money laundering, for example for narco-traffickers.  Deneault mentioned Panama as a key player for that activity.  He noted that Canada has a free trade agreement including Panama, facilitating the operations of criminal organizations.  At the same time, the free trade agreement limits Panama’s ability to plot its own economic destiny.  Because of obligations under the free trade agreement, it cannot restrict imports from Canada in economic sectors where it might want to develop.

Banks are prominent in this use of tax havens.  We are told that 70% of the money in the banks of the British Caribbean comes from Canadian banks.  But it is not just financial institutions and certainly not just Canada.  According to Deneault, there is more money in Cayman Islands banks than in all the banks of New York City combined.  And according to a U.S. Senate subcommittee report, Caterpillar deprived the United States of $2.4 billion in taxes between 2000 and 2012 through a subsidiary set up in Switzerland.  That subsidiary manufactures nothing and has no warehouse in that country, but it does pay taxes there—4% to 6%.

In a presentation to the Chamber of Commons Finance Committee, Deneault spoke against an arrangement between Canada and Hong Kong, noting that Hong Kong makes information about the operations of trusts not only inaccessible to Canada.  It even blinds itself to it.  In a report that he cited, we read as follows: “Documents do not have to be registered, and there are no statutory requirements in Hong Kong for a trust to make annual returns, submit audited financial statements, etc., unless it is carrying on business in Hong Kong.” 

Perhaps the multinationals will be finding it more difficult to use the tax havens.  All the wealthy countries are victims of these companies who use the havens to deprive them of tax revenues, and so the Organization for Economic Cooperation and Development (OECD) is working on global standards for taxing multi-nationals, expected to be released this September.  The standards would also require companies to report more fully on taxes paid world-wide and on income. 

What will happen to the OECD package once it is delivered?  It may be dead on arrival.  Currently, Great Britain has a lower tax rate for intellectual property developed and kept in the country.  Might that gimmick offer opportunities for tax havens?  The United States has what is in effect a colony, the Marshall Islands, which serves as a tax haven, and American multi-nationals who favor this location have a strong impact on such policy decisions.  The state of Delaware has some tax haven characteristics as well.  Tax havens are competitive and do their best to please, while trying to avoid being blacklisted by the OECD. 

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