Parliamentary Finance Committee
Submission by the Halifax Initiative, February 2013
Thank you and good morning:
The Halifax Initiative is a coalition of Canadian NGOs, labour and faith-based groups focused on international economic issues. Personally, I have spent the last 30 years of my life working with anti-poverty organizations in Asia and Africa. Thus, my comments today will focus largely on the role of tax havens in facilitating tax losses from developing countries. I will also comment on the part that Canada can play to promote transparency in international finance.
The Tax Justice Network defines tax havens as secrecy jurisdictions that offer minimal regulation; little or no taxation of non-residents; legally-enforced secrecy; non-disclosure of the beneficial ownership of corporations, trusts and foundations; and no effective exchange of information with other countries.Essentially, these jurisdictions enable people or entities to escape the laws, rules and regulations of other jurisdictions.
Wealthy individuals have for many years used these jurisdictions to avoid their tax responsibilities in their places of residence. A recent study estimated that $21 to $32 trillion of the financial wealth of individuals from 139 low to middle income countries has been channeled tax free through more than 80 offshore tax havens. This represents tax losses to these countries of about $200 billion annually.
Studies by economists at the University of Massachusetts found that $700 billion fled 33 sub-Saharan countries between 1970 and 2008. This means that sub-Saharan Africa is a net creditor to the rest of the world, its foreign assets far exceeding its foreign debts of $175 billion. A significant proportion of these assets are in the hands of private individuals. In 2007, African High Net Worth Individuals had offshore assets of $1 trillion.
Tax havens provide opportunities for multinational companies to reduce or eliminate their tax obligations. By establishing subsidiaries in tax havens, profits can be transferred from high tax to low tax jurisdictions. These subsidiaries are often little more than a postal address. A recent study by Christian Aid calculated that between 2005 and 2007, transfer mispricing shifted $8.5 billion out of the world’s 49 poorest countries, resulting in tax losses of $2.6 billion. An African colleague speaking at a conference this week asked "How is it possible that a company with 3,000 employees in Malawi, and three employees in the Cayman Islands, can attribute 70 percent of its profits to the Cayman Islands?"
The Deputy Finance Minister of Zambia said recently that most international mining companies in Zambia report they are unprofitable, and thus pay no corporate income tax. He reckons that his country loses $2 billion a year due to profit shifting, and said if this money stayed in Zambia it could build a lot of hospitals and schools. CIDA has a long history in Zambia and Zambia is the most important African country for Canadian mining companies.
This reality has deadly outcomes for poor countries. It reduces the capacity of poor countries to finance essential public services. It contributes to higher child mortality rates. It undermines development assistance from countries such as Canada.
So what is to be done? We have four propositions.
1. We believe that a multilateral framework for the automatic exchange of tax information needs to be established requiring all governments to collect data from financial institutions on income, paid to non-residents, corporations, and trusts. This would be a much better approach than the current bilateral tax information exchange agreements.
2. We need to put an end to the secrecy provisions that provide anonymity to individuals and companies. The beneficial ownership, control and accounts of companies, trusts and foundations should be on the public record.
3. We believe that transnational companies should be required to report sales, purchases, labour costs, financing costs, pre-tax profits, taxes and value of assets on a country-by-country basis in their audited annual reports and tax returns. This would reduce the ability of corporations to shift profits to low tax jurisdictions and costs to high tax jurisdictions. We have made submissions to the International Accounting Standards Board to adopt country-by-country reporting as an international standard.
4. Lastly, we support the call of many developing countries to transform the UN Tax Committee into an inter-governmental commission, a proposal that Canada has opposed. International tax policy has been dominated by the OECD, an association of 34 developed countries. Developing countries want an international forum where their needs and interests on tax matters are represented.
We believe that Canada should be a leader - in the G8, the G20, in the OECD - in promoting transparency in international finance and in promoting tax compliance. Prime Minister Cameron has said that corporate tax avoidance will be a priority agenda item of Britain's G8 presidency this year, and Canada should support and engage in this initiative.
Our proposals are ambitious. However, the stakes are high. If these massive outflows from developing countries can be curtailed, it could lead to major improvements in the lives of millions of poor people.