As the federal government grapples with reports that the changes it made to the tax code in 2016 failed to produce the expected increase in revenues, the ensuing national conversation heading into the next election will be shaped by two competing priorities: the need to meet the costs of preparing Canada’s economy for the challenges of the 21st century, and the need to maintain a fiscally responsible approach to spending that creates a clear path back to balance.

A tax system better able to recover the revenue lost to aggressive tax avoidance and tax evasion would go a long way toward reconciling the progressive interest in public investment with the conservative interest in balancing the books. To that end, any effort to decisively tackle the issue of tax noncompliance in its legal (avoidance) and illegal (evasion) dimensions has to begin with a recognition of the seamless transnational scope of the problem, and of the outsize roles played by tax havens and offshore tax schemes in siphoning away countries’ revenues.

Examining the “tax gap” would be a good place to start. The tax gap, roughly speaking, is the difference between how much revenue tax authorities expect to take in and how much they actually end up with. In 2016, the Canadian offshore tax gap (the amount of revenue lost to tax havens) was estimated to range between $6 billion and $8 billion. A 2017 study by the Conference Board of Canada that examined the overall tax gap (which includes avoidance/evasion, filer miscalculations and errors, and nonpayment of taxes owing) estimated a range of $9 billion to a staggering $47 billion.

A tax system that is better able to recover revenue lost to tax avoidance and evasion could help to reconcile the progressive interest in public investment and the conservative interest in balancing the books.

Another troubling figure is the amount of Canadian corporate wealth held in offshore havens using arrangements that are ethically and economically suspect but nonetheless legal under existing tax treaties — and that in effect sanction a regime of “double nontaxation.” Research by Canadians for Tax Fairness places the figure at $261 billion in 2016, with Barbados as the largest recipient of Canadian corporate offshore wealth, raking in $68 billion in virtually tax-free “investment” — which for a nation with a population of about 286,000 (less than a third that of Edmonton) doesn’t make sense.

In December 2017, an investigation by the Toronto Star and Corporate Knights looked at the financial statements of Canada’s 102 biggest corporations and calculated how much they were able to avoid paying in taxes through “complex techniques and tax loopholes,” often involving subsidiaries in tax havens, between 2011 and 2016; the figure arrived at was $62.9 billion.

These are snapshot statistics of a problem that affects not just Canada but also most nations in the global economy, big and small, developed and developing — though bigger states tend to lose out more. The tax gap is an issue that could unite a broad coalition of countries with a common interest in recovering their offshore wealth. (According to a recent study co-authored by tax expert Gabriel Zucman, “about 10% of world GDP is held in tax havens.” Estimates are also available for personal offshore wealth, and these range from $10 trillion to $32 trillion.)

There are three policy goals that Canada could adopt at the domestic and international levels in pursuit of the larger goal of reining in the worst abuses of the global fiscal and financial status quo. Taken together, these measures would allow Canada (and other nations) to reclaim billions in lost revenues.

The first is a national public beneficial ownership registry for companies and trusts. A beneficial ownership registry can be defined as a database of individuals who ultimately own, derive benefit from or exercise control over a legal entity, whether or not they are the same as the formal legal owners. By requiring the disclosure of beneficial owners, a registry of this kind could effectively address a range of financial improprieties associated with the incorporation of anonymously owned shell companies, such as tax avoidance and tax evasion, as well as money laundering and terrorist financing.

Much of the challenge in Canada stems from the fact that about 90 percent of corporate registration is shared among the provinces, with the remaining 10 percent handled at the federal level. But, as in other areas, coordination between jurisdictions could produce the conditions needed to establish a pan-Canadian system of beneficial ownership transparency.

It is important to note that while it would considerably enhance the Canada Revenue Agency’s investigative capacities and help recover illicitly hidden revenues on a relatively modest scale, a Canadian beneficial ownership registry alone probably would not recover all or even most of that taxable wealth, as the lion’s share probably sits offshore, beyond Canadian jurisdiction.

Nevertheless, a national registry would fix the major systemic flaws within this country as an essential first step to doing more, and it would open the door for Canada to start campaigning for a global beneficial ownership registry. A global registry becomes more plausible as the European Union, the United Kingdom and its territories (including many traditional tax havens), and sizable chunks of the developing world come closer to establishing their own public beneficial ownership registries. Participation in a global registry would enable the Canada Revenue Agency to begin recovering the potential billions in lost revenues stashed in Canadian-owned and -controlled shell companies abroad.

The second measure is for Canada to support the institution of global formulary apportionment taxation. Under G-FAT, multinationals would produce a single consolidated figure of annual global profits and be taxed by a national jurisdiction in proportion to the percentage of those profits earned in that particular country, based on a formula of sales, assets and/or payroll attributable to said jurisdiction. This would replace the current flawed arm’s-length principle of corporate taxation with a more realistic system that recognizes multinationals as coherent economic entities rather than continuing to abide by the fiction that they are only loosely connected sets of independent subsidiaries — which is where a lot of the present fraud and abuse stems from.

Such a taxation regime would align tax receipts with actual economic substance and eliminate the perverse incentives that lead to corporate inversions, transfer-pricing abuse and double nontaxation (no more of Starbucks, Google and Amazon absurdly claiming tens of billions of dollars of income in Ireland, Luxembourg or some tiny Caribbean nation). This method is already used to apportion taxes between US states and between Canadian provinces. Unfortunately, it is currently not the reform strategy championed by the OECD.

The third policy goal is perhaps the most open-ended because it involves the development and promotion of common global standards of international tax data reporting, presently grouped under the categories country-by-country reporting and automatic exchange of information. These common global standards would form an integral part of the mechanisms through which the first two policies might be established and maintained.

As part of its membership obligations in the OECD and G20, Canada is already engaged in different stages of compliance with these two information exchange systems, but we can do more to enhance implementation, such as investing in data analytics capabilities to better utilize all the information collected (a kind of fiscal technology application, or “fisctech”) and promoting broader global participation in the OECD’s Forum on Tax Administration as an institutionalized site of cooperation among national tax authorities. (The FTA currently has only 51 member states.)

Canada could also take the initiative by lending its diplomatic weight to further expanding the reach of these standards, for instance by proposing harsher penalties on tax evaders and their accessories. More generally, supporting these initiatives would help shape the political understanding of their significance with an eye to entrenching them as part of the fabric of global fiscal and financial systems. In the very near future, entirely new interstate standards may be needed, such as in the emergent fields of digital and cryptocurrency taxation, and Canada should be ready to lead in this respect as well.

Photo: Shutterstock, by Elnur.

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Michael Cuenco
Michael Cuenco is an independent researcher and advocate on tax issues. He is currently pursuing a master of global affairs at the Munk School of Global Affairs and Public Policy.
Peter Dietsch
Peter Dietsch, a professor in the philosophy department at the University of Victoria, works on questions of economic ethics. He is the author of Catching Capital: The Ethics of Tax Competition (2015).

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