Tax havens: The three issues | by Alain Deneault

Who pays for Canada? Taxes and Fairness, McGill Institute for the Study of Canada 2018 Conference, welcomes Alain Deneault “directeur de programme” at the Collège international de philosophie in Paris. Deneault will discuss tax havens at a panel on Political Spaces of Fairness.  

Three major points stand out when considering the vast problem area of tax havens:

  1. Collectively, they are costing us a great deal of money.
  2. The technical approach erroneously focuses on policy and diplomacy.
  3. Historically, Canada bears a great deal of responsibility in their creation

Tax havens are costly
While quantitative data can be useful in determining the order of magnitude of this offshoring phenomenon, rigidly defined calculations are not enough. Based on the estimates prepared by James Henry of the Tax Justice Network USA a few years ago with respect to the amount of capital parked in tax havens, namely that an amount of between $21 and 32 trillion is currently involved, the New Democratic Party estimated that Canadian governments lose approximately eight billion dollars, prorated based on our country's weighting in the global economy.

Although this exercise is not without interest, it does not go far enough. A qualitative reading is required so that we can begin to understand the reality of the offshoring spiral that is dragging the world's economies into a sinkhole of stagnation.

In the case of Canada, we are talking about tens of billions of dollars diverted into tax havens for the purpose of tax avoidance. According to Statistics Canada, as of December 31, 2016, six of the ten countries around the world in which Canadian companies held the largest investments were tax havens — Barbados, Luxembourg, the Cayman Islands, Bermuda, the Netherlands and the Bahamas. These so-called “investments” that Canadian companies had placed in these jurisdictions, where the tax rate is zero or close to zero, amounted to at least $262 billion. In 1990, Statistics Canada estimated the amount placed in accommodating jurisdictions by Canadian companies at $11 billion. This amounts to an increase on the order of 2,300% in the space of barely more than a quarter-century. This is the reason why the minuscule country of Barbados, which is the size of cities like Gatineau (Quebec) or London (Ontario), ranks second or third among the countries of the world in which Canadian companies "invest" the most every year. Underlying these transfers of funds are arrangements designed by experienced corporate lawyers and accountants that allow powerful corporations and private individuals to get around the tax department.

Of course, this state of affairs results in a major loss of revenues for the public purse. However, it would be a mistake to believe that the problem ends there. In fact, that is only the beginning, because rather than combating tax havens, traditional states imitate them by continually lowering the taxes that apply to big business interests. At the federal level alone, the corporate tax rate was 38% in 1981, compared to 15% today. Not only does the government fail to tax what companies legally transfer to tax havens, but it taxes what remains less than it used to in the name of tax competition. This vicious circle becomes even more pernicious when considering the fact that, for many years, as they finalize their budgets, governments in deficit have been borrowing from financial institutions and multinationals that they are no longer taxing. The world has been turned upside down, because in order to service the debt, taxpayers are now paying interest to financial empires in order to borrow the funds needed to make up the budget shortfall. And since it's never enough, governments eliminate public services or impose major budget cuts on such important institutions as hospitals or schools, while the ordinary people continue to pay as much or even more in taxes, even as incomes have been stagnant for years. Finally, with governments still failing to make ends meet, they end up imposing user fees on citizens who make use of the public services that they have already helped to finance as taxpayers…

Therefore, the entire system of public order is affected by this phenomenon.

The diplomatic approach
Tax havens are states or jurisdictions that abuse their power to make laws. Ireland, Luxembourg, Panama and the Bahamas create legal entities by means of laws passed by their parliaments that go considerably beyond activities within their territory. By doing so, they enable the creation of trusts, exempt corporations or private banks within their jurisdiction that are absolutely opaque from an information point of view, and exempt from taxes, provided that these structures conduct no business within their territory. This amounts to legislating on the administration of capital everywhere else in the world except there. Obviously, governments should exert diplomatic pressure on these countries, most of which are members of the European Union or the Commonwealth, in order to have them repeal these legal provisions. Western governments have hidden behind the pretext that the tax havens are sovereign states in whose affairs they could not think of meddling. However, all this time, these jurisdictions have been meddling in the affairs of the major countries, which pretend not to notice.

Canada complicit
Beginning in the 19th century, Canadian bankers oversaw the financial sector in the British colonies of the Caribbean, and as a result, some Canadian banks, primarily Merchant’s Bank (now the Royal Bank of Canada) and the Bank of Nova Scotia (now Scotiabank), established themselves in these territories as veritable sovereign entities. When the effects of the Marshall Plan were felt in Europe in the mid-20th century, flooding the world with US dollars that were not under the control of any authority, and when the American Mafia, spurred on by Al Capone’s conviction on tax offenses, undertook to offshore its financial assets, Canadian banks in the Caribbean persuaded local elected representatives of the British colonies to transform their tiny jurisdictions into libertarian, ultra-permissive and criminogenic states. From the 1960s to the 1980s, these now redoubtable tax havens were created by former Bank of Canada Governor Graham Towers in Jamaica, by former Finance Minister Donald Flemming in the Cayman Islands, by lawyer Jim McDonald, then a highly-influential member of the Conservative Party of Canada, in the Bahamas, and by the Government of Canada itself in Barbados. Even now, Canada shares its seat on the governing bodies of the World Bank and the International Monetary Fund with a number of these tax havens in the British Caribbean, and enters into tax treaties with them in order to legalize the offshoring of corporate assets, even though they contravene the spirit of the Income Tax Act.

Alain is Program Director at Collège international de philosophie and author of Offshore, The Rule of Global Crime (The New Press), Canada: A New Tax Haven (TalonBooks) and Legalizing Theft (Fernwood)