The high cost of tax havens.
WHEN PEOPLE SET ABOUT analyzing the losses governments incur because of tax avoidance by multinationals and wealthy individuals, they tend to approach the issue quantitatively. In France, a parliamentary fact-finding mission has estimated that the shifting of assets to tax havens by holders of capital costs the Treasury 60 to 80 billion euros annually. In the U.S., Congressional researchers have found that the U.S. Treasury loses $100 billion per year to tax leakage. Similarly, in Canada annual losses have been estimated at between $5.3 billion and $7.8 billion.
While these estimates are legitimate and, to some extent, necessary, it is exceedingly difficult to establish the numbers with accuracy, if only because of the banking secrecy that prevails in most tax havens and the lack of transparency with which funds are managed in those jurisdictions. It is likely that the studies significantly underestimate the numbers due to an excess of caution. Nevertheless, as soon as any figures are advanced, they are inevitably challenged by the mouthpieces of the regime, not so much to engage in a methodological debate worthy of the name as to muddy the waters with a numbers war. However, the common conclusion of all the studies, that this is a major problem, cannot be ignored. It is clear that governments are losing billions per year. That shortfall means they can't afford to pay for hospitals, schools, cultural centres, transit systems, accessible legal institutions and other social services, even if they were so inclined.
Starting from this premise, we propose to develop not so much a quantitative assessment of offshore transfers but rather a way of conceptualizing what is a far-reaching contemporary issue. Using elementary logic, we can identify five categories of costs that individuals and small businesses incur when they are forced to compensate for the losses they collectively suffer as a result of tax avoidance strategies that have been made "legal." Simple logic can therefore give us a clearer picture of the exponential impact of tax havens on the public.
1. Billions in lost taxes
As a matter of convention, let us start with a statistic. On April 24, 2015, Statistics Canada reported that, as of that date, Canadian companies had placed $199 billion in the top 10 tax havens in which they do business. As Quebec represents 19.4% of Canada's economy, we can assume, as a conservative estimate, that $38.6 billion has been moved beyond the reach of Quebec's tax collectors. In 1990, Statistics Canada estimated the amount placed in tax havens by Canadian companies at $11 billion. That amounts to a 1,800% increase in the space of a quarter-century.
Statistics Canada reported that in 2011 "24% of Canadian direct foreign investment was in the 12 largest tax havens. According to the agency, the country is losing $5 to 8 billion per year." Gilles L. Bourque of the Institut de recherche en economie contemporaine (IREC) estimates the shortfall at between $8 billion and $15 billion.
Statistics Canada has not developed a methodology for gathering this type of information. It acknowledges that its sources are limited to disclosures by the Canadian multinationals in question; it just adds them up. Given the famously opaque banking secrecy that prevails in most tax havens, these numbers should be regarded as barebones estimates.
Officially, the $199 billion in question has been placed in "investments." In fact, the investments are nothing of the kind. They do not consist of capital assets or any interest in the real economy but only simulate such transactions. Most often, the funds have been transferred between related companies (via internal billing for the right to use a trademark or for services provided by a subsidiary registered in a tax haven) for the purpose of shifting as much taxable capital as possible to a jurisdiction where the tax rate is zero or near zero. Between 40% and 60% of global financial transactions are between entities owned by the same parent multinational.
It would therefore be inaccurate to present these amounts as growing cumulatively over the years. For example, Canadian funds in Barbados increased from $53 billion in 2011 to $71.2 billion in 2014, but it should not be concluded that $18 billion was added to the previously existing amount. In fact, this is financial capital that flows steadily through the offshore channel simply to be shielded from taxation before being reinvested elsewhere. As the funds are constantly renewed, they escape taxation year after year. If they did not move their money in this way, Canadian companies would have to pay an average 26.3% of their profits in combined federal and provincial corporate income tax at the end of the year.
2. Sapping the state
The activities of large corporations in tax havens also drain government coffers in another way, as the federal and provincial governments have allowed themselves to be drawn into a race to the bottom in recent years.
To stave off even greater artificial transfers of capital from Quebec to tax havens, our government has started emulating the tax havens in some respects. In one striking example, the stated reason for Quebec Finance Minister Michel Audet's decision to cut the corporate investment income tax rate from an already paltry 16.25 % to 9.9 % in 2007 was fear of "capital flight." Moreover, only 50% of capital gains are taxable whereas 100% of the ordinary income of individual taxpayers is taxed.
It is telling that in a particularly austere budget tabled in 2015, Quebec's finance minister included a phased cut to the provincial corporate tax rate from 11.9% to 11.5% between 2017 and 2020. In 1981, it was 13%. At the federal level, corporations paid a 38% income tax rate in 1981; today, the rate has been lowered to 15%.
The combined income tax rate paid by corporations was therefore halved during this period, from almost 51% to about 26%. Since 2011, the capital tax, one of the few taxes that can neutralize the income-shifting at which financial institutions are so adept, has also been virtually eliminated.
In 2013, Simon Tremblay-Pepin, a researcher at the Institut de recherche et d'informations socio-economiques (IRIS), estimated that the abolition of that one tax cost the public purse $582 million per year. In addition, Quebec offers businesses numerous financial benefits in the form of tax deductions, government subsidies, investments by state-owned corporations and corporate income tax deferrals.
This has led research accountants at the University du Quebec a Montreal to comment that "Quebec is considered a genuine tax haven for businesses," given the high-quality services our social state offers companies and investors, who are the prime beneficiaries of public infrastructures, and the very low tax rate they pay.
There is also an impressive array of federal measures that benefit large holders of capital. Here is a non-exhaustive list:
1 Federal corporate tax rate slashed from 37.8% in 1981 to 15% in 2012
2. Federal capital tax eliminated in 2006
3. Federal capital gains inclusion rate lowered from 75% in 1998 to 50% in 2000
4. Some exporters exempted from sales tax and customs duty (Canada's Strategic Gateways and Trade Corridors)
5. Indefinite tax deferrals for some companies: "between 1992 and 2005 the 20 largest income tax deferrals in Canada increased by $29.4 billion or 199%, from $14.8 billion in 1992 to $44.2 billion in 2005"
6. Flow-through shares program enhanced for some mining, oil and gas companies
7. Possibility for some mining, oil and gas companies to set themselves up as tax-free income trusts
8. Tax rate on taxable Canadian property held by non-residents lowered.
Canada actually has a low corporate tax rate, one of the lowest among Organization for Economic Cooperation and Development (OECD) countries, at an average 26.3% (the federal rate plus the provincial rate, which varies from province to province). By comparison, the rate is 39.13% in the U.S. That makes Canada a tax offshoring destination for U.S. corporations. When fast-food titan Burger King acquired another industry giant, Canada's Tim Hortons, on November 25, 2014, it chose to merge with Tims and establish its head office in Canada, for the sole purpose of reducing its tax bill. On the same day, it was reported in Quebec that Valeant Pharmaceuticals, an American company prior to its acquisition of Bausch & Lomb in 2012, was paying an effective tax rate of only 3% in Canada, whereas its statutory rate in the U.S. was 36%. After a brief stay in Ontario, it had been attracted to Quebec by an $8-million subsidy from the Quebec government. Valeant, which posts total annual profits of $3.4 billion, clearly knows some tricks for reducing its debt to its host society to virtually nil: "Valeant's strategy involves offshore subsidiaries in places such as Barbados, Bermuda and Ireland." Canada is therefore becoming a tax haven because its economy is integrated with tax haven jurisdictions. On that day, the two solitudes spoke, for once, with a single voice, each describing its own case: the August 26 edition of the Toronto Star reported Burger King's administrative move to Canada under the front-page headline "Merger talks show Canada turning into a 'tax haven'," while in Quebec the front page of Le Journal de Montreal read "Le Quebec, paradis fiscal" (Quebec a tax haven), citing the Valeant case.
In addition to the lost government revenues, taxpayers have to cover the cost of the financial assistance extended by their governments to corporations. According to a Fraser Institute study, the federal, provincial and municipal governments subsidized business to the tune of $19.4 billion in 2007. The Quebec government was among the most generous, doling out more than $6 billion. This money doesn't go solely to struggling, deserving small businesses, to put it mildly. Alberta oil companies and Quebec video game developers were major beneficiaries.
In 2014, the Overseas Development Institute and Oil Change International estimated that, counting direct assistance for the search for oil and natural gas deposits and tax credits for practically every stage of exploration, Canada's federal and provincial governments handed the oil industry an annual average of $2.7 billion in subsidies in 2013 and 2014. [...]
3. Borrowing from financial institutions that no longer pay tax
From a strictly logical point of view, it can be deduced that this shortfall for the treasury, which translates into recurring budget deficits, generates additional debt service costs for government. Every year, to make ends meet, the Quebec government must borrow from the financial institutions that it now taxes at a lower rate than before or not at all. In 2013- 2014, it paid $10.5 billion in interest on its debt. The lines of authority have been reversed: It is no longer private institutions that finance the state to support the raft of direct and indirect services they receive, but rather captive taxpayers--essentially small businesses, wage earners and consumers --who finance those services so the government can balance its budget. The federal government's 2014-15 budget report shows that 14% of revenues came from businesses and 48% from individuals. In other words, individuals are being asked to pay three-and-a-half times as much. In 1979-80, the ratio was approximately two to one. (That's without counting sales tax, which weighs more heavily on households and now accounts for 11% of the tax base.) If we add up all the income tax paid by Canadian individuals at the federal and provincial levels, and compare it with what corporations pay, we find the latter accounted for 13.7% of government revenues in 1965 and only about 8% today (7.9% in 2008 and 8.3% in 2013). Meanwhile, the share borne by individuals has surged from 20% in the mid-1960s to over 30% in 2013. The colonial-inspired Quebec mining code is so generous to resource-extraction companies that their employees and suppliers pay three times as much income tax as they do.
But the increased financial burden on citizens has not yielded any improvement in public services. Not only are taxpayers paying more only to make up for the smaller share paid by corporations, but a portion of their taxes goes to finance the debt the government is contracting with holders of capital to cover its frequent budget deficits.
4. New and higher user fees
These losses for the treasury often force citizens to pay twice for the public services to which they are entitled: once as taxpayers, through income tax, and then as users, through user fees. Increasingly, Quebec is introducing or hiking fees for access to services that it can no longer fund itself from income taxes. Examples range from "other fees" at universities and costlier parking at hospitals to higher rent for co-ops at public institutions, tolls on roads and bridges and increased daycare fees. In every case, the government is not only chronically under-funding the services it claims to provide but is charging for access in order to pay unrelated expense items, such as debt service. The public clearly loses out from every point of view, although the total cost it must bear, and what ultimately hits people the hardest, is very difficult to calculate.
5. Undermining the civil service
Despite the fact that Quebecers are providing a growing share of government revenues while their incomes are mostly stagnating, their public services are being dismantled. This qualitative loss entails cash costs for the public. In many cases, the withdrawal of services forces recipients to turn to the private sector, precisely what the ideologues who made the decision want. In Quebec alone, budget cuts to public services, which IRIS estimates at more than $4 billion since the Couillard government took office in 2014, have had a direct impact in more than 15 areas: job cuts to administrative personnel, janitors, academic advisors, orderlies, special-ed teachers and other positions, cuts to maintenance budgets, layoffs of biologists at the wildlife ministry, freezes on purchases by libraries, limits on abortions, defunding of support for access to housing, even the disappearance of soap from school bathrooms, defunding of community radio stations, elimination of programs for students with learning difficulties, layoffs of psychologists and social workers, a 35% reduction in the number of public health dentists, closing of hospital beds, closing of drug treatment centres, an increase in volunteers' workloads following layoffs in the community sector, and so on.
[...] Tax havens are not the only culprits in the underfunding of public services. How the different levels of government divide up the revenue pie is also a factor. The federal government takes a large share of tax revenues while services are dispensed mainly by the provinces. The ongoing and incalculable misappropriation of funds and corruption within the government apparatus also represent a significant cost. But it is clear that the state's straitened circumstances are being used to justify the paring of public services.
The conclusion that governments are serving the interests of big capital is inescapable. They are creating loopholes that enable large corporations and financial institutions to move hundreds of billions of dollars offshore and not pay tax on that money. Taking their cue from the tax havens, they are lowering tax rates on the capital that corporations and wealthy individuals keep here. To make ends meet, they then have to borrow the money they no longer collect in taxes from those same institutions, at high interest rates. And then they make workers and the middle class bear the brunt of the shortfall by steadily slashing funding for services and slapping on user fees. This is what happens when people entrust state management to ideologues who reject its social function. It is the outcome of choices that are neither technical in nature nor necessary; it comes down to political priorities.
Translated by John Detre for Canadian Dimension
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|Date:||Jun 22, 2016|
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