Offshore tax dodgers coming under greater pressure

As the recent exhortations of the Organization for Economic Co-operation and Development (OECD) attest, worldwide pressure on offshore tax evaders is increasing, but debate continues about whether it's yielding enough in the way of results here in Canada.

The Canada Revenue Agency (CRA) said that in the six years to March 31, 2012, its investigations have resulted in the conviction of 44 people for offences related to money and other assets held offshore. By comparison, Australia convicted 26 in the six years to June 2012.

But Liberal Senator Percy Downe remains unconvinced by the CRA's claims that it has been strict in its enforcement of tax laws, saying the CRA's own internal audit from October 2010 and other documents he's obtained through access to information suggest the agency is not pursuing offshore evaders "with any great vigour."

The CRA says it reviews every lead it receives from the public about tax cheating and has increased the number of staff devoted to auditing cases with an international component by 38 per cent, the equivalent of 117 full-time positions, over the last six years.

"Since 2006, the CRA has audited nearly 8,000 cases suspected of having an aggressive international tax component," said CRA spokesman Mylène Croteau in an email to CBC News.

"These audits led to the identification of over $4.5 billion in unpaid tax."

But Downe says there's a difference between identifying taxes owed and collecting them.

CRA investigators, he says, are "going after the low-hanging fruit, the easiest ones to get convictions on, and avoiding others."

"I think that calls into question the fairness," Downe said. "There are some of us paying our fair share and others, particularly the very rich, who can hide money overseas and have accountants and lawyers help them do that. Are they getting a tax holiday?"

Tax evaders' behaviour is particularly grating, says Downe, because while evaders seem unwilling to contribute their share to the communal tax pot, they have no qualms about drawing from it.

"When a member of their family gets ill, where do they go for health care?" he said. "I'm sure they don't go to the Caymans. They come home to Canada. They want to use our [medical] system, but they don't want to pay for it. That's grossly unfair.

"When all Canadians don't pay their fair share, the rest of us have to pay more to make up the shortfall."

Voluntary disclosure policy effective

Croteau says that in the CRA's 2011-2012 fiscal year, the agency processed more than 13,600 voluntary disclosures identifying over $863 million in previously unreported income and $310 million in federal tax.

"Of these, over 3,500 disclosures were related to offshore accounts involving $309 million in unreported income and $72 million in federal tax," she said.

The CRA allows evaders to voluntarily disclose unreported income and possibly avoid criminal and other penalties — but not if the agency is already breathing down their back.

• Read about Gérard Depardieu and nine other notorious tax dodgers

An attorney with one Toronto-based tax law firm who has had clients with offshore accounts says the voluntary disclosure policy has been effective in getting tax evaders to come forward.

"Once they learn about potential disclosures and the threat of penalties on their net worth, there's definitely a great incentive for them to disclose the amounts and come clean and, basically, use their cash here in Canada," said Vitaly Timokhov, a partner with the TaxChambers firm.

Timokhov says among the most popular havens used by Canadians are the Cayman Islands, the British Virgin Islands and Luxembourg.

One way of discouraging tax evaders from sheltering their money in other countries is to establish tax treaties with those countries that spell out how individuals who live or operate in multiple jurisdictions will be taxed and, in many cases, commit to exchanging tax information and co-operating on tax evasion investigations

However, tax treaties are by no means a guarantee that tax dodgers will avoid those jurisdictions (Luxembourg and the Cayman Islands both have agreements with Canada and the British Virgin Islands are in the process of negotiating one).

The Canadian government says it has 90 tax treaties currently in force, 10 tax treaties and protocols signed but not yet in force, and nine tax treaties under negotiation.

In addition, it has 16 tax information exchange agreements in force, two signed but not yet in force and 12 under negotiation. These bilateral agreements are signed with countries with which Canada does not have regular tax treaties — including popular tax havens such as the Cayman Islands — and allow the Canadian government to obtain information relating to a criminal or civil tax investigation into someone suspected of evading tax using accounts in another country.

A 'tedious' but important issue

'It's only a matter of time until some of these people see the light of day.' — Percy Downe, Liberal senator

Downe has been a one-man campaign for the last five years, demanding better disclosure from the CRA about what exactly it has achieved in its crackdown on Canadians who hide income in tax havens such as Liechtenstein, Switzerland, Panama and the Cayman Islands.

"It's not a very high-profile issue," says Downe. "It's an issue that is, in many ways, tedious — talking about tax policy."

But he predicts there are developments coming that will raise that profile considerably.

Tax havens are jurisdictions with no or very low rates of taxation that allow their banks to keep data about accounts and account holders secret, provide little transparency about how their tax systems operate and are reluctant to sign agreements with other countries to exchange tax information.

"We've heard that 106 Canadians had secret accounts in Liechtenstein and over 1,785 in Switzerland," Downe said.

But, he warned, "nothing's secret forever." Downe predicts that the media in Canada will sooner or later follow the example of their colleagues in Greece, where a magazine published the names of Greeks with secret accounts in Switzerland.

The list has touched off a fierce debate in the nearly bankrupt country after the government failed to use it to check for possible tax evasion by rich depositors.

"It's only a matter of time until some of these people (Canadians with tax haven accounts) see the light of day," Downe suggests.

Carrot cheaper than stick

But Timokhov of Tax Chambers says focusing on prosecution might be missing the point — if the goal is to maximize the tax take while minimizing the cost of collection.

His firm, in a commentary on its website in November, advised those with offshore accounts to come forward.

The current financial climate offers a "once-in-a-lifetime opportunity" to do that, the firm stressed.

The "dismal" returns on investments over the last 10 years mean the income on which tax is owed has been at historic lows, says Timokhov, plus with low rates, the same applies to the interest to be paid.

"I had a client with a fairly significant amount of money whose rate of return has been 0.02 per cent," he said. "When you add the incentives to disclose and the dismal returns on investment, it makes sense for many taxpayers."

Given that the cost of collecting tax from ordinary Canadians who voluntarily file their returns honestly is something like eight cents on every dollar of revenue, getting evaders to voluntarily disclose $2.7 billion in tax owing (see table) is much cheaper than launching an expensive investigation, said Timokhov.

"It's a stick-and-carrot game," he said. "The threat of criminal prosecution is still outstanding. Although it has not been used extensively, it's still out there. People might still go to jail."

That said, Timokhov says he knows of no criminal tax convictions against Canadians. The 44 convictions the CRA said resulted from its investigations were, Timokhov suspects, likely all for offences under the Income Tax Act that resulted in civil,not criminal penalties, although such fines can be as high as 200 per cent of the tax owing.

"Disclosure has to be encouraged, and at the end, it makes sense to all of us as taxpayers to encourage individuals who fail to report their income to come clean, to bring money back to Canada and to benefit the whole Canadian economy."

International pressure is on

The pressure to bust offshore tax evaders has been on for years and continues to grow as deficit-burdened governments look for more revenue.

"The pressure is coming from different sources," said Timokhov.

In April 2002, OECD members — which include Canada and other countries with rich, industrialized economies — reached an agreement to exchange tax information.

Four years later, a former Liechtenstein bank employee stole secret information on the bank's clients and sold it to German tax authorities, who shared it with other governments, including Canada.

And in 2009, Swiss banking giant UBS reached a $780 million US settlement with the U.S. government, accepting responsibility for helping Americans hide assets in Switzerland. 

And the pressure continues.

On Feb. 12, the OECD urged its members to agree to major changes in tax rules for multinational corporations to prevent those firms from escaping their tax obligations by using tax haven subsidiaries to report profits earned in higher-tax jurisdictions.

It said some multinationals use legal but ethically questionable strategies that allow them to pay as little as five per cent in corporate taxes when smaller businesses are paying up to 30 per cent.

In January, the tax commissioner of the European Union, Algirdas Semeta, issued an ultimatum to tax haven Switzerland, giving it six months to comply with EU laws on better disclosure of information about bank accounts held by foreign companies or face being blacklisted as an unco-operative jurisdiction.

This month, the U.S. Public Interest Research Group released an analysis that it says shows American taxpayers missed out on about $39.8 billion US in revenue last year because of offshore tax avoidance by firms and individuals. A similar report released a month earlier by the Congressional Research Service put the loss at about $100 billion a year.

Downe is pinning his hopes for improved performance on the CRA's new CEO, Andrew Treusch, who was appointed in December.

"I'm hopeful he'll give overseas tax evasion a priority that hasn't been given to it before," he said.

Downe wants Treusch "to come forward, in a very open manner without disclosing personal information and give a general overview of what results are being obtained in fighting overseas tax evasion."