Tax cheats have nowhere to hide

High-profile leaks of private bank data raise new questions about the widespread use of offshore accounts
A HSBC private bank building is pictured in Geneva December 22, 2009. France will continue to use data stolen from HSBC’s private banking arm in Geneva in its drive against tax evasion, its budget minister said on December 22, a day after French officials agreed to return the client lists to Switzerland. REUTERS/Valentin Flauraud (SWITZERLAND - Tags: BUSINESS POLITICS CRIME LAW) - RTR28ALR
Tax cheats have nowhere to hide
Valentin Flauraud/Reuters

Back in early 2010, a meeting in Paris between ministers of the Canadian and French governments led to authorities in Canada getting their hands on an extraordinary list of potential tax cheats. The Canadian revenue minister at the time, Jean-Pierre Blackburn, met with Eric Woerth, then the French budget minister. According to a Canadian government memo on what transpired, Woerth “invited” Blackburn to “make a formal request” for information on Canadians whose Swiss bank-account records were among thousands from various countries itemized in pilfered data that had been turned over to the French by a whistle-blower.

That informant was Hervé Falciani, a former IT employee of HSBC Private Bank in Geneva. Falciani is a citizen of France and Italy, but he’s now in Spain facing possible extradition back to Switzerland, where police regard him as a thief of HSBC’s information. Among advocates of greater global co-operation to catch rich tax-dodgers, though, he’s something of a hero. But exactly how the Canada Revenue Agency has made use of the roughly 1,700 Canadian names reportedly contained in his digital trove of HSBC account-holders is impossible to find out. Revenue Minister Gail Shea won’t say, citing both the privacy rights of taxpayers, which the CRA is bound to respect, and a bilateral confidentiality deal between Canada and France.

Still, pressed by Maclean’s for some indication of results, the CRA did provide figures that suggest what some jittery Canadian HSBC customers did after the Falciani story hit the news in 2009. Under a CRA “voluntary disclosure” program, taxpayers can come clean on undeclared income, as long as they do so before the federal agency begins to audit them. They must cough up the tax owing, plus interest, but can avoid penalties and charges. In the case of HSBC, as of March 22, the CRA says 208 voluntary disclosures had been made. Of those, the agency had finished processing 177 files, and discovered that the accounts in question sheltered $89.9 million in previously unreported income—or nearly $510,000 on average for each HSBC client who suddenly decided to be more forthcoming.

Those numbers provide a rare glimpse into how much is hidden away in accounts normally sealed off from any real scrutiny. Yet the figures hardly offer a complete picture. Clearly, the holders of the large majority of the Canadian HSBC accounts named in Falciani’s data didn’t make voluntary disclosures. So is Ottawa investigating them with the intention of bringing any evaders they may find up on charges? That outcome is rare: since 2006, on average, only seven tax cases a year involving offshore assets have ended with convictions in court. And how many of those HSBC accounts have been examined and found legitimate? (After all, merely having a foreign account isn’t illegal—the wrongdoing comes with using one to conceal income. Other reasons for setting up accounts, cited by experts, include making it easier to do business or work overseas, diversifying investments, or hiding money during divorce disputes.) The CRA deems these questions impossible to answer within its rules.

On broader aspects of illicit international tax avoidance, however, the federal government isn’t staying silent in the face of mounting pressure. New questions arose after the CBC reported recently on some 450 Canadians with offshore tax-haven accounts—Canada’s slice of a massive international release of data from unnamed sources, coordinated among 37 media outlets by the Washington-based International Consortium of Investigative Journalists. Revenue Minister Shea has asked the CBC to turn over the Canadian portion of that rich mine of information to the CRA, but the public broadcaster is refusing. That story broke just as the leaders of the G8 group of major economies prepares to make international tax avoidance a top priority at its annual summit, to be held in Northern Ireland in June.

With all the attention being brought to bear on the issue, the Conservative government is eager to present the case that offshore tax cheats are feeling the heat. Figures provided by the CRA to Maclean’s show, for instance, that annual voluntary disclosures by taxpayers who have hidden money in accounts abroad climbed steadily to 4,064 in 2011-12, up from 1,596 in 2007-08. Previously undeclared income hidden outside Canada, revealed through those voluntary disclosures, totalled $309 million in 2011-12, up from just $171 million four years earlier.

Something, it seems, is spooking more Canadians who have stashed earnings abroad into ’fessing up. It’s worth noting that in the year the Falciani story attracted wide attention—raising the unsettling possibility that the supposed inviolability of some tax havens wasn’t to be trusted anymore—voluntary disclosures to the CRA and the unreported income they represented spiked dramatically. But Shea asserts that the government was taking the international avoidance issue seriously long before the highly publicized recent revelations of whistle-blowers. “That’s why,” she said earlier this month, “we have increased the resources available to the CRA for auditing those who may seek to use offshore accounts or other means to avoid paying their fair share of taxes.”

The government’s claims about bolstering enforcement are clouded, however, by its own ongoing cutbacks. Shea stresses that, since the Conservatives won power in 2006, the number of auditors working in the CRA’s international-audit program has increased nearly 40 per cent, to 422 full-time positions this year, up from 305 in 2006. In fact, employment in that program peaked at 460 full-time positions in 2009, before shrinking in the following three years. Asked to justify that recent erosion of staffing, Shea’s office insisted the decline is not what it appears. The government’s explanation: the budget for international audits has not been cut, but more highly paid specialists—though fewer auditors overall—are now working in the program.

Opposition critics aren’t buying the government’s claim that the fight against serious tax avoidance is intensifying. Liberal Sen. Percy Downe, who has for several years made cracking down on offshore tax havens a personal crusade, points to the Conservatives’ plan to eliminate more than 3,000 positions at the CRA. That is arguably the biggest staff cut in any department under the government-wide deficit-reduction strategy, outlined in the past two federal budgets. And Downe contends that, in the CRA’s case, any cut at all is perverse, since boosting spending on tax enforcement has in the past paid big dividends, in taxes collected and penalties imposed. “It’s a mystery,” he says of the CRA budget squeeze. “It makes no sense.”

But Shea has repeatedly denied that the cuts at the CRA will affect the front-line auditing and investigation capacity of her agency. As well, she points to key new measures as evidence of a get-tough approach. The 2013 federal budget, tabled by Finance Minister Jim Flaherty in late March, introduced a reward program for individuals who bring the CRA information on international tax avoidance that leads to collection of unpaid taxes. Informants will receive five to 15 per cent of any federal revenue over $100,000 reaped as a result of their tip, with their percentage of the take “based on the quality and extent of information provided.” As well, the federal government is imposing a new rule requiring banks and other “financial intermediaries” to report on their clients’ international electronic-funds transfers of $10,000 or more.

All this action targets those high-flying individuals who stow untaxed income in foreign havens, then collect investment income without paying the tax they owe on that, either. But some experts argue that when it comes to international-tax slipperiness, the far bigger action is really in the less ritzy, even more technically complex, realm of corporate “transfer pricing.” British Prime Minister David Cameron is leading a push for the G8 summit to address the ways global firms shift revenues and costs among their subsidiaries in order to record profits in lower-tax jurisdictions.

Resentment over that sort of evasion boiled over in Britian last year on news that U.S. giants such as Starbucks, Google and Amazon, despite their extensive U.K. operations, had been paying little tax there. On tackling this complex business-tax policy problem, NDP revenue critic Murray Rankin argues that Canada now trails far behind Britain. “Canada has got to start looking at transfer pricing as a more serious issue,” Rankin says. Maybe the tax machinations of multinationals will take centre stage, once angry public reaction over revelations about the tax shelters of wealthy individuals has a chance to subside.