David Dodge was Governor of the Bank of Canada for 8 years. He was a Deputy
Minister of Finance and a senior Revenue Canada economist before that. He is currently at Bennett Jones LLP in Ottawa.
BENGER: I gate-crashed the Osler cocktail party at the same conference you and I were at and I was discussing the Cameco case with a lawyer from the Department of Justice. 600 million is the allegation in that case and I asked if it was common. “They are ALL doing it” she said. Is that true, from your perspective. Are all Canadian companies avoiding taxes?
DODGE: Let’s go to the first point. Canadian companies are legally obliged to pay the taxes that the law says they’ve got to pay. And they can be offside that law by evading the tax, not reporting — by fraud.
And that’s not what we talk about when we talk about tax avoidance, this is not fraud. This is obeying the law and organising your affairs in such a way as you minimise the amount of tax that the law requires that you pay.
And of course companies do that. You as an individual do that. You don’t voluntarily stand up and say, “Here’s another 10,000 bucks which I don’t really owe you but I’ll give it to you anyway.” You might do that to a charitable foundation, you might even do it to the government as an act of charity, but you don’t do it in terms of an obligation, an obligation imposed on you by the law.
BENGER: What seems to have evolved and the Starbucks in the UK seems to have been the game-breaker, here’s a company that has made millions and millions of dollars in the UK, but arranged its affairs paying its copyright and its intellectual costs offshore etc, so in the end it pays no taxes in the UK. One needs to establish how much tax money is escaping the Taxman in Canada by that method so how much has it become part of normal Canadian business practice?
DODGE: I would like to go back to what I said before. As an individual or as a corporation, you’re obliged to pay the amount of tax that the law tells you you’ve got to pay. You may not like it, nobody really likes paying taxes.
On the other hand, in general, we accept that taxes are the price that we pay for a liveable, civil society where government performs the role on behalf of all of us as our collective agent. We pay for that through taxes. But none of us like to pay more than we have to pay and, indeed, that’s true for corporations.
So the first thing you mentioned, the Starbucks case in the UK or any individual country, the question is, are they conforming to the laws of the United Kingdom? Do they conform to the laws of Canada?
And I don’t think we’ve seen any evidence whatsoever, and indeed I don’t think there’s even an accusation, that they have not conformed to the laws of the country in which they’re operating.
So there’s no accusation of fraud or no accusation of breech of trust, or whatever. So let’s be very clear. So in some sense, what Starbucks does in the UK or which company, X, Y, Z does in Canada, is a product of the laws which the parliament of the United Kingdom has approved, which the parliament of Canada have approved.
And so one has to ask in a sense a much more fundamental question, and that is why is it that governments around the world in free and democratic nations, such as Canada or the United States or the United Kingdom, have written laws which specifically permit companies, or individuals, to organise their affairs in such a way that they pay very little income tax in a jurisdiction which they operate.
Now, that’s a very interesting question and what it does is it puts the emphasis on governments and parliaments are doing as opposed to what the lawyers and the tax accountants and the corporations and the wealthy individuals are doing.
BENGER: But when in your long and distinguished career when you sat down and planned the Canadian economy, what role did tax avoidance play? Because as a lawperson it seems from the outside is where you have a deficit, Why aren’t they looking at this massive pool of money, I mean the numbers are spectacular. 7 billion dollars 190 business exemptions adding up to a hundred billion dollars a year If you taxed that money at the national rate, you could wipe out your deficit overnight.
DODGE: Well, you’ve put a lot of questions together there.
First of all, we don’t plan the Canadian economy. What I did for part of my life was write the rules by which the government of Canada collected – imposed not collected – imposed taxes on individuals and corporations.
And so your question then is, why would I write rules that have, let’s call them loop holes, a more neutral word — provisions — that allow people or allow corporations not to pay tax on certain parts of income.
Why not have a very broad-base with very low rates? Well, the long and short of the answer is that we would be a lot better off to have a broad-base and low rates.
That would mean very considerable reduction in rates in order to-, but in order to raise the same amount of income, you would have a much broader base, that is you wouldn’t have a lot of very specific either called “loop holes” or call them “incentives” or call them “provisions”, you wouldn’t have a lot of those in the act.
Well, why governments here and elsewhere have tended to say no, we’ll impose a higher statutory base rate and then we’ll except chunks of income from taxation? Well, it’s largely because politically governments have discovered over long periods of time that people would believe that they are better off if they have an exemption or loop hole or provision, which parti-, which applies particularly to them.
And so governments find that it has been politically attractive to target certain groups of tax payers in the economy with favours. Another way to say is, they don’t want to spend money on those groups but they will spend money through the tax system by giving them an exemption.
And over long periods of time, and at any point in time, governments find that it is more politically advantageous to have a very targeted exemption for a particular group than it would be to keep the base broad and lower the overall rate by an infinitesimally small point.
So that they can point to, directly point to things that they are, quote, “doing” for the tax payer out there. So we’ll take something, we’ll take something from the personal side because people understand it, that we will say, “If you spend money on hockey equipment for you child, we will give you a tax deduction for that.
So governments have found that they could use the tax system politically to their advantage to promote certain bits and pieces, and that’s why we have the system we have even though people like me, who advise governments, would say, “No, no, economically the country as a whole would be better off to raise whatever amount of money you want to raise, whatever we raise through the corporate tax at the moment which is roughly, what, 4 per cent of GDP or 5 per cent of GDP, no a little less than that, we raise through the corporate tax system…
We could raise it the way we do with a higher rate in a base that is narrow, or we could have a very low rate in a very broad base.
That is the, that is the issue that is in front of governments all the time. And that pertains to our domestic tax system. Now, individuals and governments operate not just in Canada but they operate all over the world.
And so they are in fact competing as services providers or goods providers with companies that operate in the US jurisdiction, in the German jurisdiction, or the British jurisdiction or wherever.
And to the extent those other jurisdictions don’t tax certain types of income or provide various generous allowances for certain activities, then if we did not do that in Canada, then our companies or our individuals would have more difficulty in competing with these others.
And so there’s a very good reason when the US in particular, but the UK or Germany, provide in their tax codes for black holes — you mentioned earlier the Cayman Islands or Lichtenstein or Angora or to a certain extent Switzerland, provide, you can play in those black holes and put your income in those black holes and keep them out of being taxed.
Then, indeed, in Canada, in order to make sure our producers in this country are competitive, we say, “Well, we can’t hit our guys a lot-, our corporations and individuals a lot harder than what’s being done elsewhere.
And so there’s a tax competition game that goes on, which is very real. This is not something artificial, this is very real, which drives legislatures, drives parliaments to kind of the lowest common denominator, and also recognising what I said before, that these things are very specific.
And so do we want to put industry X out of business in Canada and let it go elsewhere? Well, elsewhere industry X doesn’t pay any tax because of provisions and tax codes elsewhere, or because they can channel it through the Caymans or Barbados or wherever, we can’t make our guys pay tax because they’ll simply either leave or they won’t conduct the activity.
BENGER: What’s your best example of a company who does that. Caterpillar? Will companies abandon Canada if we make the tax system a little fairer?
DODGE: That’s a very good point. The question is at what rate we impose the tax? And so suppose we, if you will, close the loopholes and the exemptions, broaden the base and put our corporate tax right down, or federal one down to 5 per cent, would people abandon us?
I don’t know what the equivalent number would be to go to a completely broad base from, and how much you would actually have to lower the, the statutory rate. But you probably, you probably have to cut it maybe in half… I don’t the answer.
BENGER: Right now our corporate rate is 15% which is lower than the States’, so you were to say we have a rate that’s lower than the States’ but we’re going to shut down interest dividends, or we’re going to shut down Transfer Pricing, and we’re also going to have a look at some of the money you’re sending offshore; it is an issue of fairness, but it’s also an issue of fiscal responsibility, if you’re saying we can deal with this deficit by making things a little tighter.
DODGE: Then the whole question is, you come to the economic question, how many of those individuals, or how many of those corporations would reduce and by how much would they reduce their activity in Canada?
BENGER: I don’t consider myself anti business but it seems to me, and this is at the heart of what bothers me, but it seems to me that the untold story of tax avoidance in Canada is that Canadian business has been getting away with it and has a great deal with this government when it comes to tax avoidance
DODGE: I don’t agree with that. First of all, these corporations, Canadian corporations are paying the amount of tax, which they’re legally obliged to pay. Very, there’s been virtually no cases – there are some, obviously — but very few cases where there’s outright broader tax evasion.
And those cases are taken, and indeed one can argue that our federal department of justice or the Canadian Revenue Agency should take more of those cases and should be, should be tougher and meaner and nastier in respect of compliance. And no one can argue that and there’s probably some grounds.
But that’s not what you’re really asking. You’re asking about people that pay the requisite amount of tax but arrange their affairs — and I think those are very important words, those are in the law — people are entitled to arrange their affairs in such a way that they minimise the amount of tax that they are legally bound to pay.
BENGER: What about the moral or equality issue? Every Canadian has had to deal with cutbacks in government services right across the country, and here’s this vast pool of money that’s avoiding its national responsibility.
DODGE: You use the word avoidance: all I’m saying is that they’re paying what they’re legally obliged to pay. Now, if you are saying the government should change the law, take away these exemptions, these provisions, and maintain the rate of tax at what the current statutory rate is, i.e., they’re going to broaden the base but not lower the rates, i.e., try to take in a lot more revenue, they will partially succeed initially in taking in more revenue — partially succeed initially — but most of the evidence points to the fact that over time, by following that, governments would not take in more revenue because the activity would either cease or migrate or convert into a different activity.
The evidence on that is always tricky to get at and it always takes time because people have made certain decisions and they’re kind of locked in. It’s only on the new decisions that they make that this, these rule changes will bite.
But the evidence that we have, such as it is and it’s not perfect, is that, that trying to raise additional revenue by eliminating “provisions” and keeping the statutory rate the same or raising the statutory rate on income tax and in particular on corporate income tax, is kind of a mug’s game.
That you’re likely to lose a lot of the revenues you “thought” you were going to get because activity changes, either in volume or in mix or disappears.
So you have to be extraordinarily careful in looking at this. There are some taxes and fees that are much harder to avoid – not evade, much harder to avoid – and so the amount of avoidance one conjures up or one would…
BENGER: How would you describe how the offshore benefits? I was down there, lots of Canadian banks, they call Grand Cayman Grand Canada. What benefits?
DODGE: It happens that the way our, the particular provisions of our law are and because of where our institutions are, that places like Barbados, Caymans tend to be preferred, let me call them black holes, for Canadian corporations to use.
We don’t tend to use Lichtenstein, which is the favourite black hole for European corporations to use, but it’s accomplishing the same thing. And so what is our benefit? Our benefit is that we compete on a level tax playing field with the Americans or with the Germans or with the British. That’s the benefit.
And if you were, there are a number of ways you could make that playing field less level, i.e., take taxes out of Canada, as you do that then you simply have the effect that those corporations that can and those individuals that can actually shift their activity to reduce the amount of tax to be competitive with their, with firms, with other firms.
BENGER: In one court case the Tax Department had 3 lawyers, the other side had 77. Are we at point of loss of control now?
DODGE: To use my accordion analogy, we’re kind of at the point where the thing is got pretty spread out and where we’ve driven in recent years more holes in the system. And we probably are coming up to the time where need another major reform.
But the lesson of history is you need a lot of political capital to do this because people will not thank you very much for the couple of per cent that you’ve lowered the statutory tax rate. They will beat you up very severely for removing their particular favoured provision, which allows them to pay very little tax.
And that’s, that’s a world in which we live. It’s not a criticism of any particular government but that’s the nature of the democratic system in which we live. And we will continue to contend with it and there will be periods when the accordion is going out and then there will be periods when we squeeze it back, squeeze it back together.
But what is absolutely true, and has been true for a long time, is that the salaries paid to the top auditors and top officials at CRA, even though they are higher than they were under the old department of national revenue, are still inferior and significantly inferior to that, to those salaries and revenues that are able to be earned in the private sector.
And so there’s always a bit of an uneven tussle. I think it’s marginally better with the CRA being an independent body and can set its salaries somewhat apart from the public service. But when I was there, back in the dark ages in the 1980s, it was a disaster.
We were paying our top auditors somewhere between a quarter and a fifth of what the top guys on the other side of the table were. Well, it became a very uneven contest. And there’s still an aspect of unevenness today.
There’s almost no question about that and indeed there’s no way to solve it in its entirety. You can’t, and you don’t really need to as long as those folks that are there, that are responsible for enforcing tax law, are reasonably compensated, reasonably compensated relative to the folks that they’ve got to enforce on.
And I think there is probably still a bit of a disequilibrium in that regard. When you talk about numbers of people, that I think doesn’t really capture the issue that you’ve particularly zoned in on and that is sophisticated corporations, or sophisticated individuals using provisions in the system, that, for that you need really… let me phrase it…
You need really smart guys on the good side to take on the guys on the other side, number one. And number two, you need to pursue it. Not only do you have to be smart, but you’ve got to be dogged in, going after it.
And that’s not always that wonderful. There is an argument to be made that by and large we have a voluntary tax system and if you treat people with respect and in a reasonable way, most people will actually pay their taxes.
If you treat them like they’re criminal from the start, which is how the Americans run their system, then you’re going to get a bad reaction.
I don’t want to be overly critical by any means about the way we do it because there is… The income tax system really relies on voluntary compliance. And so you want to make the system as compliance friendly for the majority of the taxpayers that you can possibly make it.
These are tricky balancing issue, but yeah, I think the contest is not quite fair.
BENGER: In this documentary, I’m going to have pop-up examples of how Canadian corporations avoid taxes legally, e.g. transfer pricing, interest deductions, mining companies. Do you think that the moral ground is not good news for Canadian business?
DODGE: It’s very easy to lob cheap shots, to argue from the particular to the general, it’s fairly easy to do that if you don’t know what you’re talking about, and most of the people who argue that this is all bad news really don’t know what they’re talking about.
We have a business world, we have a commercial which is incredibly complex, incredibly complex and we try to rely, for very good reasons, on what you might call progressive income tax or, i.e., we try to levy taxes against people’s ability to pay. The income is kind of the thing we really think that that’s a good way to measure it. Whether that’s corporate income or personal income, we think that’s a good way to measure.
Could we make the system more efficient and more fair by lowering the rates and broadening the base? Absolutely we could. So it’s not to say where we are at this point in time, or where we might get to is gonna be perfect, it’s always gonna be a matter of judgment call.
And my judgment as someone who’s practiced in the field on the side of the good guys, right. I’ve been on the side of government, guys practicing in the field is that we would do far better to lower our rates, quite a bit-
BENGER: J’accuse. How much money do Canadian corporations avoid in tax. Who was at the wheel here, who allowed this to happen? Who’s to blame?
DODGE: The people of Canada are to blame. We get the tax system that is put in place by the people we elect, either federally or provincially or locally. And if we really believe we’ve got a really crumby system, right, and that we really, really should fix that, then we’ve got to elect people that will do that.
It’s not very complicated. And we have to hold our politicians to account to do the job right and we have to have reasonable public debate on these issues. So, you know, if you think of the current issues that are there, I mean one of the problems is that we try to cram everything into these one bills and you can’t even have a debate on those provisions in parliament.
BENGER: This is the most business-friendly Canadian government since I came here in 1971…
DODGE: I think that in Canada… the rhetoric may be…If I look at what governments actually do, ’cause I think that’s very important to look at what governments actually do, we have by and large in the post-war period at any rate… I’m not even gonna try to go before I was born. But in the post-war period, we have actually had governments that have been reasonably balanced in terms of business, levies on business and upper income people relative to the rest.
In fact, I would say actually amazingly, amazingly balanced and even governments, which you obviously think by your question, which are pro-business, those are, those have been governments which have been really very balanced in terms of ensuring that all Canadians, rich or poor, corporate or personal pay some reasonable share of taxes.
BENGER: If you accept the fact that the tax avoidance and offshore methods are the additives that make Canadian capitalism run, why would you shut that down? In Flaherty’s head I imagine…
DODGE: I don’t think you should imagine things, you should be a little more analytic in how you look at it.
The issue on the international competitiveness issue is one, that has been there and has been dogging nation states forever and ever, and it’s no different today. If indeed, if indeed the Americans were serious about dealing with what I call the “black hole issue”, right, the havens, the havens issue, everybody else would follow right along.
And so if you are asking me should Canada be a Boy Scout and move and close up the holes while the Americans leave the holes out, I’ll say you are simply shipping Canadian activity south of the border. Don’t do it. And I’m on the government side.