Tax havens are unfair and only benefit global elites
When it costs as much as $1,200 an hour to hire a top tax lawyer in Canada for offshore tax planning, tax havens have long been a tool of wealthy elites and corporations and not normal tax planning for ordinary citizens who clearly can’t afford such fees.
These global elites take advantage of tax havens that, as sovereign countries, can do whatever they want with their taxation laws, including charging little or no taxes, and allowing favourable banking secrecy laws and solicitor client privilege, to hide wealth and income.
Tax havens, given their small size and distant and exotic locales, have little to no local economy of their own, except to handsomely profit off the legal and financial service industries that set up tax avoidance structures. These jurisdictions have no incentive to ensure that extremely wealthy Canadians, or other global elites, pay their fair share of domestic taxes. Several Canadian banks have branches in these locales catering to wealthy expatriates.
When the United States and other countries experienced the economic collapse and the Great Recession that resulted from the subprime mortgage crisis, they were desperate for tax revenues and with the mounting backlash against banks and the top 1 per cent that had caused the subprime crisis in the first place, they finally put pressure on countries with low taxation and banking secrecy laws.
The most important first domino to fall was Switzerland, when the U.S. took the unprecedented step of going after a major Swiss bank, UBS. The U.S. government threatened UBS that it would not be allowed to operate in the U.S. if it did not reveal information, hidden in Swiss bank accounts, on American citizens concealing wealth and failing to pay their taxes.
What makes the Paradise and Panama Papers important is the transparency in shining a light on the sometimes shady but, in many cases, legal tax practices of these elites. While these practices may be legal, it does not mean they are fair or democratic.
If sunlight is the best disinfectant, then transparency is the best democratizer for tax fairness.
Transparency ensures wealthy elites and corporations pay their fair share of taxes and keep their wealth here instead of sending it elsewhere, so they can no longer pretend to be Canadian first while profiting off the rest of us who work hard and pay our taxes.
Transparency makes it harder for these elites to profit from and take advantage of Canada’s generousness by benefiting from health care, education, safety, security, social benefits and other services, for themselves and their families, while secretly sending their business and money elsewhere.
The way to address the tax imbalance created by these offshore low-tax jurisdictions is to increase transparency so that the many Tax Information Exchange Agreements are broadened to require countries to set up corporate registries. This way, the public has access to trust and corporate records, including names of the directors and trustees, and any legal or accounting professionals that set up and maintain the trust and corporation. The use of offshore trusts is a sham when the wealthy beneficiaries of these trusts are still controlling what happens to these trusts.
Canada is considered a haven for tax avoiders and a favourite repository for dubious sources of wealth because our federal and provincial governments have allowed corporations to be set up as anonymous shells with nominal directors.
If sunlight is the best disinfectant, then transparency is the best democratizer for tax fairness
The “know your client rules” that are used by banks should be added to these corporate registries so lawyers and corporate registrars are required to ensure the identities of those on corporate registries are true and accurate.
And if they are not, these professionals or anyone acting as nominal (or “sham”) directors should be held liable for any illegal activities of the corporation. This creates accountability on the part of intermediaries. Transparency needs to be paired with accountability to be effective.
Canada can use the exposure from the Paradise Papers to finally address tax abuse and go after dubious or criminal activities in these tax havens, but it has to target the banks or professionals that acted as facilitators, and make increased transparency at home and abroad a mandatory requirement to be successful.
Daniel Tsai is a business lawyer with a masters of laws, where he wrote his thesis on taxation avoidance, and is a part-time professor at Humber College Business School, where he teaches business law and marketing.