The Finance Committee, KPMG, and Section 241

In the 2013 documentary film The Tax Free Tour - excellent doc, highly recommend it - former KPMG accountant Richard Murphy explains that federal governments hire the Big Four - Price Waterhouse Coopers, Deloitte, Ernst & Young, & KPMG - to write their tax laws and those tax laws benefit the Big Four and their clients. According to Murphy, he is still bound not to talk about KPMG client affairs in offshore tax free havens from 30 years ago under pain of fine for breach of ethics and being sued by the clients.

Yesterday Canada Revenue Agency's Diane Lorenzato told the Finance Committee right off the bat that Canada Income Tax Act Section 241 permanently prevents any CRA employee from divulging any info on any taxpayer's affairs under pain of fine or imprisonment even after they leave CRA. 

The CRA team plus Justice Dept. lawyer appeared before the Finance Committee to not answer any questions about the CRA amnesty deal with 27 KPMG clients who moved their money to the Isle of Man to avoid paying Canadian taxes. The leak to CBC revealed "Canada Revenue officials demanded, and offered, secrecy in a no-penalty, no-prosecution deal to KPMG clients."

May 5 Committee highlights :

Lib Robert-Falcon Ouellette is a bright spark; asks the CRA panel questions about media reports on :

1) CRA hobnobbing socially with KPMG while it was under investigation, 

2) top CRA compliance official Ted Gallivan (who was on the CRA team today at this committee) lobbied by former CRA compliance official to restrict auditor powers and keep client docs secret, 

3) dissension in CRA ranks over KPMG file, and 

4) by what criteria CRA chooses compliance agreements over litigation.

Con MP Phil McColeman : KPMG issue no biggie - a media thing; I've only been asked about this deal twice. Angles to give impression better CRA powers came from Cons.

NDP Pierre-Luc Dusseault asks CRA for official copy of CRA KPMG amnesty deal leaked to CBC. 

CRA CEO Andrew Treusch : Nope, prevented by law from doing so.

Dusseault : If KPMG scheme is not legal, why offer them an amnesty letter?

CRA Ted Gallivan : No assurance we would win in court. Careful reading of letter shows it's not amnesty from criminal prosecution.

Dusseault : Can you confirm that is your signature, Stephanie Henderson, on the leaked CBC website letter?

CRA Henderson : "Although signature appears to be my signature, I can't confirm the source of the information on the website so therefore I cannot confirm the origin of the document and whether it would be mine or not."

Dusseault : But can you confirm you signed that letter?

Henderson : No I cannot because I do not know the source of the document.

Lynn Lovett, Dept of Justice : Section 241 of Income Tax Act precludes Henderson from answering question about details of letter to which you refer.

Lib Jennifer O'Connell : What are criteria re litigation vs settlements. Compare someone who pays KPMG $100,000 for this offshore service with a single mother in my riding who has low income government support money garnisheed over a $1200 CRA debt? What about average Canadian who cannot afford to pay $100,000 to KPMG? How is this fair and equal treatment of taxpayers? Plus it takes 9 to 12 months to receive a response on an appeal and can only communicate with CRA via fax.

CRA CEO Treusch : We're all about fairness. If your constituent has complaints, send them to ombudsman. All MPs have access to our Complaint Resolution Program to address constituents' complaints. If taxpayer has a debt beyond possibility of paying, please come talk to us. 600,000 get free help from us with preparing taxes.

Lib Francesco Sorbara : In my riding, liens were put on peoples' homes for insignificant amounts owed and CPP and OAP were garnisheed. 

Con Ron Liepert : Maybe we can get back to the reason why CRA is here. I have not received one call from a constituent on KPMG issue, perhaps because we have far fewer listeners of CBC [in Calgary.] The previous gov gave CRA $15M for a return of $1 1/2Billion ...

CRA CEO Treusch : We have special program within agency for companies with over $250M in revenue to target audits. Math algorithms with 200 variables.

Liepert : Awful big increase to CRA considering we're running 30B deficit..

Treusch : $440M over 5 years in 2016 budget to combat tax evasion and bring $2.6B return on investment in revenue to government. 

Lib Steven MacKinnon : My mother worked for CRA all her life. Ms O'Connell reflects views of ordinary taxpayers. Why does CRA not publish tax gap figures?

Treusch : Will in future. 

MacKinnon : KPMG told us they do not deal in construction of tax havens. In hobnobs with their accountants as mentioned in media, do you discuss these issues?

Treusch : CRA officials in meetings whether business or social bound by Section 241. We discuss tax admin but don't deal with specific taxpayer info.

Con Lisa Raitt :  How many prosecutions in a year? 

Treusch : 5,000 in litigation; 2,200 go to court; 3,000 result in settlement. Aggressive tax avoidance vs tax evasion - tax evasion being criminal matter. 

Raitt : How many cases sent to Public Prosecution Service for tax evasion?

Gallivan : 200 a year solely for tax evasion. 30 convictions in 2012/3. Jail terms up 95%. 3 to 5 years to get case before a judge.

Raitt : Does CRA monitor post-employment practises re permanent oath of silence as public servant?

Treusch : Re media report on 21 former CRA employees who went to work for Big Four employers. They went back 15 years ... 

Ok, fact check required here - how about 3 months? 

Senior federal tax enforcer joined KPMG as its offshore 'sham' was under CRA probe

"Jeff Sadrian, who until last July was an executive in the CRA's compliance division, began working as a senior adviser for KPMG in "tax litigation and dispute resolution" in October... As a new member of KPMG's tax litigation and dispute resolution team, Sadrian would be dealing with his former federal colleagues — but now from the opposite side..."

Lib Raj Grewal : It isn't just that the Chartered Professional Accountants of Canada, or CPA Canada, invited both CRA enforcement officials and KPMG execs to a couple of Rideau Club private recepions in 2014/15 while KPMG was under CRA investigation, it's that CPA also applied for intervenor status between CRA and KPMG, and lobbied CRA against pursuit of info about KPMG's wealthy offshore clients.

Treusch : If we had to avoid meeting taxpayers, we could never leave the building.

Section 241 .... Section 241 ... Section 241

The magical Tax Act Section 241 appears to even preclude the CRA from answering questions about whether they violated Section 241.

Andrew Treusch, CRA CEO under two governments, is passionate in his defence of CRA practices. This would be so much more convincing if they had not gone after birdwatchers concerned about bees and pipelines under the 10% rule, while apparently ignoring rw charities pushing the political agenda of the Cons. 

OK so CRA can't answer questions on KPMG because Section 241. What about getting those answers from KPMG?

Finance Committee discussion on NDP motion to "compel" KPMG to cough up: 

"That the committee compel KPMG to provide documents indicating the names of clients who used the Isle of Man tax sheltering scheme and the names of KPMG employees responsible for the development and marketing of the tax scheme."

Here's how that went :

Lib Francesco Sorbara proposed to amend motion from "compel" to "request" and take out "names of clients" and add "where legally allowable"

NDP Guy Caron : Without "compel" KPMG may well refuse to supply any documentation. 

Lib Raj Grewal : Does this committee have authority to compel names and docs?

Lib Chair Wayne Easter : "It's close to the line."

Lib Steven MacKinnon : I oppose the motion. There's a case before the courts already funded by taxpayers and Her Majesty The Queen to get access to same info. This motion would duplicate court case and uselessly waste taxpayers' money

NDP Guy Caron : It's not a case before the courts; it's an application by the Minister for the names of those responsible and those who benefitted. We in committee can't ask the same question? Six individuals are before courts now and CRA amnesty has removed them from culpability. It is not a duplication to ask for names of who set up scheme for them. Do we want to dilute motion so KPMG has no obligation? If KPMG refuses to comply they will have to defend that decision in the court of public opinion. Do you want to use the power of the committee and the House to not let this just slip away?

Lib Robert-Falcon Ouellette : My concern is privacy - not fair to participants in scheme to reveal their names. The point of committee is to gain further info on how tax havens work. Remove the phrase "compel KPMG" and replace it with "request KPMG" and remove names of clients.

NDP Caron : I assent to striking names but "compel" is what's important here.

Con Rich Coleman : I don't like the word 'compel" Names of individuals should be protected - they may not be guilty. This is politicizing the issue. 

Result - Watered-down motion replacing "compel" with "request" and foregoing the names of KPMG clients was passed by an unrecorded vote of 7 to 2. 

"That the Committee request KPMG to provide documents on the Isle of Man tax sheltering scheme and the names of KPMG employees responsible for the development and marketing of the tax scheme before Wednesday, May 18, 2016."

Liberal

• Hon. Wayne Easter
• Raj Grewal
• Steven MacKinnon
• Jennifer O'Connell
• Robert-Falcon Ouellette
• Francesco Sorbara

Conservative

• Ron Liepert
• Phil McColeman
• Hon. Lisa Raitt

NDP

• Guy Caron

And so it goes ... As under the Con regime, the Libs ask good questions in committee and then vote down or water down any motion to actually do anything.  

May 10 Update : After a partner at KPMG and Canada Revenue officials explained to the committee over two days that both KPMG and CRA are protected under the Tax Act from coughing up documentation on schemes for hiding money offshore in the Isle of Man tax haven, a motion was eventually passed "requesting" the CRA to deliver what documentation they were allowed to disclose under the Tax Act as they discovered it. 

And that, my friends, is the last we will ever hear about it.
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March 3 2017 Update : Happily I was wrong about that!

Here's a doc premiering on The Fifth Estate tonight :
KPMG and Tax Havens for the Rich : The Untouchables

and a background article from CBC :
KPMG offshore tax dodge a 'facade' designed to hide money, ex-client says

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Lux Leaks in Canada

I thought we'd have a look at a few of the 35 Canadian corps mentioned by the International Consortium of Investigative Journalists in their Luxembourg foreign tax fiddling leaks but first ...

On Monday, Minister of National Revenue Kerry-Lynne Findlay proclaimed in the House: 

"One of our government's key areas of concern is the issue of international tax evasion and aggressive tax avoidance."

By Wednesday, courtesy of CBC, NDP Megan Leslie shot back : 

"An international investigation has revealed a Canadian crown corporation uses phony Luxembourg shell companies to avoid paying foreign taxes. So how are Canadians supposed to trust the Conservatives to crack down on aggressive tax avoidance when they're busy setting up shell companies of their own?" 

Tony Clement, President of the Treasury Board, responded that the Public Sector Pension Investment Board is "at arms length, arms length from the federal government." 
And just in case that wasn't clear enough, Joe Oliver leaned into the mike to crossly repeat "arms length". You can watch this above exchange in Montreal Simon's excellent account.

ShamWow Tony is trying to be at arms length from his own job here.
From the Public Sector Pension Investment Board website :

"Directors are appointed ... on the recommendation of the President of the Treasury Board.   Candidates for directorships are selected from a list of qualified Canadian residents proposed by an external nominating committee established by the President of the Treasury Board.   The Chair of the Board is designated from among the Directors ... on the recommendation of the President of the Treasury Board."

The board seem like a highly qualified and capable bunch, all appointed since 2006 for four year terms and variously coming from backgrounds in banking, insurance, and Vampire Squid Canada. 
It must get tricky though - one of them is on the board of Husky Energy Inc., a company 70% owned by Li Ka-shing and one of the companies profiled in the ICIJ leak. 

Here's a three minute primer on how these Luxembourg tax loopholes work : 



OK, on to a few of the Canadian companies mentioned in the ICIJ leaks, as written up by PricewaterhoseCoopers.

United Technologies Corporation (UTC) - multinational billionaire owner of Sikorsky Helicopters, Otis Elevators, Pratt & Whitney aircraft engines, etc etc - uses a Canadian company so small it's housed inside Pratt & Whitney to set up shell companies in Luxembourg and funnel money to them :

"HAMILTON STANDARD CANADA, INC., a company incorporated under the laws of Quebec (Canada) , with offices c/o Pratt & Whitney Canada ...

"In view of facilitating the cash redeployment out of Hamilton Standard Canada Inc., UTC envisages the use of a Luxembourg-based finance company.

Hamilton Standard Canada Inc. ("HSC"), a Canadian incorporated entity, acting as Limited Partner, will set up Arlington Luxembourg SCA ("Arlington") together with Berkeley Luxembourg S.a r.l. ("Berkeley"), acting as an Unlimited Partner.

Subsequently, Hamilton will transfer funds to Arlington in exchange for issuance of Mandatory Redeemable Preference Shares ("MRPS"). Arlington would then finance in its turn various subsidiaries of the group, as necessary.

Such entities will therefore be considered as Luxembourg tax residents.

Sinopec - 

"TIPTOP Energy Limited, a Hong Kong company, is a fully-owned subsidiary of SIPC. 

TIPTOP Luxembourg Sari, created on 10 October 2008, has incorporated a fully owned Canadian subsidiary (hereinafter referred to as "Bidco"). Bidco has launched a public takeover of Tanganyiak Oil, a Canadian listed and incorporated company. TIPTOP Luxembourg Sari's existing share capital is EUR 12,500. To fund the Canadian acquisition, TIPTOP Energy Limited plans to increase TIPTOP Luxembourg Sarl's equity from EUR 12,500 to about EUR 1 million and to change the denomination of the share capital at the same time to CAD. For the additional financing of its participation in Bidco, TIPTOP EnergyLimited will grant TIPTOP Luxembourg Sari an interest free loan in an amount of about CAD 2.1billion.

In case it is necessary, for dividends and net wealth tax, the double tax treaty concluded between Luxembourg and Canada also applies, should TIPTOP Luxembourg Sari hold at least a participation of 10% in the capital of Bidco since the beginning of its fiscal year (particularly, there is no requirement for a minimum taxation)."

UK's Doughty Hanson set up a Luxembourg shell, Luxco, loaned itself $3M and bought preferred shares in a Canadian solar inverter tech company. 

Only interesting because one of DH's former principals, who focused on Benelux markets, made the jump from DH last December to do private equity in the Toronto office of our other pension board, the Canada Pension Plan Investment Board.

Li Family Trusts   Mr Li Ka-Shing, who owns a good deal of Vancouver, loaned its Husky Energy shares to a Luxembourg shell through two of its Barbados companies. The shell was entitled to all Husky dividends for the period of the loan : "The securities lending agreement for [the shell] will be neutral both from an accounting and tax perspective." 

Meanwhile it was almost exactly one year ago that 270 unionized welders and pipefitters contracted to the Husky tarsands project were laid off and replaced by cheaper temporary foreign workers.

 
These are the corporate legal loopholes and tax avoidance schemes feeding the 1% and fueling growing wealth disparity and austerity bullshit - and there's no evidence any of it is illegal!

CNN Money : 

"Luxembourg is like a corporate version of extraordinary rendition, a place where companies can do their dirty work that would not be permitted at home," said Crawford Spence, professor of accounting at Warwick Business School.

 

The Tax Free Tour is an excellent doc on this.  To see what holding corps to account for their foreign tax fiddling actually looks like, skip to the 33:33 minute mark.

Dec 11 2014 Update : Bombardier among companies exposed for controversial Luxembourg tax plan

"Drafted for the company by consultants Ernst & Young, the proposal involved a complicated restructuring that would send $500 million from Bombardier's U.S. unit to a Luxembourg subsidiary in exchange for mandatory redeemable preferred shares, which are treated as debt.All payments made by the Luxembourg-based company are treated as interest payments and thus deductible and subject to low tax rates in the grand duchy.Bombardier can then repatriate the money to Canada in the form of dividends, which are not taxable under a tax deal between Canada and Luxembourg.

Bombardier has been the recipient of millions of dollars in federal and provincial subsidies to boost the aerospace industry."

Upperdate : 28 year old Antoine Deltour, LuxLeaks leaker and former PwC auditor, is being prosecuted by Luxembourg for theft, violating secrecy laws, and violation of trade secrets.
Fuck you, Luxembourg.
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The Tax Free Tour - tax havens and outsourcing

A doc about the stateless offshore world of tax havens. 

Why does Apple only pay 1.9% tax?
The Big Four : Price Waterhouse Coopers, Deloitte, Ernst & Young, KPMG

Former KPMG man : "They are the constant feature of every tax haven. Without one of those firms, or maybe all of those firms being present, you really will not have a tax haven."

He describes how the Big Four as he calls them are hired by governments to guide financial rules that benefit the Big Four.

So remember back in Sept 2011 when Steve gave Deloitte a $20-million contract to advise federal cabinet and senior officials on how to trim $4 billion from government program spending in order to balance the books by 2014?  

Ah -an outsourcing firm is being hired to recommend more outsourcing we said at the time, remembering a 2010 CBC report on the 80% increase in a parallel civil service made up of consulting firms.

At the same time, Deloitte, CORE-outsourcing, and Ryerson's Ted Rogers School of Management teamed up to produce a joint research initiative using Deloitte's "proprietary outsourcing maturity model". It was called The 3 E's of Effective Outsourcing Governance -Experience, Essentials, and Empathy -because that sounds better than Externalizing accountability, Eff Off Unions, and Economic entropy.

They projected that "almost $25 billion worth of outsourcing contracts in Canada [are] to be renewed or renegotiated over the next three years."

Pictured at the top of their 3 E's report are Ray Lavitt, President of CORE; Ian Chan, Principal at Deloitte; and Ron Babin, Professor at Ryerson.  
All three have outsourcing and/or offshoring creds : 

• Lavitt was "VP, Global Sourcing at CIBC" before becoming CEO of CORE
• Chan is "Leader of Deloitte Canada's Outsourcing Advisory Practice" and 
• Babin was "a partner at Accenture and at KPMG", according to his Ryerson bio, and "his area of research is IT Planning and IT Governance with a specific focus on IT outsourcing and off-shore delivery."

Lavitt and Babin featured in an article a month ago at CBC : Offshore outsourcing 'not always a negative thing'

Lavitt is President of CORE; Chan and Babin are CORE board members.

So how did Steve's outsourcing report from Deloitte work out for us?
FinMin Jim Flaherty announced a trim to Ottawa’s annual spending by $5 billion a year in budget cutbacks in programs and services to eliminate the $26-billion deficit by 2015.

As of Dec. 31, 2012, 16,220 public service positions were eliminated, even though according to Canadian Centre for Policy Alternatives in 2011 :

Over the past five years, personnel outsourcing costs have risen 79%. While federal departments have had their budgets capped, expenditures on outside consultants have not been touched and remain above $1 billion a year,” says Macdonald.

Wednesday May 8 update : 

Star investigation: Millions in taxpayer-funded consulting work kept secret

A Star investigation has found 90 per cent of the $2.4 billion paid out in the past decade comes with no description of the work done — and more than a dozen departments refuse to provide details when pressed.

Thursday May 9 update :
Hundreds of public servants at seven departments received notices today that their jobs are on the block as part of the Conservative government’s ongoing spending cuts

Watch the doc. 
See also International Consortium of Investigative Journalists/offshore
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