Offshore Compliance Advisory Committee – Statement on the Canada Revenue Agency’s Treatment of the Panama Papers and the Paradise Papers

The Honourable Diane Lebouthillier, P.C., M.P.
Minister of National Revenue
7th Floor
555 MacKenzie Avenue
Ottawa, ON  K1A 0L5

Dear Minister:

Re: Offshore Compliance Advisory Committee – Statement on the Canada Revenue Agency's Treatment of the Panama Papers and the Paradise Papers

On behalf of the Offshore Compliance Advisory Committee (the "Committee"), I am pleased to provide you with an update on the Committee's work since its last report in November of 2017. 

At its meeting on June 8, 2018, the Committee received presentations from officials of the Canada Revenue Agency ("CRA") about the CRA's dealing with information obtained from the Panama Papers and the Paradise Papers. Herewith, we set out the conclusions of the Committee in response to those presentations.  We focus primarily on the handling of the Panama Papers because they were disclosed earlier than the Paradise Papers (May 2016 vs. late 2017/early 2018) and CRA has had more time to develop a response strategy for them.  That strategy and the Committee's comments should also be generally applicable to the Paradise Papers.

The Panama Papers

The "Panama Papers" is a term referring to information derived from an unauthorized (and presumably illegal) provision by an anonymous informant of approximately 11.5 million documents held by the Panamanian law firm Mossack Fonseca to the International Consortium of Investigative Journalists ("ICIJ").  The documents relate to approximately 215,000 trusts, corporations and other entities established or maintained by Mossack Fonseca in a number of tax haven jurisdictions, beneficially held by a large number of individuals or other entities resident in many countries.  On May 9, 2016, the ICIJ released to the public a downloadable database of information extracted from the disclosed documents by the ICIJ.  It is important to note that the database does not contain copies of the documents themselves, but sets out limited information taken from the documents by the ICIJ. CRA immediately downloaded the database and began the review described below. The CRA noted it had already begun work in relation to a number of clients associated with the law firm Mossack Fonseca prior to the data leak.

The CRA Review

In addition to the data it already had, the CRA's initial review of the leaked data identified about 16,000 items in the ICIJ download with a potential connection to Canada.  Those items were reviewed to identify Canadian taxpayers connected with the information.  This was complicated by the absence of Canadian tax identification numbers or, in some cases, Canadian addresses.  Information associated with a particular name then had to be aggregated with information from other sources, including returns and information forms filed, previous voluntary disclosures, information with respect to cross-border funds transfers, information received from other tax authorities and from Revenu Quebec.  In addition, based on information from media reports, CRA successfully pursued requirements for information from a major Canadian financial institution which had used the Mossack Fonseca firm to set up approximately 450 offshore corporations for clients, both Canadian and non-Canadian. 

From this review, some 3,348 non-resident entities (corporations, trusts and similar entities) were identified as potentially connected to Canada, involving about 2,700 potential beneficial owners (approximately 80% individuals and 20% corporations and trusts). Each of these entities was then assessed to determine the risk it posed to the Canada Revenue Agency.  Of the potential beneficial owners identified in the initial review, about 72% were found either to be non-residents of Canada or otherwise not subject to Canadian tax or not ultimately identifiable from the information available.  Where the owners were found to be non-resident, information was provided to the relevant foreign tax authority in accordance with the exchange of information provisions in the applicable tax convention (this included the bulk of the entities disclosed by the financial institution under the requirement referred to above, resulting in provision of information to 19 countries).   About 2% of the remaining beneficial owners had either been previously audited, were deceased or were otherwise low risk (in the case of deceased persons, CRA is following up to ensure that their estates have complied with any inherited Canadian tax obligations).  In addition, a small number of voluntary disclosures have been accepted from members of this group either because the disclosure was filed prior to May of 2016 or because of the absence of any apparent link to the disclosed information.
Of the remaining 25% of the cases (about 670), approximately 150 Canadian taxpayers have been or are under audit and some reassessments have been raised.  The remainder will be subject to the same process of risk assessment and possible audit and reassessment in due course.  At this time, it is not possible to assess with any certainty the amount of tax, interest and penalties which might be realized.  A further product of the review to date has been the identification of at least three Canadian promoters of aggressive or evasive offshore structures associated with the Mossack Fonseca firm. This information was provided to the CRA Promoter Compliance Centre for action.  Where the promoters were assisting residents of other countries, that information has been shared with those countries' tax authorities.

The Paradise Papers

"Paradise Papers" is similarly a term used to describe information obtained from documents stolen from a Bermuda law firm, Appleby Global, and provided to ICIJ.  That information was made public in three releases between November 2017 and February 2018, also downloaded by CRA. The data released is more limited than that in the Panama Papers.  CRA is currently in the first stage of reviewing the data – identifying Canadian taxpayers mentioned in the download and determining the level of risk they pose.  The Paradise Papers contain approximately 2,400 names of persons or entities apparently connected to Canada.  Of that number, about 1,500 have been matched to names in CRA records (approximately 1,150 individuals and 315 corporations).  To date, about 30 of these have been selected for audit, mostly multi-national corporations.  At this stage, no reassessments have been raised. The CRA had also already identified and taken action including risk assessments and audits on many of the individuals and entities named in the Paradise Papers prior to the data leaks, based on risk assessment processes that recognized non-compliance.

We have also noted CRA's participation in the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) and its use of the JITSIC network to exchange information obtained from its review of the Panama and Paradise Papers with other tax administrations. The CRA noted that several project meetings of the JITSIC Network took place to discuss opportunities for obtaining data, co-operation and information-sharing. JITSIC members are continuing to collaborate on common compliance issues including the identification of specific intermediaries that facilitate and service the offshore tax industry and identifying nominee shareholders and directors that act on behalf of other individuals to obscure their identity.

Assessment of CRA Action

The Committee is well aware of criticism in the media and elsewhere of the way in which CRA has dealt with the Panama Papers and the Paradise Papers and, in particular, the apparent absence of any monetary recoveries or prosecutions in the two years since the Panama Papers download became available.  In assessing that criticism, a number of factors must be taken into consideration:

1. The fact that the ICIJ did not release the stolen documents themselves, but limited information it extracted from them (apparently to protect itself from legal action), has complicated the work of the tax authorities by making it more difficult to identify the often-complex strategies used by taxpayers.
2. Taxpayers engaged in aggressive tax avoidance or evasion typically use complex or opaque structures which may make it difficult and time-consuming either to identify the ultimate beneficial owner or to identify the precise way in which the tax laws are being disregarded.
3. Once a high-risk taxpayer has been identified, it is often necessary to obtain further information in the course of an audit to support an accurate reassessment.  While CRA has broad powers to audit taxpayers and demand information, taxpayers have the right to challenge CRA demands for information in the courts and, while CRA may prevail in the end, the process uses scarce resources and produces delay (as no doubt intended by the taxpayers). Applications for judicial review of CRA requirements to produce information or documents can cause delays for months, particularly if all rights of appeal are exercised.  Information requests under the Access to Information Act in the course of an audit can also produce delay.  In addition to delaying the audit, these tactics similarly consume resources which could be applied to other, pending cases.
4. In some cases, information from foreign tax authorities is required and may not be supplied on a timely basis given the challenges that they face in obtaining the information in their jurisdictions.
5. Raising an assessment, after completing the necessary audit, is only the first step in actually collecting unpaid tax, interest or penalties.  If a taxpayer exercises their rights of objection and appeal provided in the Income Tax Act, a period of about three years could, in a normal case, elapse between the time of the reassessment and the delivery of a judgment in the Tax Court of Canada (for individuals and many corporations, collection action cannot be taken until this point).  While this period could be materially shortened by CRA entering into a negotiated settlement with the taxpayer, this would likely expose CRA to criticism on other grounds.
6. Comparison of the results of CRA's activity to date with reports of the results of the activity of other tax authorities must ensure that the comparison is made on a comparable basis.  For example, we understand that the amounts reported to have been collected in response to the Panama Papers in some other jurisdictions may be amounts flowing from disclosures made by taxpayers under various amnesty programs and not always as a result of completed audits and assessments.  It is difficult to compare this with CRA's activities because, as noted, Canadian taxpayers implicated in the Panama or Paradise Papers would not qualify for relief under the VDP. In May of 2018, an official of the Australian Taxation Office (in a report to a committee of the Australian Senate) stated that it had completed a little over 300 reviews or audits flowing from the Panama Papers and were working an about another 80.  The reviews completed involved tax liabilities of about A$65 million.  This suggests that CRA's actions in this regard are within a similar order of magnitude (150 audits or reviews, with potentially another 500 cases identified).  The Australian experience also suggests that some published estimates in the media of tax recoveries flowing from the Panama papers may be exaggerated.
7. Constraints are faced by CRA in defending its actions when faced with public criticism or erroneous or misleading media coverage due to confidentiality provisions in the Income Tax Act.

Committee Comments and Recommendations

1. Continuing CRA efforts to optimize its use of "big data"
   Our first comment is to repeat the point we made in our letter to the Minister dealing with the treatment by CRA of "big data".  The need to deal with large quantities of data, much of which may not be related to tax evasion or avoidance, is accentuated in events such as the Panama or Paradise Papers, will be experienced on a permanent and on-going basis as the Common Reporting Standard is implemented, co-operation and exchange of information with other tax administrations and the availability of third-party data sources increases.  Dealing effectively with information on that scale requires not only technical sophistication (the use of algorithm-based computer analysis for example) but highly skilled personnel.  CRA must continue and intensify its efforts to attract and retain staff and to review and, if necessary, enhance its internal training programs.  Dealing with complex and opaque avoidance structures requires a high degree of familiarity with complex rules in the Act.  In this respect, CRA should consider expanding dedicated specialized teams to work only on these kinds of situations – the more frequently auditors work with these structures, the more quickly and effectively they will be able to assess them and, if necessary, take assessing action.
2. Dedicated or embedded teams of lawyers
   It might also be productive for CRA to further discuss with the Department of Justice on the formation of similarly-dedicated (and perhaps embedded) groups of lawyers to deal both with litigation arising out of these audits and with legal issues arising during the audit stage.
3. Potential of the tax gap data to set baselines to measure the impacts of offshore compliance activities and illuminate areas of focus for compliance resources.
   On June 28, 2018, CRA released a study estimating the offshore "tax gap", that is, the difference between the amount of tax that would be collected from offshore activities by Canadian taxpayers who are individuals if the law was fully respected and the actual amounts collected.  It is expected that a similar study with respect to Canadian corporate taxpayers will be completed in 2019. It may be helpful to compare the amounts assessed as a result of initiatives such as the Panama or Paradise Paper with the overall tax gap to determine the effectiveness of these initiatives.  This may help to determine, for example, how much of the offshore tax gap is produced by the type of structures identified in this initiative and whether attention should be directed to other areas.  This might include avoidance strategies which fall short of criminal tax evasion and fall in the grey area between acceptable tax planning and aggressive tax avoidance.  Such knowledge would assist in determining where to apply audit resources and what training auditors might require. Comparison of the results of the Panama and Paradise Papers initiatives with the tax gap estimates may also assist in determining if CRA's offshore enforcement efforts are permanently reducing the offshore tax gap.
4. Exploring new avenues for human resources
   CRA should also consider whether it is practicable to use outside technically-skilled personnel, whether by secondment or on a contract basis, to assist in this area.  This would enable CRA to move faster in this area in the short run and the collaboration with CRA personnel would, we suspect, be mutually beneficial.  We believe that there are a good many younger accounting and legal professionals who are interested in public interest work and dealing with offshore tax avoidance is today one of the more prominent areas of public interest.  It is beyond our mandate to deal with matters such as pay scales or incentive pay arrangements for CRA personnel but we assume that CRA management are giving due attention to such issues.
5. Monitoring collectability
   Attention should also be given to any material gap which opens between amounts assessed and amounts actually collected when assessments are confirmed.  We are not aware of any particular problems in this area but it is possible that taxpayers who are assessed will attempt to avoid payment by moving themselves or their assets offshore.  Offshore enforcement of such tax debts is only possible where Canada and the relevant jurisdiction have mutual assistance arrangements and any such difficulties should be brought to the attention of the Department of Finance for possible discussion in treaty negotiations.
6. Public awareness
   We have also considered whether greater publicity should be given to CRA's activities in this area.  CRA is obviously constrained in what it can make public by the taxpayer privacy provisions of the Income Tax Act, so that it cannot, for example, identify taxpayers who have been audited or reassessed until and unless their case is brought before the court and decided.  This is as it should be, but that does not prevent CRA from disclosing aggregate amounts assessed or collected from offshore compliance activity.  Despite the tightening of the Voluntary Disclosures Program (VDP), the CRA should continue to publicise amounts identified through the VDP in respect of certain offshore disclosures made on a timely basis because such disclosures are likely an indirect product of enhanced CRA enforcement action in the offshore area.
7. Return on investment
   As with the treatment of "big data" generally, CRA should measure the cost of enforcement in relation to amounts recovered on a continuing basis to determine whether more (or less) resources should be applied to a particular area. The estimation of the offshore tax gap will assist by giving CRA (and the public) an idea of the relative size of the offshore and domestic tax gaps and the relative weight to be given to CRA's efforts to narrow those gaps.

All of which is respectfully submitted. The Committee would be pleased to meet at your convenience to discuss our review and these recommendations, if you wish.

Yours very truly,

Colin Campbell
Chair, Offshore Compliance Advisory Committee