Saturday, May 14, 2016

The Ball Is In Trudeau's Court

Justin Trudeau has done an admirable job of tending to his image, Murray Dobbin writes. But his real test as prime minister will be how he deals with the Isle of Man Tax Dodgers:

By now most people are familiar with the KPMG tax "sham" uncovered by CBC News. The scheme involved at least 26 wealthy clients (minimum contribution, $5 million) for whom KPMG set up shell companies in the Isle of Man, one of many tax havens for the rich and large corporations.

The Canada Revenue Agency initially said the scheme was "grossly negligent" and "intended to deceive."

But 15 of the 26 participants would end up getting special treatment. Some of the first ones caught were assessed huge penalties, but later KPMG clients were offered a secret deal. The "amnesty" agreement granted rich KPMG clients immunity from civil and criminal prosecution and freedom from any penalties, fines or interest as long as they paid the taxes they had dodged. Secrecy was written into the agreement: "The taxpayer agrees to ensure the confidentiality of the offer and will not inform any person of the conditions of the offer..."

It's interesting that this story came to light just as the Panama Papers fiasco was surfacing. The root of the problem, Dobbins writes is the cozy relationship which exists between top executives at the CRA and Canada's major Accounting firms:

The practice of making deals and providing amnesty for the biggest offenders seem rooted in the cozy relationship between senior CRA officials and senior management figures from the accounting firms that facilitate the scams. The CBC uncovered five years of expensive receptions hosted by KPMG and other accounting and law firms for senior agency executives -- including those involved in overseas compliance.

"Senior enforcement officials from the Canada Revenue Agency were treated to private receptions at an exclusive Ottawa club, hosted by a small group of influential tax accountants that included personnel from KPMG -- even as the firm was facing a CRA probe for running a $130-million tax dodge in the Isle of Man," the CBC reported.

Despite strict rules stating employees must "not accept gifts, hospitality, or other benefits that will, or could, have a real, apparent or potential influence on your objectivity and neutrality in performing your CRA duties," these unseemly get-togethers became routine. One that took place at the exclusive Rideau Club in June 2014 saw more than 20 "high-ranking CRA executives" wined and dined by accountancy and law firms including KPMG. CRA executives were actually "required" to attend by the agency. The same day they had been treated to a luncheon followed by a session where they were lobbied by KPMG and other firms.

Little folk pay penalties. But the big fish continue to swim unimpeded. The ball is in Trudeau's Court.



The Mound of Sound said...

I've coined a word for this syndrome, Owen. It is the state of being "Mulroneyed." You will recall how, after Mulroney was outed for accepting cash=stuffed envelopes from Karl Heinz Schreiber at Montreal coffee shops, he raced to make a "voluntary disclosure" to what I think was still then known as Revenue Canada. It was plain as day what had happened but the tax agency swallowed hard, accepted the fanciful notion that Mulroney had forgotten to report the money, and then allowed him to pay the arrears plus a small amount of interest - no penalties, no prosecution. Mulroney also managed to hang onto the defamation settlement he had extracted from the Liberals.

The KPMG investors were likewise "Mulroneyed." What is going to change in the future? Well, for now, the heat is on. Criminals adjust their behaviour when the police stage a crackdown. They lie low, back off. I suspect these tax cheats will become a bit less daring, more ready to go the voluntary disclosure route earlier, perhaps at the first whiff of danger.

My guess is that it will take a year or two for this to blow over and then it'll be business as usual - unless Slick implements some big changes in how Canada enforces its tax laws. That means upping the ante on investigations and prosecutions to emphasize punishment, deterrence and restitution/recovery.

Otherwise law abiding people of privilege resort to these schemes based on an expectation they won't be found out but, if they are, they'll probably be able to cut a sweetheart deal. In other words they have nothing to lose. They can pay the taxes now or pay them later with the sort of interest they would expect from any commercial transaction. That's a "no lose" situation. If Trudeau doesn't change it, why would the evaders' behaviour change?

Owen Gray said...

My hope is that, after the Panama Papers, Trudeau will have to do something. This behaviour is so egregious, Mound, it's hard to ignore.

Steve said...

You can get shot in China for this.

Anonymous said...

Most Canadians are apathetic chumps, so the Liberals probably will get away with ignoring the widescale tax evasion by the rich. The Liberal and Conservative politicians have more in common with the corporate elites than they do with the commoners. They take care of their own.

Owen Gray said...

They have to keep their contributors happy, Anon.

Owen Gray said...

I should think that would concentrate the mind, Steve.

Steve said...

Owen the sad fact is no it does not. China is built on connections, and if you thnk you are bulletproof you cheat. They tell the people its a death sentance, but in fact as long as you do not upset the beast its carte blanche. Same thing exists in our world. In the end no matter what Goverment is just a friends and families institution.

Owen Gray said...

It seems that, all around the world, it's all about the palms you grease, Steve.