For the first time since 2011, Canadian businesses pulled their money out of tax havens, ending a five-year run when more than $120 billion was stashed in the 10 most popular low-tax or no-tax countries.
The newly released Statistics Canada numbers provide the most concrete evidence yet that the Panama Papers may have had a chilling effect on the use of tax havens to minimize corporate taxes.
“This could be a sign that global efforts to curb corporate profit shifting to tax havens may be paying off,” said Dennis Howlett, executive director of Canadians for Tax Fairness, a group that lobbies for the closure of loopholes that encourage the use of offshore tax havens.
According to the government’s official foreign direct investment statistics, Canadian businesses reduced their holdings in the top 10 tax havens from $272.4 billion in 2015 to $261 billion at the end of last year, bringing home $11.4 billion.
This reversal could be due to a number of different factors, including reforms in Ireland that make it harder to exploit that country to avoid taxes, Howlett said. But investment reductions in Luxembourg and Bermuda point to a wider trend.
“We know that public attention to this has affected calculation of risk, so companies are being more cautious now because of the potential for a public relations backlash,” Howlett said.
Allan Lanthier, a retired senior partner at Ernst & Young and former chair of the Canadian Tax Foundation, cautions against reading too much into the numbers, as the majority of the reduction in foreign holdings in 2016 can be attributed to the fact that the Canadian dollar rose against the U.S. dollar, the currency in which most international investments are made.
“The cumulative amount of Canadian investment in these countries is significant, but the amounts appear to have been fairly stable for the last couple of years,” Lanthier said. “And there’s been no substantive Canadian legislative change to address corporate tax base erosion that would account for a change in the behaviour of Canadian multinationals.”
After the U.S. and U.K. the most popular destinations for Canadian foreign investment are Barbados, Luxembourg, the Cayman Islands and Bermuda, all of which have very low or no taxes.
“It’s still shocking that the top destinations for Canadian foreign direct investment abroad are tax havens,” said Toby Sanger, an economist with the public sector union CUPE who has been tracking the foreign investment numbers for the last five years.
Sanger said that the billions that flow into tax havens “are robbing government of money needed for public services.”
“There’s less economic activity happening in Canada as well,” he added.
The numbers made public this week capture only a fraction of tax haven use. For example, Howlett said, the official figures don’t reflect “the secret money.”
“Roughly two thirds of the problem is corporate abuse of tax havens, most of which is done legally,” he said. “And one third of the problem is wealthy individuals, most of which is done illegally.”
The Panama Papers investigation, based on a massive leak of tax haven records, revealed the kind of illicit activities that go on behind the closed doors of law offices and banks in tax havens like Panama, Bahamas and the British Virgin Islands.
Other than massive tax fraud, the international collaboration of more than 100 news organizations, including the Toronto Star, exposed how tax havens have facilitated the payment of bribes to obtain foreign contracts, provided cover for shady deals in African diamond mining, allowed corrupt politicians to hide their pilfered wealth and arms dealers to circumvent trade embargoes.