KPMG’s Appearance before Quebec’s Committee on Public Finance
KPMG Canada today testified before the Committee on Public Finance in Quebec City. Guy Langlois, KPMG’s Managing Partner for Quebec and Greg Wiebe, KPMG’s former Global Head of Tax appeared on KPMG’s behalf to answer questions and provide commentary on the industry, the firm and its rules and regulations to manage best practices. KPMG presented the following prepared remarks.
Thank you Mr. Chairman for your invitation to appear before this committee.
I am the KPMG Managing Partner for Quebec and have been with KPMG for over 29 years. I am not a tax expert, but with me today is Greg Wiebe, who has been with KPMG for over thirty years and who has just recently completed a term as KPMG International’s Global Head of Tax. Before that, Greg was the Canadian Managing Partner of KPMG Canada’s tax practice. Some of you may be familiar with Greg from his appearance before the House of Commons Finance Committee in Ottawa last week.
We welcome this opportunity to help bring clarity and understanding to a number of issues that are important to all of us as Quebecers and Canadians, the accounting profession, and KPMG.
We are proud of our role in society, and take very seriously the trust that is placed in KPMG by our clients, the business community, and the broader financial community, but perhaps most important of all, the communities in which we work and live.
We have offices in Montreal and Quebec City with more than 750 employees and 80 partners.
Our firm has been serving Quebecers and Canadians for close to 150 years. KPMG employs 6,400 employees in 40 offices from Victoria to St. John’s.
Globally, the KPMG network employs 175,000 people in 155 countries.
Our people here come to work every day to help our clients with the business challenges they face:
Our people do all of this while living by the values of our organization. One value stands out from the rest – “Above all, we act with integrity”.
I now wish to turn to Greg.
Bonjour et merci pour l’invitation. Before I get into the topic of Tax Havens, and give our perspective on this issue that is of concern to Quebecers and Canadians, I would like to say a few words about how our society and attitudes towards taxation have evolved. I would also like to address how KPMG has evolved over the years to, not only meet our legal and professional obligations in serving our clients, but also meet the needs of a broader group in society, including the tax authorities and the communities in which we live.
All tax planning undertaken by KPMG has always and continues to meet the technical requirements of the Canadian and provincial tax laws. That we always comply with the law is a given. But today, the world looks at tax planning through more than just a legal lens. As a firm, we have modified our business practices to meet these expectations.
Today, we look at tax planning with three lenses:
We have cemented these three lenses into our ever evolving quality review framework. For instance:
There has been a lot of media attention recently on tax havens, including some focus on a particular tax plan created by our firm in 1999 involving a corporate structure in the Isle of Man. While this was fully compliant with the tax laws of the time we decided to cease offering it to clients almost a decade ago. The world in 1999 was a much different time and place than it is today. A lot has changed in the last 17 years. What I can tell you is that using our current standards today, we would not offer such a plan to our clients.
Like every business, we have changed dramatically since 1999. One area where we have not changed, however, is the importance that we place on client confidentiality.
Client confidentiality is not just a KPMG issue – it is a cornerstone of the accounting profession. We have legal and professional obligations to keep our client information confidential. As all of you can appreciate, if Quebecers and Canadians could not trust their accountants to keep their private business affairs private, there would be no accounting advice.
Moving on to the broader topic in question, we are pleased to share our perspective and thoughts on the topic of tax havens. Tax havens and the related issues are relevant to all Quebecers, Canadians and indeed to citizens of all countries around the world and to the integrity, stability and proper functioning of our collective tax systems.
Let me start by stating our conclusion… simply put, our existing tax system does not work well enough. The basic problem is that business is global, yet taxation systems are primarily national (and in some cases provincial) in their focus. Many steps have been taken over the years, including most recently major initiatives by the OECD and the G20 to make the system more “fair”, but significant gaps still exist.
The inappropriate use of tax havens is clearly one of the problems with the tax system. We make specific recommendations for change later in our submission.
So what exactly is a “tax haven”? It can certainly mean different things to different people. To give this discussion and our comments a proper context I’d like to cite the OECD’s generally accepted definition. Under the OECD model there are three key identifying badges of a tax haven jurisdiction:
There are two main streams in the tax haven debate and we need to look at each stream differently. Firstly, we have individuals who pay personal income tax on their incomes and secondly we have businesses who pay taxes on their profits. In the case of individuals, they are in general currently subject to income taxation on their global income in their home country (i.e. the jurisdiction in which they live). In general, business profits should be taxed in those jurisdictions where the profit is earned.
Tax systems however have not been able to keep up with the modern realities of today’s digital world and our global marketplace. As an example, Canada’s income tax system was introduced in 1917 and the framework was amended in 1948. At that time, the movement of people and capital was fairly limited. It was therefore natural that the income tax system came to be structured around two concepts, the place of residence and the source of their income. Although rapid changes in our society, such as globalization and the digital economy, have brought about far greater movement of people and capital, Quebec and Canadian taxation continues to be based on these two core concepts.
We believe that in 2016 all tax jurisdictions should fall in line with the emerging international norms and expectations around the automatic exchange of financial account information with governments of all jurisdictions. The OECD’s recently developed “Standard for Automatic Exchange of Financial Account Information in Tax Matters” and the related common reporting standards are leading the way in this regard.
Pressure should be placed on those remaining tax haven jurisdictions to fully comply with these global standards.
We do believe that governments need to have the right to determine their own policy around the taxation of their own citizens, as long as it does not negatively affect another jurisdiction.
Given our highly competitive global marketplace it is not surprising that in their quest to attract foreign investment, governments have been prompted to reduce their corporate tax rates (and tax burdens in general) to provide an incentive for global players to invest and locate business activity in their jurisdiction. Ireland and Barbados are two examples of countries with low corporate tax rates designed to attract foreign investment. Not surprisingly many governments struggle to strike the right balance between expanding their tax revenue base and preserving their international competitiveness.
This tax rate competitiveness is not just confined to country-to-country. It also applies to competition between subnational jurisdictions. In Canada, there is the same type of competition between the provinces to provide incentives to business to locate in their province. You will know that Quebec, for example, with your income tax credit system favours targeted industry sectors. In fact, your latest budget just introduced patent box legislation to support innovation in the Quebec manufacturing sector by offering a low 4% tax rate for qualifying income under this new regime. Until recently, Alberta has been touting its low corporate tax rates as the “Alberta Advantage” to attract business to the province.
Seeking to maximize their business operations and profits, global businesses compare corporate taxes, amongst other factors, in determining how to structure their affairs.
This current system of country-based business taxation presents two potential areas for abuse:
In our view the global taxation system applicable to business needs to change in at least four ways:
Notwithstanding these recommendations, a country’s tax system needs to be flexible enough to continue to allow for tax competition, including reduced rates on corporate income where substance exists, patent box incentives to encourage innovation and tax subsidies to attract the investment of capital and the creation of jobs, among other things.
The OECD’s Base Erosion and Profit Shifting (BEPS) initiative could go a long way in achieving some of our recommendations. The Action Plan which has been endorsed by the G20 countries, including Canada, focuses on 15 initiatives. We agree that these are the right 15 key areas of focus in the international tax arena. The Action Plan covers the waterfront including tackling the digital economy, tax transparency, and provides best practices to limit the erosion of a country’s tax base by interest deductions and other financial payments and significant new transfer pricing guidelines.
If the G20 countries take the lead here and push hard to make the appropriate changes to their domestic laws and tax treaty networks, this can lay the foundation for a much needed overhaul of our global tax system.
The OECD recently developed the “Standard for Automatic Exchange of Financial Account Information in Tax Matters”, which calls for an annual automatic exchange of financial account information between governments. To make this exchange of information possible, financial institutions, as broadly defined under domestic and international law, must report information according to common reporting standards on accounts held by non-resident individuals and entities such as certain corporations, trusts and foundations.
Countries around the world have begun enacting legislation to implement these common reporting standards in their jurisdictions. These measures are a significant step towards a globally coordinated approach to disclosure of income earned by individuals and organizations and build on other information-sharing legislation such as FATCA in the U.S.
Every member of our KPMG team is committed to and supportive of the continuing evolution of our world to a place where there is more trust in the role of government, the role of the accounting profession, and confidence by society in the fairness of the taxation system, in Quebec, Canada and globally.
In conclusion, we thank the Quebec Committee on Public Finance for its work on this important matter and for inviting us here.
Mr. Chair, I will now be happy to take your questions.
KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative ("KPMG International"). KPMG member firms around the world have 174,000 professionals, in 155 countries.
The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.
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KPMG in Canada
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