Quebec Finance Minister Carlos Leitao has asked Revenue Quebec to look into Bombardier’s tax practices after a leak of documents outlining the aerospace company’s secret tax proposal with Luxembourg.
A new cache of documents released by the International Consortium of Investigative Journalists ICIJ reveals hundreds of secret tax deals with Luxembourg by multinational corporations.
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According to information obtained by Radio-Canada newsmagazine Enquête, Bombardier has transferred hundreds of millions of dollars to Luxembourg, a low-tax jurisdiction.
The proposal is legal.
On Wednesday, Leitao said he would ask Revenue Quebec to verify whether the company had indeed used a tax dodge to avoid paying taxes.
The ICIJ has uncovered the secret tax deals Luxembourg made with 340 multinationals, including giants such as Disney and the Koch brothers.
Companies are able to reduce their taxes by transferring cash, often through a series of shell companies, into Luxembourg.
Restructuring of finances
Enquête obtained a copy of a secret tax proposal dated in 2010 between Bombardier and Luxembourg that described a plan affecting 11 of its subsidiaries in eight countries.
The proposal exposed by LuxLeaks lacks the official stamp that would confirm it had been approved, but Radio-Canada tracked evidence of Bombardier's restructuring going through using corporate records in Luxembourg.
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.
According to tax experts, the complex fiscal manoeuvring helps Bombardier reduce its tax bill in Canada and the U.S.
“The net effect is less taxes collected by authorities in Quebec and Canada,” said André Lareau, a tax law professor at Laval University. He spoke in French and this quote is CBC's translation.
"With millions of dollars saved by Bombardier and millions of dollars saved by all companies that use this type of vehicle, there is no way to win for Quebec or Canada, which are short a phenomenal sum,” he said.
Bombardier has been the recipient of millions of dollars in federal and provincial subsidies to boost the aerospace industry.
Like most multinationals in Luxembourg, Bombardier has an official office residence, manned by a part-time employee, a few minutes from the capital. Its name is among 87 inscribed in small type on a post-office box.
Bombardier responded that its world corporate structure “conforms to all the applicable laws, including the tax laws.”
Bombardier strategy is legal
Bombardier’s strategy is legal and common among multinationals that want to remain competitive internationally. The tax tactics are also approved by the federal government.
“Canada has given them permission to do this,” Lareau said. “Unhappily, these strategies are widely used and it's somewhat dismaying seeing the inequality of the tax game that is being played here.”
The so-called LuxLeaks documents from ICIJ reveal tax deals for Canadian companies such as Yamana Gold, Baytex Energy, Fairfax Financial Holdings and Brookfield Asset Management.
Public Sector Pension Investment Board was also revealed to be avoiding land transfer taxes on its German real estate holdings by using a Luxembourg entity.
In the new leak this week, the ICIJ concentrated on the millions in taxes avoided by big U.S. investors the Koch brothers and by Disney.
These kinds of tax tactics have been frowned on by the G20 and by the U.S., which has pledged to change its laws to prevent profit-shifting from one jurisdiction to another.
The EU has been investigating Google, Apple and other tech giants for their tax structures, which shift much of their profit to low-tax jurisdictions such as Ireland.
The concern for Canada, the U.S. and the countries of the EU is the erosion of their tax base.