Ontario health-care workers' pension has up to $430M at stake in Danish tax dispute
Denmark alleges HOOPP wasn't entitled to huge rebates it claimed on stock dividends
One of Canada's largest pension funds has been hauled into court in Denmark in a dispute about whether it improperly claimed hundreds of millions of dollars in tax rebates on Danish stock dividends, in a country already roiling from an alleged $2.5-billion stock dividend fraud.
Denmark says the case against the Healthcare of Ontario Pension Plan, or HOOPP, involves no allegations of fraud, but instead turns on whether the pension fund truly owned billions of dollars of shares in Danish companies or just temporarily borrowed the stock and collected dividends on it.
At stake is $180 million that was paid out to the pension fund in the form of tax rebates between 2011 and 2014, plus another $252 million in rebates HOOPP claimed since then that the Danish Tax Agency refused to reimburse.
HOOPP — the eighth biggest pension fund in Canada and one of the Top 30 in the world, according to one ranking — says it has done nothing wrong and always "followed the laws" and the terms of the Denmark-Canada tax treaty. It would not comment further, citing the ongoing court case.
The pension fund has total assets of more than $79 billion, according to its latest annual statement, and has 350,000 members working for public- and private-sector health employers in Ontario, including nurses and staff at dozens of hospitals and community clinics.
Possible 'exploitation of the tax system'
The case pitting Denmark against HOOPP hangs on one of the "miscellaneous rules" tucked into the closing paragraphs of the Canada-Denmark tax treaty.
Under Danish law, ordinary foreign investors have to pay a withholding tax on any dividends they receive on Danish stocks amounting to 27 per cent. But under the Canada-Denmark tax treaty, pension funds are exempt provided they are "the beneficial owner of the shares on which the dividends are paid" and they own the shares "as an investment."
The Danish Tax Agency alleges HOOPP didn't meet those criteria.
And while it may seem like a stale quibble over the arcana of tax law, the matter has generated media attention in Denmark.
It must be regarded as an exploitation of the tax system.- Tax law professor Jan Pedersen
On Sunday, the Danish public broadcaster DR and the financial daily Borsen both published investigations into the case. They reported that HOOPP held some of the shares in question for mere days — just enough time to collect the dividends — and entered into "swap" contracts to return the stocks to their original owners without risk of losses or gains from changes in the stock price. The reports said it was part of an arrangement with a number of big global banks that set up the stock loans and shared in the profits of the transactions.
CBC was unable to independently verify those findings.
HOOPP has always denied any wrongdoing. In its statement in response to questions about its transactions, it said it "followed the laws and processes of the Denmark-Canada tax treaty, and should be entitled to recover the dividend tax refund. Because the dispute is before the tax tribunal and court, it would not be appropriate for us to make any further comment."
Jan Pedersen, a professor of tax law at Aarhus University in Denmark, told DR in a Danish-language interview commenting on its findings: "Since this is one big circular transaction, it is clear that the participants have tried to make it appear as if one had the formal ownership, and thus the claim to have the dividend tax refunded, even if another, from a strict legal point of view, is the real and beneficial owner.
"It must be regarded as an exploitation of the tax system," he said.
A number of HOOPP members expressed surprise to CBC News that their pension fund is embroiled in the Danish litigation. HOOPP is widely respected in the pension world for generating strong returns while adhering to socially responsible principles such as not investing in tobacco or firearms companies.
Pension fund says it's entitled to refunds
While HOOPP wouldn't answer questions about its dealings in Danish stocks, its financial statements hint at significant transactions in the Scandinavian country. They show the pension fund had a sizeable negative position — the equivalent of $287 million Cdn — in the Danish currency, the kroner, in 2017 that was almost entirely wound up by the following year. It was more exposure than in any other foreign currency except the U.S. dollar, the Japanese yen and the euro.
Last year, when HOOPP's name first emerged in Denmark in relation to the dividend tax matter, the pension fund said in a statement: "HOOPP has been an investor in the Danish capital markets for a number of years, purchasing Danish listed company shares through Danish licensed brokerages.
"As the purchaser of the Danish company shares it has bought, and having received the dividend net of the Danish tax, HOOPP, as a tax-exempt entity under the Canada-Denmark tax treaty, should be entitled to a refund of withholding tax on the dividends received on those shares...
"HOOPP has been working co-operatively with the [Danish tax authority] and, while HOOPP maintains it has not done anything illegal, we understand why the Danish Tax Authority had denied HOOPP's application for dividend tax refunds and had raised concerns about the refunds previously paid. We intend to resolve this issue in the best interests of our organization and our members."
Michael Hurley, president of the Ontario Council of Hospital Unions, which represents thousands of workers who are HOOPP members, told CBC News that his union is aware of the Danish tax case but is confident that their pension fund would only have made the investments if it thought they were "credible and valid."
"This is not a pension plan that's making investments without thought to legality or its social obligations. If it has made a mistake, it will own up to that and repay whatever is owing," Hurley said.
Part of bigger scandal in Denmark
Hurley pointed out that the court case pitting HOOPP against the Danish Tax Agency comes in the context of a move years ago by the Danish government to strip its tax regulators of many of their oversight powers and outsource some of their functions to the private sector.
Indeed, the HOOPP-Denmark litigation is a smaller and more innocuous part of a wider scandal involving the Danish Tax Agency. Following funding cuts, the agency farmed out some of the responsibility for processing dividend tax rebate applications in 2001 to three private banks as part of a broader effort to try to streamline and automate tax collection. The arrangement was scotched in 2015 after an internal audit found evidence of possible abuse, and a public inquiry continues to delve into the fallout from the bungled overhaul.
The HOOPP case is a far cry from the most arresting allegations to emerge. In hundreds of other instances, the Danish Tax Agency is alleging civil but also some criminal fraud involving $2.5 billion in dividend tax rebates obtained by small-scale, mostly American pension funds. Those cases are part of a wider European scandal around a practice called "dividend stripping" that has cost national treasuries billions of euros.
Court documents from one of those cases state that three of the small pension funds are from Canada.