Canadian Parliament Reviews KPMG Role in Isle of Man Accounts

May 6 — The Canadian Parliament will further review the role of accounting firm KPMG LLP in the creation of offshore tax shelter schemes on the Isle of Man that allegedly are used for tax evasion.

The House of Commons Finance Committee voted May 5 to ask KPMG to provide documents by May 18 on the Isle of Man tax shelters and the names of its employees responsible for development and marketing of the scheme.

The motion approved by the committee, which has a majority of members of Prime Minister Justin Trudeau's governing Liberal Party, was significantly softened from the initial motion proposed by Pierre-Luc Dusseault, a New Democratic Party member of Parliament, that sought to “compel” KPMG to provide all correspondence with the Canada Revenue Agency between Jan. 1, 1999, and May 5, 2016, on the tax plan, including the names of all clients who used the plan.

The committee voted 7-2 in favor of an amendment by Robert-Falcon Ouellette, a Liberal member of Parliament, to instead “request” the information and not seek disclosure of the names of KPMG's clients, which the accounting firm has fought in the courts to protect for confidentiality reasons.

KPMG in a May 6 statement said it remains committed to contributing to the discussion on non-resident tax planning. “Given that we just learned of this particular committee request, we will be taking it under advisement and will of course be in touch with the committee in advance of their stated deadline,” the firm told Bloomberg BNA in an e-mailed statement.

Summary of Findings

Meanwhile, the CRA on May 5 made public a summary of the findings of an independent review of its management of audits on the KPMG tax structure used on the Isle of Man and the agency's efforts to obtain the names of participating Canadian taxpayers.

The summary was released to provide assurances that due diligence has been followed in the case, the CRA said in a statement. Recent media coverage has focused on the CRA's actions on aggressive tax avoidance and offshore tax evasion, particularly in the KPMG case and related to the CRA's relationship with the accounting firm, it said.

“The CRA wants Canadians to have complete and accurate information on these issues,” it said.

The review by Kimberley Brooks, former dean of the Schulich School of Law at Dalhousie University in Halifax, concluded that compliance measures taken by the CRA follow established policies and procedures, and that any variances from those established approaches were reasonable and supported by the evidence in the case at hand.

“The review found that each of the audit files appears to have been carefully completed by diligent staff and that the practices used in pursuing the KPMG case were compliant with established CRA policies and procedures,” the summary said. “The procedural actions taken on the KPMG file were not inappropriate given the facts of the particular case and were consistent with the treatment of taxpayers in similar situations.”

No Preferential Treatment

The review rejected suggestions of preferential treatment of KPMG by the taxation agency or any inappropriate interactions between federal officials and the accounting firm, including any former CRA employees now working for KPMG, it said.

The efforts by CRA officials to resolve the tax dispute amicably, based on the strength of their case and the potential outcome and cost of litigation, are part of normal practice, it said.

“While there were delays in the progress of the KPMG case, they were typical of complex litigation and files,” it said.

The CRA noted in its statement that publicly available court records confirm that the CRA's efforts discovered the KPMG offshore tax avoidance scheme, that many of the participants have already been identified and that the case is being actively pursued.

An additional 15 KPMG clients whose identities were sought have voluntarily stepped forward, and legal action continues in the Federal Court of Canada to obtain the identities of any clients not yet identified, it said.

KPMG Defends Practices

In a May 3 appearance before the Commons Finance Committee, Greg Wiebe, until recently KPMG's global head of tax in Canada, stressed that the Isle of Man trust accounts at issue were fully legal when established in 1999 and that the tax plan hasn't been used in more than 10 years.

Nonresident trusts were permitted under Canadian law in the late 1990s, and in fact were encouraged by the federal government as a way for immigrants with financial means to emigrate to Canada while maintaining some of their funds abroad, Wiebe said in an opening statement to the committee.

“We need to try to put ourselves back in that environment 17 years ago. Simply put, we can't take a 2016 lens to look at a 1999 issue,” he said.

KPMG conducted extensive internal and external due diligence before implementing the tax plan, including the extraordinary step of obtaining independent legal opinions in Canada and the Isle of Man, he said. The plan was then implemented 16 times, of which 13 are known to tax authorities, he said.

The accounting firm has since significantly modified its practices in response to the changing accounting and legal environment, and is a strong supporter of the Organization for Economic Cooperation and Development and Group of 20's base erosion and profit shifting initiative, Wiebe said. That included no longer offering the Isle of Man tax plan to clients many years ago because its tax practice and the national and global context had evolved on acceptable tax planning, he said.

Emphasis on Confidentiality

KPMG hasn't, however, changed the major importance it puts on client confidentiality, which is a cornerstone of the accounting profession, Wiebe said. The firm has a legal and professional obligation to keep client information confidential, and that is the major issue in the ongoing debate over releasing the names of individuals involved in the Isle of Man tax plan, he said.

The company opposed the CRA's 2013 application to the Federal Court seeking the names of clients involved in the tax plan on the basis of the impact such a precedent would set for the entire accounting profession, he said.

“The existence of this ongoing litigation has resulted in us being limited in what we can and cannot discuss publicly, which in turn has led to an unfortunate imbalance in the depiction of our firm in the media,” Wiebe said. “But as inconvenient as it is for us, the principle is too important to the profession to forgo.”

By Peter Menyasz

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