Did PSP Investments Skirt Foreign Taxes?

Zach Dubinsky, Harvey Cashore, Frédéric Zalac, and Verena Klein of CBC report, Federal pension board used offshore 'scheme' to skirt foreign taxes (h/t, James Infantino):
The federal agency that invests civil servants' pensions set up a complex scheme of European shell companies and exploited loopholes that helped it avoid paying foreign taxes — a move that could undermine Canada's standing internationally as its allies try to mount a crackdown on corporate tax avoidance.

The arrangement involved two dozen entities, half of them based in the financial secrecy haven of Luxembourg, and all of them set up in order to invest money in real estate in Berlin by a Crown corporation called the Public Sector Pension Investment Board.

The blueprint for the tax-avoidance plan was obtained by the Washington-based International Consortium of Investigative Journalists and shared with CBC News as part of a larger leak of records exposing hundreds of corporate offshore schemes set up to capitalize on advantageous tax and secrecy rules in Luxembourg.

Some of those leaked documents were first reported on in 2012 by Edouard Perrin for France 2 public television and by the BBC, but most of them have never before been analyzed by reporters.

While the Canadian government corporation's transactions were not illegal, a senior German tax official who reviewed them said the pension investment board had used "a very aggressive way to avoid taxes."

"The only goal is to avoid taxes," Juergen Kentenich, director of the regional tax office in Trier, Germany, said of the tangle of Luxembourg companies.

The loopholes that were exploited were legal, he says. "But is this fair? Should a reputable and decent businessman do something like that? That's another question."
Hundreds of millions in European real estate

The pension board invests the pension funds of federal civil servants, RCMP officers and members of the Canadian Forces, and has its directors appointed by the federal government with some input from public servants.

According to its website, it had $94 billion in assets under management as of March 31.

Between 2008 and 2013, hundreds of millions of that was held in real estate in Germany, though the leaked records also lead to assets in France, Spain, Norway, the Netherlands, Britain and Belgium.

The documents — which consist of a tax plan devised for the pension board by global accounting firm PricewaterhouseCoopers — show that the pension fund acquired 69 mixed residential and commercial buildings, totalling nearly 4,500 suites and units, in Berlin in 2008.

CBC News has learned the buildings were acquired for close to $390 million. But as a result of the way the transaction was structured, the pension investment board would have avoided paying $20 million in German taxes.

The purchase exploited a loophole in Germany's land transfer tax, which is normally levied on any entity that acquires 95 per cent or more of the shares of a real-estate holding company.

Instead, the pension board bought a direct 94.4 per cent interest in a number of Luxembourg-based property holding companies, and then obtained an indirect interest by taking a large majority position in entities that held the remaining 5.6 per cent.

The board thus obtained a 96.4 per cent overall stake in the Berlin buildings, but the German loophole meant the indirect holdings weren't counted toward the real-estate transfer tax — so it didn't pay any.

PricewaterhouseCoopers's own experts refer to this kind of set-up as a tax "avoidance scheme," though the firm said in a statement that it rejects "any suggestion that there is anything improper" about its work.

Germany closed the loophole last year.
'No issue was raised'

Pension board vice-president Mark Boutet acknowledged in an email to CBC News on Tuesday that the board's Berlin investments used the arrangement, but said it was "communicated to the German tax authorities and no issue was raised in that regard."

"Before German legislators changed the law, this approach was used by other investors and was consistent with German case law," Boutet wrote. "We respectfully disagree with your characterization of our actions as 'aggressive tax avoidance.' "

The board also avoided paying almost any tax in Luxembourg, because it used a complex system of cascading loans between the different companies it owns. (As a pension plan, it is tax-exempt in Canada.)

And Boutet acknowledged that by acquiring and then selling some of the Berlin real estate using non-German corporations, the pension board saved some money on German capital gains taxes. But he said it was minimal.

"The capital gain tax on the sale of a German company holding German real estate is less than one per cent," he wrote in an email. "No significant tax advantage resulted from [using] Luxembourg companies."

CBC reporters tracked those companies to an address in Luxembourg, where two staff rent desks in a shared office and oversee $700 million in civil servants' pension assets.

The revelations come as the Canadian government asserts it is fighting the very kinds of complicated, abusive tax practices that see multinational corporations route their profits through letterbox companies in tax-friendly jurisdictions. Just on Monday, Revenue Minister Kerry-Lynne Findlay told the House of Commons: "One of our government's key areas of concern is the issue of international tax evasion and aggressive tax avoidance."

Finance Minister Joe Oliver and his predecessor, Jim Flaherty, made similar declarations in recent years, as they touted measures to let the Canada Revenue Agency go after more tax from money held and moved offshore.

Canada has also pledged to crack down on international tax wizardry as part of wider efforts on this front by the Paris-based Organization for Economic Co-operation and Development and by the G20. Canada is a member of both groups.

"I think this is hypocritical," German opposition MP Gerhard Schick said of the Canadian pension board's tax planning. "Our governments should work for better rules, but they should also, in the companies they control, make sure that they are not part of the problem and avoid taxes as aggressively as private investors do."

Dalhousie University tax law professor Geoffrey Loomer agreed, saying the pension board's explanation that it follows all applicable tax laws is "the completely standard response given by the likes of Apple, Google, General Electric, Amazon, every multinational pharma corporation, every multinational financial institution."

"I have a problem with the hypocrisy of a government entity engaging in tax avoidance," Loomer said, "while the CRA, OECD and G20 are routinely criticizing 'aggressive tax planning.' "
If you have more information on this or any other story, email us at investigations@cbc.ca.
Secret tax plan censored

The Public Sector Pension Investment Board's Luxembourg holdings came to light in a large document leak. Separately, CBC applied under access to information legislation to get the same documents directly from the pension board. The files that were released came heavily redacted. See a comparison of the redacted version with the original (also click here to view document):

CBC also reports Cabinet Minister Tony Clement has moved to distance the federal government from a Crown corporation's decision to set up a complex arrangement of offshore companies as part of a tax "avoidance scheme" on pension investments in Europe.

So what do I make of this story? Honestly, not much. It sounds a lot worse than it actually is. It's somewhat embarrassing to the Canadian government but if you ask me, the German government should be equally if not more embarrassed.

Why? Because German tax authorities were informed by PSP of this transaction telling them "Yo, you've got a nice tax loophole here that we're exploiting to maximize our returns to benefit our clients" and then embarrassed, they closed the loophole.

In fact, this story is much more embarrassing for German tax authorities than it is for PSP Investments. And the figures we're talking about here are trivial. For a multibillion dollar public pension fund to save $20 million in taxes in some real estate transaction in Germany by exploiting a legal tax loophole, it's not exactly scandalous.

Where it gets interesting, and what is worth investigating, is to see if PSP used these tax savings and others similar to them to beef up the reported performance of their real estate holdings which have significantly outperformed the benchmark returns over the last five years. This all figures into "added value" which helped PSP's senior management collect hefty payouts throughout the last five years.

It's also worth investigating how many other large Canadian public pension funds use similarly  "aggressive" tax avoidance schemes to skirt foreign taxes in real estate and other private asset investments. I happen to think all of them exploit legal loopholes in foreign taxes to one extent or another, and why not? If foreign tax authorities are dumb enough to allow these loopholes, then they shouldn't be complaining if a foreign pension fund is exploiting them.

There are far are more interesting things worth investigating at PSP Investments than this alleged tax scheme. I went over them when the Auditor General of Canada slammed public pensions:
In 2011, the Auditor General of Canada did perform a Special Examination of PSP Investments, but that report had more holes in it than Swiss cheese. It was basically a fluff report done with PSP's auditor, Deloitte, and it didn't delve deeply into operational and investment risks. It also didn't examine PSP's serious losses in FY 2009 or look into their extremely risky investments like selling CDS and buying ABCP, something Diane Urqhart analyzed in detail on my blog back in July 2008.

I had discussions with Clyde MacLellan, now the assistant Auditor General, and he admitted that the Special Examination of PSP in 2011 was not a comprehensive performance, investment and operational audit. The sad reality is the Office of the Auditor General lacks the resources to do a comprehensive special examination. They hire mostly CAs who don't have a clue of what's going on at pension funds and they need money to hire outside specialists like Edward Siedle's Benchmark Financial Services.

Siedle specializes in forensic and operational audits. He would have seen well past PSP's tricky balancing act, and highlighted a bunch of shady dealings. For example, how did André Collin, PSP's former head of Real Estate, join Lone Star right after directing billions to that fund while at the Caisse and PSP? Collin was recently promoted to President at Lone Star, responsible for global operations (unbelievable). He's a good real estate investor but he basically bought himself a cushy job at Lone Star. Amazingly, PSP's governance rules did not forbid their senior managers from working at funds they invest with after they leave that organization (nothing was mentioned in the Special Examination).
In 2007, I wrote a detailed report on the governance of the Public Service pension plan for the Treasury Board. It's still collecting dust somewhere in Ottawa and last I heard, the Auditor General had yet to write its comprehensive report on the governance of this plan.

In 2009, I went to testify on Parliament Hill at the Standing Committee on Finance where I discussed how poor governance at some of Canada's large public pension funds led to excessive risk-taking and enormous losses (official transcript available here). Tom Mulcair, the now leader of the opposition, was the guy who invited me but that turned out to be another dog-and-pony show for politicians to make a big splash and then do nothing about the problem.

Let me end by stating that even though there is room to improve the governance at all of Canada's large public pension funds, they are way ahead of most of their global counterparts and this has contributed to their success.

I also don't think PSP Investments is the same shop it was back in 2006 when I was wrongfully dismissed on very dubious grounds. Like any large organization, it went through major growing pains and evolved. Hopefully, their current and past senior managers, learned from their past mistakes. If they didn't, they're stupid and hopelessly arrogant.

That's all I have to write about on this latest PSP "tax scandal." I was informed that the Treasury Board Secretariat announced yesterday that PSP will be providing an updated report at the TRIPAC meeting scheduled for November 20th, 2014. Details of this update should be posted on their website here.

If PSP or anyone else has anything to add on this comment, feel free to reach me (LKolivakis@gmail.com) or just contact CBC's investigative journalists (investigations@cbc.ca).

I was also told the CBC's National discussed this story last night (Nov. 5th, fast forward to minute 24) and they will interview residents from the low income properties PSP invested in Germany and air the clip in the near future (update: it was aired on November 19th). You can view this CBC clip for now.

Below, an older RT report on how more politicians and tycoons appear to be marred by scandal as the International Consortium of Investigative Journalists (ICIJ) keeps adding names to its list of owners of secret offshore firms. ICIJ promises two more weeks of exposures.

A third of the world's wealth is tied up in the offshore, according to the Tax Justice Network, cited by ICIJ's website. That's estimated at US$20 trillion and most global banks are aiding and abetting these tax avoidance schemes (tax arbitrage is big business at big banks).

And after more than 300 companies secured secret deals from Luxembourg to slash their tax bills, Commission President Jean-Claude Juncker, and former Luxembourg Prime Minister, was asked on Wednesday if there wasn’t a conflict of interest since he took over as chief of the EU executive. Not surprisingly, Mr. Juncker avoided answering the question as he has bigger issues to contend with.