Opening Statement to the Committee on Public Accounts

Revenue Canada - International Tax Directorate: Human Resource Management (December 1998 Report)

23 March 1999

L. Denis Desautels, FCA
Auditor General of Canada

Mr. Chairman, thank you for this opportunity to present the results of our audit of Revenue Canada - International Tax Directorate: Human Resource Management.

Before we begin with the details of this chapter, I would like to say that one of our Office principles is to devote resources to auditing high-risk tax areas. In 1992 and 1993, we examined tax arrangements for foreign affiliates, the advance income tax rulings, goods and services tax rulings and interpretations program, and the resource allowance income tax provision. In 1996, we reported on Revenue Canada’s enforcement programs for large corporations and for combatting income tax avoidance, and also reported on the administration of the Income Tax Act related to family trusts. We have also done work involving the GST, excise and customs. All of these programs and issues involve high-risk tax areas where there is much at stake.

The chapter that is the subject of today’s hearing also deals with an important high-risk tax area – human resource management in Revenue Canada’s International Tax Directorate.

The International Tax Directorate, which was established in November 1991, is the focal point for all international tax enforcement and compliance issues. The international tax area is big business. In 1993, taxpayers reported to Revenue Canada $248 billion in related-party cross-border transactions, $166 billion of which were between related parties in Canada and the United States. The Technical Committee on Business Taxation noted that even relatively small shifts in income allocated to Canada from related party transactions have the potential to cause a significant change in the domestic revenue base.

The complexity of the issues the Directorate must deal with is daunting. Issues include transfer pricing; electronic commerce; global enterprises and their related-party transactions; tax havens and harmful tax competition; international financing arrangements; tax treaties; and non-residents carrying on business in Canada or disposing of taxable Canadian property.

The continuing growth of electronic commerce and globalization of businesses, the neverending creation of complex financial instruments and the sophistication of global enterprises and their professional tax and financial advisors will continue to present challenges to Revenue Canada’s International Tax Directorate.

It is clear that the Directorate requires staff who are highly skilled and who understand Canadian tax laws and the tax laws of other jurisdictions. Our audit showed that human resource issues need much attention. Weaknesses in human resource management in the Directorate, coupled with the often cumbersome human resource management rules in the public service, have resulted in long delays in the staffing process.

We noted that the Directorate could take action to speed up the staffing process. The chapter illustrated the unusually long time it takes to mark examinations and establish eligibility lists. Good candidates may lose interest if they have to wait long periods of time before being offered positions.

Despite having recognized since 1994 the urgent need for a human resource plan, the Directorate is still developing a comprehensive plan and human resource strategies linked to its business plan.

Mr. Chairman, the Department has acknowledged that the need for reliable human resource information systems and databases affects not only the International Directorate but the whole Department.

The Directorate will need to have a robust human resource strategy to ensure that as people at senior levels retire or transfer, their positions are filled with competent, experienced people. A reliable human resource information system will be needed to support the implementation of this strategy.

We found that auditors in regional offices have an average of less than three years’ experience in international tax. Out of a current staff of 80 people at headquarters in Ottawa, only 31 employees were there in April 1995. Many key positions, including positions of leadership, are filled using secondments, redeployments and acting assignments. This approach to staffing has resulted in a lack of stability and continuity and may pose a risk to the quality of the work. When you have to match wits with some of the brightest and most highly paid private sector tax minds in Canada, it makes sense to use permanent staff who are committed to practising in the international tax area.

Mr. Chairman, there are currently five senior positions in the Directorate – a director general and four directors. As we pointed out in the chapter, in September 1996 the Director General was transferred to another branch of the Department. A staffing action was undertaken shortly thereafter and an appointment was made in October 1997 – one year later. Since the completion of our audit, that Director General has also left and in February 1999 the position was being filled through an interim appointment. The four director positions were also being filled through acting or interim appointments.

At the time we concluded our 1996 audit on enforcing the Income Tax Act for large corporations, the Branch had a number of competitions under way. Mr. Chairman, since then, these staffing actions have been started, aborted and restarted. Meanwhile, private sector tax professionals continue non-stop to devise and refine tax strategies to advance their clients’ interests, which may not necessarily meet the intent of our tax laws.

This past month the Department released a seven-point plan for fairness. It noted that fairness requires equal treatment regardless of age, race and status; location; background; sophistication; access to professionals; political influence; assertiveness; or size of business. To provide fairness and a level playing field, a highly skilled and stable work force is required to ensure that the sophisticated multinational taxpayers with access to expensive professional advice pay their fair share of taxes.

Directorate staff are expected to interact with senior people in the largest corporations and with skilled tax professionals in the private sector and other governments. They are also expected to exercise good judgment when interpreting complex transactions and complex tax laws. Attracting and maintaining the necessary work force can be achieved through developing the current work force, hiring new people with the right skills and providing a suitable environment that enables personal growth and career progression.

Mr. Chairman, the solutions to a number of problems we have outlined rest solely with the Department. It would be unwise to expect the proposed new Canada Customs and Revenue Agency by itself to resolve the Directorate’s or the Department’s human resource problems. It is important that the Directorate develop a plan as soon as possible to hire, retain and train key employees. Our recommendations were targeted to achieving that outcome.

This audit was our first project dealing with the activities of the International Tax Directorate. In future audits, we will examine and report on other important aspects of the Directorate, such as transfer pricing and non-resident tax issues.

Mr. Chairman, that concludes my opening statement. We would be pleased to answer your Committee’s questions. Thank you.