In the spring of last year, Cameco, the $2.3-billion-a-year Saskatchewan-based uranium giant, included an unexpected detail in its quarterly filings. The company disclosed it has been mired in a two-year legal dispute with the Canada Revenue Agency (CRA) over a transfer-pricing arrangement with a Swiss subsidiary that could potentially produce a tax arrears fine of up to $850 million. According to CRA, Cameco set up a holding company registered in Switzerland that would purchase Canadian uranium on a long-term contract at $10/pound. The division, in turn, sold the radioactive mineral on world markets at up to $140/pound. But because Switzerland is a low-tax jurisdiction for certain types of foreign-owned companies, the holding company paid corporate taxes well below Canadian rates, significantly increasing Cameco's after-tax profits.\nThe allegations, still before the courts, have drawn the attention of not just CRA auditors but also investors, the media and advocacy groups such as Canadians for Tax Fairness (C4TF), which are pressing federal officials to crack down on Canadian multinationals that use tax havens and other, perfectly legal, sleights of hand to drive their corporate tax bills well below the official combined provincial and federal rate of up to 27%. The pressure to clamp down on this kind of tax avoidance has gained momentum since the 2009 recession. Indeed, last year the Harper government earmarked $30 million to step up CRA's policing of tax evasion and "aggressive" tax avoidance. Canada, apparently, isn't alone: "In the last year, there's clearly been a dramatic change in global government policy on tax havens," says C4TF executive director Dennis Howlett.\nAccording to various estimates, Canadians and Canadian companies currently sock away about $170 billion in offshore accounts, including more than $50 billion in Barbados alone. A quarter of all Canadian foreign investment ends up in tax havens, up from about 10% in the mid-1980s.\nAll those vacationing loonies exact a steep toll on federal coffers: Howlett estimates Ottawa forgoes about $7.6 billion a year due to aggressive tax avoidance — a deep hole at a time when the feds are still trying to eliminate the debt created by the 2009 stimulus package. A significant portion of this offshore investment, however, involves Canadian multinationals taking advantage of Canadian tax laws promoting the expansion of their business abroad.\nThe international numbers are even larger. Figures cited by the World Bank suggest African governments lose US$38 billion a year due to "abusive transfer pricing," while developing nations sustain losses of US$98 billion to US$160 billion annually due to corporate tax avoidance. More than US$2 trillion flows into Switzerland, much of it connected to the global resource sector, according to one analysis by the Boston Consulting Group. In response, governments and central bank officials in many developed countries have redoubled their efforts to clamp down on money laundering and tax evasion, but also to reduce the flow of corporate profits into offshore, and frequently secretive, tax havens such as the Virgin Islands and Switzerland.\nBut this story has taken a turn in the past two years, with revelations about the tax avoidance practices of Starbucks, Apple, Google, Amazon and other global brands. In 2012, for example, Reuters reported that in the 14 years Starbucks had been operating in the UK, it opened more than 700 cafés and brought in £3 billion ($5.3 billion) in sales. But thanks to a complicated weave of financial and licensing arrangements between the Seattle-based chain's offshore subsidiaries in tax havens, the company paid just £8.6 million in corporate income tax in the UK, including none in the three previous years. That amount was dwarfed by the taxes paid by food service giants McDonald's and KFC.\n"Starbucks has been telling investors the business was profitable, even as it consistently reported losses," Reuters reported. "This apparent contradiction arises from tax avoidance and sheds light on perfectly legal tactics used by multinationals the world over. Starbucks stands out because it has told investors one thing and the taxman another."\nSuch accounts have triggered a sharp public backlash, placing more pressure on tax collectors to counter aggressive avoidance techniques that leave governments short of cash. While no one questions whether national and international authorities should go after tax cheats, the ongoing debates around "aggressive" tax planning, especially by multinational corporations, have proven to be intensely controversial.\nAccording to the CRA, unacceptable "tax avoidance results when actions are taken to minimize tax, while within the letter of the law, those actions contravene the object and spirit of the law." The delineation between what is acceptable and unacceptable is where the battlefield exists. The Income Tax Act is filled with incentives and shelters specifically designed to allow corporations to reduce their tax burden. So if Canadian multinationals structure themselves to take advantage of other countries' tax inducements, why should shareholders find themselves facing CRA's wrath? On the other hand, when giant corporations hire armies of tax accountants and tax lawyers to devise clever ways to avoid taxes in the countries where they operate, are they running afoul of our basic notions of fair play?\nSome accounting professionals point out that Canadian corporations pay a range of other taxes, including payroll, property and HST, and are compelled to abide by Canada's stringent anti-avoidance rules. Indeed, they argue that Canada's multinationals are already paying their fair share, and shouldn't be lumped in with the international companies that have been accused of aggressively ducking taxes.\nAt the same time, some governance experts and academics argue that aggressive tax minimization also appears to contradict corporate social responsibility and may even harm shareholders if the practices lead to steep fines, such as those that Cameco could face, or reputational damage, if consumers decide to boycott companies that don't pay their fair share. But multinationals have discovered that the potential payoff, in terms of after-tax earnings, from aggressive tax planning far exceeds both the fines and the cost of battalions of accountants and lawyers who develop the strategy. "It's economically rational for these companies to continue to do what they're doing," says Queen's University law professor Arthur Cockfield, who has studied tax avoidance policy.\nAll these complicated questions now dominate multilateral discussions about the international financial system. In mid- 2013, the G20 finance ministers asked the Organization for Economic Development and Co-operation (OECD) to work with developing nations to create international tax treaty protocols designed to stanch the flow of profits to tax havens (see chart "An international response to tax avoidance").\nDespite the attention from policy-makers, Cockfield and others say that national courts remain the ultimate arbiters of whether a particular tax strategy passes muster. "What you're doing concerning tax liability is legal or it is not," adds C.D. Howe Institute vice-president Finn Poschmann, who invokes the famous adage from one Lord Tomlin: "Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be … however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity." The legality of such acts, Poschmann continues, "is not something you're meant to discover after the fact."\nPoschmann, moreover, stresses that the term "aggressive" has no legal meaning, and shouldn't form the basis of a policy designed to plug the hole in federal coffers. "Corporate tax law is complex and subject to interpretation," says Albert Baker, Deloitte's global tax policy leader. "Reasonable, well-informed people will have different interpretations of what's in the law."\nGabe Hayos, CPA Canada's vice-president of tax, says the corporate tax system is "an anachronism" that bears little relationship to the globalized economy of the 21st century. In many ways, he is correct. Companies used to organize operations around a "permanent establishment," then expand internationally by establishing wholly owned subsidiaries in the countries where they may have built a distribution centre, factory, sales office or mine. But it's been a long time since multinationals relied only on such fixed structures. Today's global corporation is really an intricate network of relationships with supply chains, national operating subsidiaries and holding companies located in low-tax jurisdictions.\nDigital giants such as Facebook or Google are even more difficult to describe, because it is not necessarily clear where the business activity takes place. When a consumer in Winnipeg orders an item from Amazon, which relies on server farms in one country and distribution hubs in another, and whose trademark, in turn, is held by a holding company that leases its use to Amazon's national subsidiaries, how should that transaction be reported for tax purposes?\nNone of this is to suggest there was ever a time when large companies loved to pay taxes. As long as governments have levied corporate taxes, firms have sought to minimize their exposure; those avoidance strategies, in turn, attracted regulatory scrutiny. But as tax lawyer Brian Studniberg observed recently in The Queen's Law Journal, "Canada's modern tax system has fallen into an endless cycle of action and reaction [and] efforts to eliminate tax avoidance have merely led to greater complexity and … this complexity only engenders further avoidance behaviour."\nIn the late 1980s, Ottawa sought to differentiate between legitimate and abusive avoidance by issuing the General Anti-Avoidance Rule (GAAR). But as Studniberg explains, the "broadly drafted" GAAR itself has been the subject of legal challenges and apparently contradictory Supreme Court rulings. "The challenge," he writes, "is that abuse is easy to 'smell,' but hard to specify." (Other countries have their own versions of GAAR and other enforcement mechanisms. In the US, for example, corporations that locate earnings in subsidiaries in low-tax jurisdictions are subject to a withholding tax if they try to repatriate dividends; Canada has no such rule.)\nHowlett and other critics of aggressive tax planning have plenty of examples that, they say, don't pass the smell test. Some multinationals, for example, transfer intellectual property to holding companies in low-tax jurisdictions and then lease trademarks and software back to national divisions, which book the leasing costs as a business expense. The lease income, in turn, is taxed at a very low rate. "The problem," says Howlett, "is that there's no real world market price" for trademark leasing.\nCockfield points to double-dip financing structures as another widely used mechanism that has attracted the attention of policy-makers. Under this approach, a Canadian firm will borrow money in Canada, then use the funds to invest in shares of its subsidiaries in low-tax jurisdictions such as the Bahamas. These subsidiaries then re-lend the money to a third subsidiary in the US, for example, allowing another interest deduction. The payments on the second loan are taxed at a very low rate because they are booked by the subsidiaries in the tax haven.\nThe broader context, of course, is the sheer existence of low-tax jurisdictions. Tax havens, such as those in the Caribbean, are not new, but a growing number of governments, both national and regional, now seek to attract investment by slashing corporate tax rates and creating ever more elaborate shelters. Ireland, once known as a tax haven for rich rock stars, has enticed the likes of Apple with loopholes that can create effective tax rates as low as 2%. The UK has established something called a "patent box" that allows companies to take advantage of low tax rates for income associated with intellectual property, such as startups and technology-based firms. Canada has gotten into this game, and now offers the lowest corporate rates in the OECD (our aggregate corporate taxes are about 10 points below those in the US). In addition, CPA Canada has recommended that Canada adopt a patent box as well.\nThe global variation encourages arbitrage, as well as a downward pressure on tax rates as national governments seek to draw direct foreign investment. Some observers think that dynamic is healthy and encourages politicians to deliver services efficiently. "Tax competition is something good," says Hayos. Indeed, a recent analysis by economist Jack Mintz predicted that the reduction of Canada's corporate rate to 15% would create 100,000 new jobs and add more than $30 billion to the country's capital stock.\nBut Brigitte Alepin, a Montreal CPA who has written at length about the implications of tax avoidance, feels governments need to confront the financial consequences of a global race to the bottom — in this case, the possibility of a zero tax rate: "The most important question is, what is the worst case scenario, and do we want that?" Governments should start analyzing seriously the impacts of a possible zero tax rate on public finances because it has not been proven everything will balance by itself.\nGiven the steadily increasing scrutiny of avoidance strategies and tax havens, it's not surprising that many competing ideas have emerged about how to address this dynamic. UK accountant and tax reform activist Richard Murphy, a founder and project director of the international Tax Justice Network, has called for new disclosure rules that would require publicly traded multinationals to report where they operate, the legal name of national subsidiaries, the financial performance of those divisions, the taxes payable in each region and an accounting of intrafirm transfers. This so-called "country-by-country" reporting system has gained traction in international forums and among experts.\nBut not everyone agrees. In a recent position paper, CPA Canada offered its advice to federal tax authorities. Ottawa, it said, should keep corporate rates low, tighten anti-avoidance enforcement to avoid dragnet prosecutions, shift the fiscal burden to consumption and value-added taxes and establish more international tax information exchange agreements. The CPA document questions whether the government should be formulating tax rules based on nebulous concepts such as a "fair share." "Corporations should pay what they legally owe and they should be expected to plan their affairs to legally minimize their tax liability, as they would with any other business cost."\nAccountant Albert Baker adds that companies should nonetheless be vigilant about what he calls "tax governance." Tax planning used to take place in a "black box," he says. Today, boards and C-suite executives should actively participate in decisions about tax strategy, using a risk management framework to assess the financial and reputational fallout from the sort of aggressive avoidance prosecution Cameco is facing.\nMultinationals, Baker says, disagree about how much granular information they should reveal to investors about their tax-planning decisions, with some global firms actively resisting calls for more disclosure of tax strategy, citing competition and cost. Cockfield, however, points out that with the passage of the US Dodd-Frank Act, an omnibus financial reform bill, corporations in the resource extraction sectors must already disclose to the Securities and Exchange Commission the tax they pay in every country in which they operate.\nThe Harper government has passed no such legislation, and tends to take a somewhat more moderate stance to aggressive avoidance, says Poschmann. In last year's budget, Conservative Finance Minister Jim Flaherty established a whistleblower program, offering commissions of between 5% and 15% for anonymous tips on evasion and aggressive offshore structures that lead to federal tax collection of $100,000 or more. CRA has also established a specialized SWAT team and a group that will track wire transfers greater than $10,000 that appear to be heading for a tax haven. "I think there will be fishing expeditions," predicts Toronto tax lawyer Ian Morris. But, as Poschmann points out, steep personnel cuts at CRA could undermine Ottawa's aggressive avoidance enforcement.\nThe feds are also in the midst of developing a policy intended to minimize "treaty shopping," another tax avoidance strategy, following a pair of high-profile Supreme Court of Canada rulings. When multinationals treaty shop, they are essentially creating complicated networks of holding companies and intracompany payments designed to take advantage of lower withholding taxes that exist between two countries with a tax treaty. According to the Department of Finance, "When treaty shopping occurs, tax treaties concluded between Canada and its treaty partners provide indirect and unintended tax benefits to residents of third countries." Federal officials are hustling to figure out how to cap such tax benefits that flow to companies that might not otherwise be entitled to them.\nAs with other campaigns to curb tax minimization, that effort will be contentious. As Morris observes, Ottawa has been redrafting trade agreements to limit the tax benefits available to nonresident companies, although he notes that the 2014 budget suggested that the feds now believe a domestic law regulating treaty shopping may be the way to proceed.\nQuite apart from Canada's domestic moves, Morris says the OECD's ambitious Action Plan on Base Erosion and Profit Shifting (BEPS), which was ordered by G20 leaders last year, may prove to be the most far-reaching anti-avoidance policy, if implemented. OECD officials last year proposed 15 measures meant to limit undue avoidance, seven of which are expected to be finalized in September. The OECD is in the midst of a two year process to seek buy-in, both from its own members as well as developing nations, including some that have lost significant revenue to tax minimization by multinational companies.\nMost observers agree the OECD initiative, because it has sought to involve many countries beyond its membership, is pointed in the right direction: "The two things that are important are international collaboration and transparency and that's what the OECD effort is all about," says Hayos. But, as Baker adds, it's a huge task. "To truly implement this goal, they're going to have to get buy-in from all countries. It remains to be seen whether this is possible," he says. He's also concerned activist governments will move unilaterally, resulting in double-taxation for firms with operations in multiple jurisdictions.\nAlepin, who is organizing a 2015 global summit on the deleterious effects of international tax competition, acknowledges that finding a global consensus could be a daunting task, especially given the difficulty that dogged previous multilateral exercises, such as the General Agreement on Tariffs and Trade or the Kyoto Accord. Her view is that a solution may involve a patchwork of various tax measures, plus an attempt to entice support from multinationals by stressing the connection between corporate social responsibility and tax obligations.\nFor all the corporate horror stories and the resulting international reform initiatives, there's little doubt the next generation of rules and policies will have to pass muster with tax courts in individual jurisdictions, even if governments have become more vigilant about trying to regulate the gray zone between conservative tax planning and outright evasion. As Baker says, "It is like a cop saying, you can't make right turns on a red, even if it's legal. In the tax area, the right threshold is what's found in the law."