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.
Juergen Kentenich, director of the regional tax office in Trier, Germany, said the pension board's tax dealings amounted to 'a very aggressive way to avoid taxes.' (Harvey Cashore/CBC)
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.
The pension board bought these Berlin apartments, and many others, through a complex web of companies based in Luxembourg. (Harvey Cashore/CBC)
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.
The blueprint for the pension board's tax strategy was drawn up at the Luxembourg offices of PricewaterhouseCoopers. (Harvey Cashore/CBC)
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.' "
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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."
'Hypocrisy'
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."
CBC reporters tracked the pension plan's maze of companies to this address in Luxembourg, where two staff rent desks in a shared office and oversee $700 million in civil servants' pension assets. (CBC)
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:
(On mobile? See the document-reveal animation here)
PSPIB Luxembourg Tax Plan (PDF)
PSPIB Luxembourg Tax Plan (Text)
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