Sixth Standing Committee on Delegated Legislation
Wednesday 22 November 2000
[Mr. Mike Hancock in the Chair]
Double Taxation Orders
The Paymaster General (Dawn Primarolo): I beg to move,
That the Committee has considered the draft Double Taxation Relief (Shipping Transport) (Hong Kong) Order 2000.
The Chairman: With this it will be convenient to consider the draft Double Taxation Relief (Taxation on Income) (Norway) Order 2000.
Dawn Primarolo: I shall briefly introduce the two orders. First, however, I welcome the hon. Member for Hertsmere (Mr. Clappison) to his new post in the shadow Treasury team. I welcome him to our happy little band, and I look forward to debating with him the various finance matters that we shall be called upon to consider during the coming year. I hope that we shall be able to do so in the good-spirited yet probing and direct manner of his predecessor.
I am pleased to introduce the two double taxation orders. The order relating to Norway deals with the new, comprehensive convention that replaces the existing one. The order relating to the Hong Kong special administrative region of the People's Republic of China is a limited agreement dealing with profits from the business of international shipping. Both were concluded recently.
Double taxation treaties are welcomed by the business community as an aid to international trade and investment. The main aim is to relieve double taxation when income from one country goes to a resident of another and is taxable in both countries. In order achieve that, each country agrees to limit its taxing rights and to give credit for the other country's tax. Tax treaties also help businesses to plan their investments by providing certainty about their tax treatment. They also provide for an exchange of information and consultation between the two tax authorities to try to resolve difficult cases by mutual agreement.
We are committed to maintaining and developing the United Kingdom's network of double taxation treaties. We have more than 100 bilateral tax treaties, the largest network of double taxation treaties in the world. We recently began our annual round of consultation, in which we invited the business community and other interested parties to let us know their priorities for new and updated treaties, in order to take advantage of changes in international trade and in taxation systems. We shall take those views into account when planning future programmes.
Norway is a substantial trading partner of the United Kingdom. We have a shared interest in the continued development of North sea oil and gas resources. The new double taxation convention with Norway will replace the existing one, which was concluded in 1985. In many respects, the new convention follows the rules set out in the existing convention, but there have been some changes in policy and legislation in both countries since 1985, and we have agreed that it was right that the convention should be updated.
One change is that Norwegian residents will no longer be entitled to the UK tax credits on dividends. From April 1999, the value of the tax credit was reduced as part of our corporate tax reform. In practice, Norwegian investors no longer receive cash payments in respect of the tax credit under the terms of the present convention. The new convention also has a more effective anti-avoidance provision. Other changes reflect the adoption by Norway of the credit method of relieving double taxation. In relation to oil and gas development, the convention provides new rules for taxation of future cross-border development of the UK-Norway oil and gas fields that do away with the need to amend the convention on each occasion.
The draft order for the Hong Kong special administrative region of the People's Republic of China will give effect to the first double taxation agreement relating to international shipping transport to be made between the Governments of the United Kingdom and of the Hong Kong special administrative region. The agreement, which was signed on 25 October, complements a similar provision relating to international air transport, which was included as part of the air services agreement between the two Governments.You may recall, Mr. Hancock, although it did not immediately spring to my mind, that the air transport provision was considered by this Committee in 1998. The Order in Council that gave effect to it was made by Her Majesty in Council on 21 October that year.
The agreement provides an exemption in one territory for profits derived by an enterprise of the other territory from the business of international shipping transport. The exemption also applies to profits from participation in a joint business, gains from the alienation of ships and movable property, and capital represented by such ships and property. It is welcomed by the United Kingdom shipping industry and represents good progress in the smooth operations between the two territories.
Mr. James Clappison (Hertsmere): It is a great pleasure to serve under your chairmanship this afternoon, Mr. Hancock. The measure that we are debating is a short one and although several questions arise, they will take up an inordinate time.
I thank the Paymaster General for her kind personal remarks and for the briefing that was extended to me by her office, involving representatives of the Inland Revenue. I found it a most helpful innovation. I understand that it began under the previous Government and it helps the process of scrutiny.
The Paymaster General questioned whether the Committee could be said to be a happy band. Well, we are few, but whether we are a happy band of brothers I know not. I am not sure that it is the Opposition's responsibility to make the Government happier than they happen to be at any time, but I can tell the Paymaster General that we do not intend to oppose the order. We support, in principle, double taxation treaties. They bring important benefits to this country and enjoy the general support of the business community. The previous Government were responsible for some notable and important additions to the United Kingdom network of double taxation treaties. Indeed, the Paymaster General mentioned that this country is party to more than 100 such treatiesone of the most extensive such networks in the worldand the 100th treaty was concluded under the previous Government. The Conservative party continues to support the development of the network of United Kingdom treaties on double taxation.
I shall discuss the order relating to Norway first. The treaty is not a new one, but replaces the treaty that was concluded in 1985. I have consulted the parliamentary record with respect to that treaty and note that it does not seem to have taken up a great deal of time. The then Opposition spokesman seems not to have seen the need to scrutinise the double taxation treaty at all.
Mr. Peter Luff (Mid-Worcestershire): Who was it?
Mr. Clappison: I must resist the temptation to respond to that question. Perhaps other hon. Members will discover the interesting details later. Clearly, however, the spokesman was completely satisfied with the way in which the Government of the day had negotiated the double taxation treaty, and did not see fit to ask any questions about it.
Since the conclusion of the treaty in 1985, the economic relationship between the United Kingdom and Norway has been strong. As the Paymaster General pointed out, Norway is an important trading partner for the UK, especially in relation to the size of its population. Last year, it was the UK's 15th largest export market, and recently Norwegian inward investment in the UK has been growing, reaching a peak in 1997 and falling back since. It would be interesting to know the most recent figures for Norwegian inward investment in the UK, as the order will influence them, but I do not know whether the Paymaster General has the information. Recently, Norway has invested more in the UK than some other Scandinavian countries, including Denmark and Finland, and apparently even more than some important members of the European Union, such as Italy or Spain. Anything that affects the economic relationship between Norway and the UK must receive proper scrutiny.
I propose to ask several questions concerning significant differences between the old and new treaties. Article 10 relates to tax credits on the payment of dividends. Under the old treaty, a resident of Norway was entitled to receive a tax credit in respect of dividend receipts when a UK resident was entitled to receive a tax credit, but such provisions have been deleted from the new order. Will the Paymaster General confirm that that is a consequence of the Chancellor's decision in his first Budget to abolish tax credits for non-residents, alongside the abolition of credits for pension funds and UK residents who are non-taxpayers? We all know about the long-term consequences of that decision for UK pension funds and how UK resident non-taxpayers have been deprived of their tax credit. Under the new provisions, Norwegian residents will be deprived of the tax credit as well, as the Paymaster General accepts. Will she confirm that one of the policy reasons for such a tax credit was the connection to inward investment? Does she think that inward investment will be increased or decreased as a result of the measure?
Under article 13 of the new treaty, there is a noticeable change to the taxation of capital gains on the disposal of shares. In the old treaty, capital gains liability due to gains derived by a resident of one contracting state from the disposal of shares in a company in the other state arose when more than 25 per cent. of the shares in the company were disposed of, and when the majority of the company's property was in the other state. Under article 13(6), gains derived by an individual resident in a contracting state from the disposal of shares in a company resident in the other state may be taxed in the other state only if he has been resident in the other state at any time during the previous six years. That change is noticeable, going from a test based on the proportion of shares in a company owned by an individual and the location of the majority of the company's property, to a test based on length of residence. Will the Paymaster General explain that?
Article 13(2) is an addition. It provides that gains by a resident of a contracting state resulting from the disposal of shares or other forms of interest that derive their value from immovable property in the other state may be taxed in the other state. One imagines that that is some form of anti-avoidance provision to reinforce the provisions in the old treaty. Will the Paymaster General confirm whether that is the case? If it is not, will she tell us why the addition has been made? I refer to new paragraph (2) in article 13, which deals with capital gains on shares or other forms of interest deriving their value from immovable property in one of the contracting states.
Article 17 of the new treaty deals with ``Artistes and Sportsmen''. Since the treaty with Norway was concluded in 1985, several Norwegian football players have enriched English and Scottish professional football. One thinks of players of the calibre of Eric Bakke of Leeds United or even, possibly, Tore Andre Flo. Under this treaty they are described as sportsmen, which is a stylistic change, because in 1985 they were described as athletes. Will the Paymaster General confirm whether the tax treatment of Norwegian sportsmen or women or artistes remains the same as in 1985?
The new treaty contains new provisions relating to Frigg field. One of the most important features of the double taxation agreement with Norway is that it
Sitting suspended for a Division in the House.