Finance Bill

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Dawn Primarolo: Alas?

Mr. Letwin: I did not mean that it was unfortunate that other countries had democracies, for which we should be grateful, but that as a consequence they change their tax rules. A body of highly conscientious United Kingdom officials, following industry representations, track down the effects of those changes on our companies. That process results—often some years later—in revisions to tax treaties. A tax treaty takes a long time to revise and conclude, so it may not catch up with the changes in other jurisdictions, with the result that it may be necessary to allow for unilateral relief. I am not saying that there should be a blanket provision to that effect, but it may be necessary in particular cases.

The amendment has no mechanism for dealing with that; it deals with the unfortunate effects of the discrepancy between past tax treaties and those for which we aim. However, it does not deal with subsequent adjustments in other tax jurisdictions that have not been addressed in subsequent treaties. That is my first point. It provides a reason not for rejecting the amendment, but for the Treasury to consider some robust technical means of dealing with the problem. That consideration may take some time, as the problem will not occur immediately.

My second point goes deeper, so deep that it is not easy for anyone—even for me—to grasp its full practical effects.

Mr. Barry Gardiner (Brent, North): The hon. Gentleman is too shallow.

Mr. Letwin: Perhaps, as the hon. Gentleman says from a sedentary position, I am too shallow.

There is an ancient principle that you, Mr. Cook, and we in the Committee and the House as a whole are here to defend above all, which is that Parliament raises taxes and gives the Executive money. There was an ancient dispute, well known to all of us, that centred on the question whether the Royal prerogative could be used to raise taxes. That dispute led to poor old Mr. Prynne losing his ears. The Paymaster General is covering her ears, which I would certainly not want her to lose—far be it from me.

Strangely, and unintentionally, the provision under discussion is a reassertion of the principle that the royal prerogative can be used as a taxing power. I am sure that that was not part of the Treasury's purpose, although, if one thinks through the logic, that is how it works. By concluding a new tax treaty, including certain provisions, the Government, using their prerogative power, which they use when they conclude treaties, will affect the rights of individuals in the UK to claim—or, in some cases, not claim—unilateral relief or any relief. By changing treaties using prerogative power, the Government will in effect be raising taxes on people on whom those taxes were not previously raised. I do not assert that that is the Government's intention, but that will be the effect. Although that may be unobnoxious in itself—depending on the ways in which it cashes out in practice over the years—it is obnoxious in principle. We would not want it to be a precedent that will be used for other purposes. I think that that is common ground among hon. Members on both sides of the Committee, and, more generally, on both sides of the House.

In pursuing the real-life technical problem of future jurisdiction changes in other countries, with which tax treaties will need to catch up—although that will not happen fast enough to avoid the need for unilateral relief in some circumstances—I hope that the Treasury will also bear in mind the need to construct a mechanism that does not have the effect that, by changing tax treaties, the Government can exercise their prerogative power to raise UK taxes rather than reduce them. The basic principle of double tax treaties is that they should relieve UK tax, which is why it has always been unobjectionable for the prerogative power to be used in that respect. The provisions under discussion alter that logic, and we hope that the Treasury will attend to that matter.

Mr. Flight: I should perhaps declare an interest—

Mr. Letwin: Will my hon. Friend give way?

Mr. Flight: I give way to my hon. Friend.

Mr. Letwin: I am grateful to my hon. Friend for allowing me this opportunity. The Paymaster General may or may not say other things that are right in the Committee today, but she has said one thing that was right—that hon. Members should declare their interests. I declare, for the ``manyeth'' time, that mine are in the Register of Members' Interests.

Mr. Flight: My question is about the application of universal relief provisions that are relevant to the amendment. A constituent who is an accountant wrote to me to make the point, of which I was not aware, that when a UK citizen invests in securities in another EU economy, he suffers a tax on the dividend in that other country—Germany, France or wherever—on which he does not obtain relief against his UK income tax liability. All that he or she can do is seek to reclaim the tax from the other country, which, for 99 per cent. of people, will be difficult. In the light of the changes in the amendment, do the Government envisage standardisation? Given their warm views on the integration of continental Europe, it is astonishing that such a tax situation should prevail. It is a disincentive to invest on a pan-European basis, because, in practice, UK citizens who do so will suffer double tax on their dividends.

Dawn Primarolo: Broader points have been made about double taxation relief. The hon. Member for West Dorset asked what happened when tax authorities changed the rules relating to double taxation agreements. He asked also about the royal prerogative and the accountability of our double taxation treaties. The hon. Member for Arundel and South Downs (Mr. Flight) referred to broader matters concerning double taxation, the prevention of which is the purpose of the treaties.

Paragraph 5 enacts three provisions. First, it makes it clear that the United Kingdom will not give relief on foreign tax if the taxpayer can claim in the other country that he does not have to pay it, either because of a provision under a double taxation agreement or because that is the law in the other country. Secondly, if a taxpayer can claim credit for foreign tax under a treaty, he cannot claim credit unilaterally under domestic law. Thirdly—this was the first point made by the hon. Member for West Dorset—if a treaty contains an express provision that credit for foreign tax is not allowed in particular circumstances, relief for that tax may not be claimed unilaterally. Paragraph 5 applies only if an express provision in the treaty denies relief, not if the treaty is silent on the issue. It bears no relevance to when the laws of another country change because only a new treaty or suspension of the treaty can change the agreement. However, I shall have to seek guidance from my officials on the last point.

The hon. Member for West Dorset referred to accountability for the tax treaty. Before they are enacted, tax treaties are debated by a House of Commons Committee under the system of delegated powers. The hon. Gentleman and I have already discussed some treaties. The arrangements are scrutinised before they are made part of a double taxation treaty. The amendment makes it clear that the provisions would have effect in relation to claims for credit relief made on or after 21 March 2000.

I have already answered the question asked by the hon. Member for Arundel and South Downs, in that it is up to the taxpayer to claim a repayment. The Inland Revenue talks regularly to other countries about improving that procedure. If the hon. Gentleman was referring to a particular case in which a constituent identified difficulties, perhaps he will write to me about it. I shall be more than happy to ask the Inland Revenue to take it up. We must ensure that taxpayers have access to the relief to which they are entitled in the country in which it is supposed to be given. I understand the hon. Gentleman's wider point, especially as we increase the number of double taxation treaties. They are of great importance to this country, especially to businesses based here that want to invest in other countries. I hope that the Committee agrees with the amendment.

Mr. Letwin: I shall deal in reverse order with the two responses of the Paymaster General. I accept that there is a Commons mechanism for discussion of revisions to existing treaties or new treaties in the tax domain. It so happens that the Paymaster General and I have discussed such matters. However, there is no specific provision for them to be debated on the Floor of the House and, more important, nor is there any provision to bring to the attention of those who are debating such matters whether the treaty, interacting as it may do with existing tax law, will have the effect, bizarrely, of raising taxes as opposed to reducing them.

11 am

If we parliamentarians were all-knowing and on our guard at all times, we would spot such things without their having to be brought to our attention. The problem to which I am alluding could probably be solved if the Paymaster General reflected on the proposition that sometimes guidance should be issued that would be parallel to regulatory impact assessments. That would always alert us if a tax treaty had the potential effect, under its interaction with United Kingdom law, of raising rather than reducing UK tax for a specified class of taxpayers, which would trigger a full-scale debate. Under such arrangements, the property power would be appropriately reined in.

Perhaps in anticipation of the lively debates that will take place later in Committee, I may have been more inarticulate than usual when describing the character of the problem because the Paymaster General did not respond to it. However, I shall try again. The mischief that the amendment would remedy is well described in the Inland Revenue's notes, which state:

    For example, in agreements with Egypt—

and various other countries—

    UK petroleum companies are expressly excluded from claiming relief for taxes paid in those countries under the agreements . . . But in all those situations the companies concerned can claim credit relief under UK domestic law and the Government does not want to alter that situation.

So far, so good. Indeed, it is marvellous. It is right that we should allow companies to claim unilateral relief under those circumstances.

What is the genesis of the mischief? When the treaties were originally signed, it was envisaged that the companies concerned would end up, one way or another, being able to claim tax relief. That is why the Government want to return to the point at which they will be allowed to claim the tax relief. Let us imagine a situation in which the Government sign a new treaty and expressly provide for something or other not to be reclaimable under the treaty. A change then comes about in a foreign jurisdiction whereby a previous Government had acted in a way that meant that that new tax provision cannot be the subject of relief. It should be possible for the UK company to obtain unilateral relief. There is no mechanism in the amendment for that to occur. First, I hope that I am not confused; secondly, I hope that I have now clarified the problem. I do not expect the Paymaster General to respond to me immediately, but I hope that she will reflect on whether the succession of events that may flow from future double tax treaties may engender the problem that I have described.

 
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