|Draft Double Taxation Relief (Taxes on Income) (The United States of America) Order 2002 and Draft Double Taxation Relief (Taxes on Income) (Lithuania) Order 2002
Mr. O'Brien: I look forward to seeing the answer in a letter, once the Minister has checked the record. Indeed, that might be a better way to deal with the point. However, I wish to highlight the need for that to be focused on. There is—and, in my experience, there has been over the past 15 years—a great incentive for those who are trading as a group of companies with overseas operations to channel as much as possible into royalty income. That is owing partly to previous arrangements, and seems likely to be reinforced. I make no complaint about that, but it increases the importance of understanding when such royalties might be adjudged to be excessive, and how that excess will be measured.
Dawn Primarolo: I will need to return to that point in correspondence with the hon. Gentleman. We are talking about tax authorities on both sides of the Atlantic that are legendary for ensuring that they receive the right amount of tax, so I would find it a little odd if they had missed that point—and I do not think that they did. The answer is probably buried somewhere in the treaty, and I will be happy to write to the hon. Gentleman about it.
The hon. Gentleman also asked about stock options, and he referred to the exchange of notes. In line with existing practice, that matter will normally be determined by reference to the periods of employment in each country using a straight-line time apportionment. That is simple, clear and avoids distortions arising from the short-term fluctuations in share values. Very occasionally, time apportionment might not produce an appropriate result, so the exchange of notes provides that the competent authority will then endeavour to resolve the difficulty. Therefore, there is a general rule that recognises that there will sometimes be something outside the general rule, and that that will have to be determined by whichever is the competent authority.
Mr. O'Brien: I am conscious that stock options were an increasingly attractive form of remuneration, particularly to IT companies. In constructing the appropriate incentive plans for companies that are characteristically entrepreneurial, we need to ensure as much clarity and certainty as possible. Although we recognise that some discretion to apportion time will
Column Number: 19be appropriate if a ''felt fair'' result is not produced, fuller guidelines, which could be issued by Revenue and Treasury ministries on both sides of the Atlantic, would no doubt be highly appreciated.
Dawn Primarolo: That takes us to a question that the hon. Gentleman asked at the end of his remarks. It is appropriate that I comment on that now. He asked how the monitoring of the treaty's provisions would work. The review mechanism is built into the treaty. The competent authorities shall consult about matters of application, whenever that is necessary. In addition, all the provisions of the treaty must be reviewed after a maximum period of five years. I heard what the hon. Gentleman said about issues concerning IT, and I hope that I have been able to reassure him that provisions are in place that would allow the relevant monitoring to be undertaken.
The hon. Gentleman asked about the 30--day de minimis limit in article 21, which refers to offshore exploration by oil companies. The 30--day limit avoids unnecessary tax complications for companies and individuals who are working in another country for only a short period. That is the reverse of what he suggested. The 30--day limit avoids catching short-term contracts. That is in recognition of the fact that very substantial sums can be expended on contracts in the industry that last for only a few weeks. Such contracts would not be taxed if a longer de minimis period were allowed. The general comment that I made about the monitoring of the provisions would apply in such a case.
The hon. Gentleman and his hon. Friends asked about safeguards on exchanging information. Information can only be exchanged between the US and UK competent authorities. The exchange must be necessary for the provisions of the treaty to be carried out, or for UK or US domestic law to be exercised. The exchange must relate to taxes that are covered by the treaty. The information must be treated as secret. The exchange must not disclose any trade, business, industrial, commercial or professional secret or trade process, and must not be contrary to public policy. The obligation to exchange information does not require either country to implement administrative measures that are at variance with its existing practices, or to supply information that is not obtainable under domestic law.
Mr. O'Brien: There is only point that the right hon. Lady has not covered, but which I think she intended to encompass in her remarks. Article 27 on exchange of information states that the competent authorities
I assume that that is against the rules that apply to compulsory disclosure. Perhaps she will look into that.
Dawn Primarolo: I will look into that, but I do not think that that is the case. The hon. Gentleman merely states what are already obligations in law, which would have been covered by the treaty or by UK or US domestic tax law. He will be aware from his employment before entering Parliament that there are
Column Number: 20certain conditions under which the tax authorities can be required by a court to disclose information. Those conditions are very strict and, so far as I am aware, nothing in the treaty would change that. I cannot believe that we would allow such change, because we defend such matters so closely. I am happy to give the hon. Gentleman the absolute assurance that, from our point of view, the domestic law as it relates to controlling public disclosure remains as it is and that we continue to defend it. I believe that to be the case in the United States, where there are similar requirements.
The hon. Gentleman asked about penalties and interest. Article 26 relates to mutual agreement. The point is that companies will not be required to pay tax until a matter is resolved. The interest liability compensates the country where the tax is due for not having had the money at the right time. Penalties are a matter of domestic law and are not affected by any delay in tax being paid.
The hon. Gentleman asked about the main benefits of the treaty. There are many benefits; it is an excellent treaty. If he agrees, I shall write to every member of the Committee about the benefits to British business of this excellent treaty in order to save hon. Members from having to hear me go on and on. It is an excellent treaty with substantial benefits. [Interruption.] I do not want my hon. Friends to shout ''More, more.'' Time is pressing, Mr. Illsley, and I am sure that you appreciate that the treaty is very good for the United Kingdom.
The hon. Member for Eddisbury asked whether extra compliance costs would be imposed on businesses as a result of some of the changes. All UK residents pass the test in the limitation on benefits article and are therefore entitled to the treaty benefits. For a large section of the UK corporate community, the article provides clear, objective rules for determining entitlement of treaty benefits, and many will automatically qualify. Rather than being a burden, the article provides certainty and enables business decisions to be made in the clear knowledge of where benefits under the treaty are available. The hon. Gentleman referred to the explanatory notes and the notes in the treaty. They are designed to assist that.
The hon. Gentleman also asked a complex question about countries whose US treaties provide for a higher dividend withholding tax rate than 5 per cent. Where the US has a treaty with a third country that provides a dividend withholding tax of more than 5 per cent., there is an incentive for a company resident in that country to hold US operations through the UK so that it can enjoy the present UK--US treaty rate of 5 per cent. As the UK does not have a dividend withholding rate, 5 per cent. will be the final tax rate.
The present UK--US treaty is the only treaty that the US has with an EU country, with the exception of the treaty with Greece, which the hon. Gentleman mentioned, although that does not have a limitation on benefits article. The addition of a limitation on benefits article means that, where the motive for routing dividends through the UK is simply to take advantage of the tax treaty, such routing will become more difficult. I make no apology for that. The treaty is designed to assist trading between the UK and the
Column Number: 21US, and has the shared objective in both the UK and the US of eliminating treaty shopping.
Finally, on the United States order, I come to the article on equivalent beneficiaries. Paragraph 3 provides that even if a company is not a qualified person as defined by the treaty, it shall nevertheless be entitled to the benefits of the treaty if it is at least 95 per cent. owned by seven or fewer persons who are equivalent beneficiaries as defined, and less than 50 per cent. of the company's gross income for that period is paid to the non-UK or US persons in the form of tax-deductible payments.
The hon. Gentleman asked whether the Lithuania Order in Council had been revoked. No, it has not been. The new order merely amends the article of entry into force.
I thank the hon. Gentleman for his extensive sets of questions. I will check the record in case I have overlooked any of his detailed points. I will write to each member of the Committee. I, too, congratulate him on his bedtime reading. He has obviously been studying the treaty every hour of the day and night. I look forward to working on a Finance Bill with him. That probably means that he will have to go without sleep, but I look forward to the debate.
I hope that I have covered all the questions that were asked. I commend both orders to the Committee.
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