|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
Dr. Vincent Cable (Twickenham): I apologise to the Minister for missing her introductory comments. She made a couple of remarks in responses that I want to follow up. I do not want to make any preamble, but I fully support the principle behind the measure, which seems eminently sensible. I worked in international business before becoming a Member of Parliament and I can see the point in clarity, simplicity and avoiding regulation. I can also see the advantage to Governments of preventing companies from playing one Government off against another. That is important.
I have two questions. The first arose from an exchange involving the hon. Member for Orpington. I do not understand why it is necessary to have very large numbers of agreements—I think that the Minister gave the figure of 106—or why we attach such value to that. On that basis, all the other OECD countries presumably have the same number, so we are probably talking about 1,000 bilateral tax treaties, generating an enormous amount of subsidiary litigation. I know very little about international taxation and tax law, but I know a little about international trade negotiation, where the principle of multilateral agreements is established.
It seems an obvious way forward for the OECD pro forma agreement to be elevated to the status of a treaty, under the OECD or the World Trade Organisation, and for individual countries to ratify it. I do not know whether the Government have suggested that or are even pressing for that. It would mean that, instead of hundreds or thousands of treaties, there would be one unified treaty that did not have discrimination or treaty shopping built into
Column Number: 22it. That would be much simpler. There may be a simple answer to that question, but I pose it to the Minister.
Mr. O'Brien: I dare say that the Minister might have other reasons for doing so, but I hope that she agrees with me that the primary concern is that the arrangements are strictly bilateral and need to be negotiated bilaterally. I certainly support that, as does my party. To cede that to a supranational body would possibly lay open to confusion the need to raise tax at local jurisdictional level, rather than to consider it as something at a common level. The model of the OECD is there to be followed, but to tailor-make it to each bilateral arrangement is critical to the arrangements.
Dr. Cable: The hon. Gentleman misunderstood the point. The purpose of multilateral trade agreements is not to create a supranational body that sets every individual country's trade policy but to create a set of rules by which the system is governed. Multilateral agreements on tax would have precisely the same effect and would be beneficial, but I should be interested to hear the Minister's answer.
My second question concerns the Minister's response to the question raised in a slightly bantering way about devolved Governments and the Liberal Democrats' enthusiasm for local income tax. Her reply brought out the much more important point that the American states do not accept federal jurisdiction over large areas of taxation. She will remember that, a few years ago, the state of California, whose economy is the size of the UK's if not bigger, repudiated the whole idea that the United States Government could fix tax regimes for multinational companies.
I should like an assessment of what the cumulative impact of all the various state exemptions will be on the flow of capital between the United States and us. At first sight, given that the states have a key role in income taxation and company taxation, it is probably a substantial part of the overall set of tax arrangements, but perhaps the Minister could clarify that.
Dawn Primarolo: On the question of a bilateral or multilateral approach, there is a multilateral approach in the sense that the OECD now recommends a model treaty, which we and the United States follow, to try to standardise the types of agreement. The hon. Member for Eddisbury made a point about the rights of taxation or another reason why there are, or need to be, bilateral arrangements. The most obvious answer is that countries tax in different ways. Their economies are different, they respond in different ways, their trading relationships are different, they specialise in different areas, and it is patently obvious that the world is very complex, especially with ever-expanding globalisation. The OECD offers the framework—the model taxation treaty is the multilateral approach—but the bilateral agreements are still necessary because states are, rightly, in charge of their own tax decisions, and all the relationships are different.
The United Kingdom has a huge network that reflects our long-standing status as a trading nation. Not every country has double taxation agreements, let
Column Number: 23alone many of them. However, the world and its economies are becoming more interrelated, and that is why the OECD has considered having a model tax treaty. We use such a treaty, but not every country does, and the purpose of many of sittings of our Committees is so that I may explain why there are exceptions. The OECD recommends that there should be no article on teachers in standard treaties, and the United Kingdom and the United States also take that view. However, both countries have been persuaded that there are particular benefits to having such an article, and the protocol has restored it to the treaty. The protocol therefore allows for finessing and for the nuances and major differences.
I must say that it is not for me to account for state exemptions in the United States. I have enough problems being required to account for the tax system of the United Kingdom, varied as it is. We do our best with our treaties and treaty partners to have meaningful agreements that take account of all developments. However, as I told the hon. Member for Eddisbury, a tax treaty does not remove the United Kingdom's ability to use other parts of its tax legislation to deal with a situation in which it believed that it was losing revenue. In fact, Finance Bills tend to be substantially passed, whether through our controlled foreign company legislation or by taking away offshore pooling and bringing it onshore as they do in the US.
This is a very complicated area, and neither the United Kingdom nor the United States can get it 100 per cent. right. However, both countries believe that this is a good, sound treaty, which enables them to facilitate their businesses and the movement of people between them without subjecting those people to double taxation. It does not mean that there will not be problems in the future. I am sure that there will be problems—there always are—but this is the best way forward. I am sure that the hon. Member for Twickenham will know only too well from the experience he gained outside the House of Commons before he was elected how the tax treaties are crucial in particular industries.
Mr. O'Brien: I thank the Minister for her extensive replies to my extensive questions. I shall not crave the indulgence of the Chairman or the other members of
Column Number: 24the Committee by taking any more time at this stage. However, to conclude what has been proper scrutiny of this very important treaty with the United States and an equally important, in its own relative terms, treaty with Lithuania, it is critical that business has the opportunity to take note of these proceedings as it looks to chart what are always uncertain commercial waters with as much certainty about the taxation system as possible.
The Minister helpfully said that she will write to the Committee with a list of benefits. I dare say that members of the Committee, like me, are already holding their breath for that letter. Given my willingness, which I hope that I have demonstrated, to agree that the whole process is desirable and the right way to take us forward, I would be more than happy for Her Majesty's official Opposition to co-sign the letter, if the Minister wished us to, rather than her running any risk of being accused of using it as possible Government propaganda. I place on record my gratitude for everything that she has done.
Dawn Primarolo: I am grateful to the hon. Gentleman for his kind suggestion that he would like to co-sign the letter. He will understand that at this stage I shall have to decline his offer because our current parliamentary majority does not require it. I hope that it never will.
Mr. O'Brien: I hope that that was not too churlish of the Minister. I want it placed on record that we fully support the perceived benefits. What matters is to create the maximum amount of certainty and I hope that our proceedings will have assisted with that.
Question put and agreed to.
(Taxes on Income)
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