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Ninth Standing Committee
on Delegated Legislation
Thursday 3 July 2003
[Mr. Joe Benton in the Chair]
Draft Double Taxation Relief (Taxes on Income) (Canada) Order 2003
The Paymaster General (Dawn Primarolo):
I beg to move,
That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Canada) Order 2003.
The Chairman: With this we may discuss the draft Double Taxation Relief (Taxes on Income) (Mauritius) Order 2003.
Dawn Primarolo: Good afternoon, Mr. Benton, and welcome you the Chair.
I am pleased to introduce the two draft double taxation orders. The protocols scheduled to the draft orders amend the existing comprehensive double taxation conventions with Canada and Mauritius. Double taxation conventions are welcomed by the business community as an aid to international trade and investment. Their main aim is to relieve double taxation when income arising in one country flows to a resident of the other country and would otherwise be taxable in both countries. In order to achieve that, each country agrees to limit its taxing rights and to give credit for the other country's tax.
Tax conventions also help businesses to plan their investments by providing certainty about their tax treatment, and by allowing consultation between the tax authorities to try to resolve difficult cases by mutual agreement. Finally, they serve an important Exchequer protection role by including provisions to combat avoidance and evasion, not least by measures providing for the exchange of information between the two tax authorities.
The Government are committed to developing the United Kingdom's network of double taxation conventions which, with 106 conventions, is already one of the largest such networks in the world. However, negotiating new conventions is only half the task. It is also essential regularly to review and maintain our existing conventions in order to ensure that they continue to serve their aims in the context of a changing global economy—if, perhaps, our domestic legislation or that of a partner country has changed, or if taxpayers have gained unforeseen and unintended benefit from a convention. If a convention is, in most other respects operating satisfactorily, it may be appropriate to negotiate and bring forward an amending protocol, rather than re-negotiate the whole convention. That is the position with both Canada and Mauritius.
It is important that the United Kingdom has modern double taxation conventions with Canada and Mauritius. We share partnership in the Commonwealth, and those further protocols strengthen our economic relationship and clearly
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show the warmth of our long-standing relationships with those two countries.
On behalf of the Government, I signed the third protocol to our convention with the Government of Canada on 7 May. It addresses a number of areas of the convention that required updating to take account of changes to domestic legislation in both countries and of the ever-changing global economy since the second protocol was agreed in 1985.
We have succeeded in reducing the withholding tax on dividends paid by a Canadian company to its UK parent from 10 per cent. to 5 per cent. The provision is reciprocal, but because the UK does not have a withholding tax on dividends, that is the actual effect. We have also removed the obligation for the UK to pay tax credits to Canadian residents.
The headline withholding tax rate on interest and royalties remains at 10 per cent., but we have negotiated a total exemption from source state taxation for interest that is paid in connection with a sale of equipment, merchandise or services on credit, and for royalties paid in connection with computer software rights.
We have also agreed that should Canada reduce its withholding tax rates below that provided for in the convention, it should make a similar reduction if it has a treaty with any other country in the Organisation for Economic Co-operation and Development. We will consult at the earliest opportunity if that occurs.
We have sought to facilitate the freer movement of workers between our two countries by allowing pension contributions paid to an equivalent pension scheme in the person's home country to be tax deductible in the host country. The exchange of information provisions have also been updated to bring them in line with what we have agreed in the new treaty with the United States, and other recent treaties.
As always, we have sought to combat tax avoidance by including measures against treaty shopping in all the income articles. The protocol also blocks a loophole whereby payments from Canadian pension schemes escaped taxation altogether, and includes measures to deal with avoidance of capital gains tax by UK resident individuals. I shall say more on that last issue in relation to the protocol with Mauritius, where the same avoidance techniques have been employed. Finally, measures exist to ensure that Canada retains a right to tax gains accrued while an individual is a Canadian resident, but who subsequently leaves to become a UK resident.
The second protocol to our convention with the Government of Mauritius was signed on behalf of this Government by the British high commissioner in Mauritius on 27 March. The protocol is needed to clarify the treatment of capital gains from the disposal of property by a person who is treated under the terms of the convention as a resident of one of the states at the time that the property is disposed of, but who is resident of the other state at another time. Perhaps I should explain.
Mr. Mark Prisk (Hertford and Stortford): Please do.
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Dawn Primarolo: Well, it is the equivalent of being in two places at the same time, but not really.
A tax avoidance scheme has been widely marketed that purports to enable UK-resident individuals to avoid payment of capital gains tax on the disposal of high-value items. The scheme is targeted at individuals who have transferred the ownership of assets to offshore trustees. Those trustees then arrange to be resident, for the purposes of the convention, in Mauritius, and while so resident, they dispose of the asset concerned. At a different time in the same tax year they also become resident in the UK. That is supposed to frustrate the working of the UK anti-avoidance legislation, which is intended to bring such disposals by offshore trustees into the charge to UK tax, because—it is argued—this legislation does not apply in a tax year in which the trustees are resident in the UK at any time. Because the convention provides an exemption from UK tax in certain circumstances for disposals by a resident of Mauritius, and because Mauritius does not levy capital gains tax on property situated outside Mauritius, such gains are, according to the promoters of the scheme, supposed to escape tax altogether. The Inland Revenue does not accept that those arrangements are effective. But the new protocol puts the matter completely beyond doubt.
The operative provision is article 1, which substitutes a new paragraph (5) in article 13 of the convention. The new paragraph makes it clear that, notwithstanding the other provisions of the article, the UK retains the right to levy a charge to tax under its legislation in respect of gains from the alienation of any property by a trustee or other person who is resident in the UK at any time during the fiscal year in which the property is alienated, or has been so resident at any time during the six fiscal years immediately preceding that year.
Once the protocol comes into force, it will be effective in the UK for capital gains tax purposes from 6 April 2003. The Inland Revenue will apply the provision to disposals made on or after that date.
The protocol puts the intended effect of the capital gains article and the anti-avoidance legislation completely beyond doubt and removes the potential loss to the UK Exchequer. The Government will not hesitate to take similar action in the future where arrangements are used to obtain unintended benefits from our double taxation conventions.
I commend the draft orders to the Committee, and I will be happy to respond to questions.
Mr. Prisk: The Order Paper named Mr. Derek Conway as the Chairman but, with no disrespect to my hon. Friend, it is a pleasure to see you in the Chair this afternoon, Mr. Benton.
I thank the Paymaster General for her opening statement, and her office for the generous offer of some information on the background to these rather difficult treaties. Regrettably, on this occasion I was unable to gather that myself because of the pressures of the Finance Bill—I am sure that Members will understand what I mean when I say that.
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The official Opposition welcomes the principles that underlie the double taxation agreements. Indeed, my party has the proud record of having been in office when this country went through the 100 barrier on taxation treaties: my right hon. Friend the Member for Fylde (Mr. Jack) was the Financial Secretary at the time.
Conservative Members share the Government's support for the role of double taxation treaties. As the Paymaster General highlighted, they secure this country's attractiveness to both individual and corporate wealth creators. They help to provide something that is very important in business—certainty in underpinning international trade. Double taxation treaties also promote closer economic and political ties. They do that primarily by removing the risk of individuals and companies being taxed twice. They also provide an opportunity to counter tax evasion—a good thing from any Government's point of view—with regard to which the principal area of interest is agreed exchange of information.
I am grateful to the Paymaster General on two counts. She introduced a new term—treaty shopping. It would be invidious of me to suggest, but I will anyway, that I wonder whether her mind was drifting just for a moment to other activities, which she might have preferred to be doing.