|Draft Double Taxation Relief (Taxes on Income)(Canada) Order 2003
Dawn Primarolo: I assure the hon. Gentleman that the concept of treaty shopping has nothing to do with what is sometimes called retail therapy. It is a standard phrase employed where individuals or companies seek to use a combination of treaty provisions and/or anti-avoidance measures or other legislation to get an effect that they desire that was not intended by any of the rules.
Mr. Prisk: I am grateful for that clarification. I have no doubt that the Paymaster General's mind was firmly fixed on the business before us. I am also grateful to her for giving the Committee a detailed and important explanation of the concept whereby individuals have sought to get around the tax arrangements in two places at once. I confess that the possibility of being in two places at once would be very attractive at the moment, but that is more a comment on workload than anything else.
There are now about 1,300 double taxation conventions in the world, and this country has perhaps the largest network. That is supported on both sides of the House.
I have read the details and all the explanatory notes and it is clear that, for the most part, these amending provisions are, if I may use the phrase, tidying-up orders. Therefore, I have only a number of short questions to ask.
In the context of the Data Protection Act 1998, will the Paymaster General give an assurance in respect of both orders on the way in which the information will be used and who will see it? The right hon. Lady referred to article 1 in the schedule to the Mauritius order, which would amend article 13(5) of the convention set out in the 1987 order. As she said, the change is designed to clarify the treatment of gains in relation to the alienation of property. My question
Column Number: 7may not come as a great surprise to her, but will she tell me what implications she believes may arise from the recently discussed stamp duty land tax? [Interruption.] I like to make sure that the right hon. Lady is up to speed with the issues that are to the fore of my mind. Given that alienation of property is, in its strict sense, a land transaction, will she make clear the implications of the interrelationship between the two legislative provisions? I ask a similar question in relation to the Canada order.
I think that this country first entered into a double taxation agreement with Canada in 1980; that agreement was amended later that year, and again in 1985. The draft order makes several changes; the Paymaster General referred to them, but I seek clarification on some points. Article 3 of the agreement is to be amended. The draft order expands the meaning of the term ''person'', to include a trust, for example, but it specifically
What is the purpose of excluding partnerships, and does she include the distinct definition of a limited liability partnership? The Paymaster General understands the difference between the two and the potential implications for the parties thereto. Given the fact of the trade relationship between United States and Canada, will she clarify whether there is a similar existing order in relation to the United States? The amendment to article 3 also amends the term ''national'' in relation to this country. Will the right hon. Lady confirm that that is in line with our treaty obligations?
Paragraph 5 of article 12 of the agreement is to be replaced with a provision that refers specifically to ''professional services''. Will the Paymaster General define precisely what that means? Article 13 of the Canada agreement, like article 13 of the agreement with Mauritius, deals with alienation of property. I reiterate my question about the relationship to stamp duty land tax and other property legislation. Finally, article 17, which deals with the taxation of pensions, is to be amended by the draft order to counter a potential abuse relating to lump sum pension payments. What evidence is there of the scope of such abuse? Are there a large number of cases involving many people? What proportion of total revenue is affected?
Mr. John Burnett (Torridge and West Devon): Welcome, Mr. Benton. I have had the privilege of serving under your wise chairmanship on many occasions.
I have one or two general points to make about the two protocols and one specific point on the Canada protocol. The latter point is esoteric, but important, and it affects other protocols as well. I declare at the outset that I am a lawyer, although I do not practise as such, and I used to deal a lot with tax law.
Business invariably welcomes protocols such as these, as they usually prevent double taxation and encourage international trade. I have a couple of
Column Number: 8observations to make about withholding tax. I noted what the Paymaster General said about that, but will she confirm that full credit will be available for all withholding tax deducted in either Mauritius or Canada, and that it can be carried forward in subsequent years, in effect, as a loss? If there are insufficient profits available in the year in question, what is the maximum withholding tax to which each party to the two orders is committed? In fact, the Paymaster General has already answered that—I am grateful.
Will the right hon. Lady confirm that unilateral relief will be available for taxes and tax-triggering events not covered by the orders? If such relief is available, I presume that it will be at a rate appropriate to the UK, even if other countries' rates are lower than ours. I was interested in the exchange of information provision: will she confirm that such information exchange will cover only essential fiscal information—tax information? Will she confirm that information will be made available only to the revenue authorities in each treaty country? If not, will she specify what other authorities will have access to the information.
All I would say about the Mauritius protocol is that we support any efforts to combat artificial tax avoidance schemes and tax evasion. I do not know whether the Paymaster General can comment on this, but I do not believe that I have seen provisions similar to article I of the protocol, which deal with a specific tax avoidance scheme. In my limited experience of these matters, the provision seems unusual; I hope that it is effective.
In respect of the Canadian treaty, I am indebted to Peter Nias, chairman of the international tax law sub-committee of the revenue law committee of the Law Society. I understand that there is a problem of definitions in relation to remittance and tax in the Canadian treaty and others. Article 27 of the existing convention is the remittance article: it provides that income under the convention that is potentially relieved from tax in one state—state A—but which is subject to tax by reference to amounts remitted or received in the state B will be relieved only to the extent of the amounts remitted or received in state B. That is fairly clear.
The protocol changes will now require a taxpayer to show that such amounts have been ''taxed'' in state B if they are to be relieved from tax in state A. No guidance is given in the protocol on the meaning of ''taxed'', nor is any indication given of what evidence either state might require by way of proof that such income has been ''taxed'' in order to retain the relief. The change in wording is identical to similar wording introduced into a further 23 conventions which have been negotiated or renegotiated since 1991. In 1991, the decision was taken to change the wording to avoid the situation in which a taxpayer could claim the benefit of the convention by showing that income had been remitted or received in state B in circumstances in which no liability to tax in respect of those amounts would arise, for example, by reason of source-ceasing rules. In other words, though careful planning, the convention provision would enable a taxpayer to avoid tax in both states.
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The concern is that an amount would not be taxed if the taxpayer was entitled to some relief in respect of it, for example, because of personal allowances or some other legitimate deduction. As I said, as far as I am aware, no formal guidance has been published on the meaning of ''taxed''. However, it is understood that ''taxed'' means no more than subject to tax. In other words, provided that the amount of income in respect of which a taxpayer is seeking relief under the double taxation convention is potentially taxable and is made the subject of a tax return, even if no tax liability arises—for example, due to reliefs—the amount nevertheless falls to be treated as ''taxed'' for the purposes of the convention and earlier conventions.
I hope that the Paymaster General can confirm that, even if no liability to tax actually arises in respect of the amount in question, and irrespective of the amount of any actual liability, the term ''taxed'' means no more than that the sum in question is subject to tax in the relevant state and that it is enough for the taxpayer to show that the amount in question has been the subject of a tax return to the relevant tax authority in order to satisfy treaty provisions.
Finally, I seek confirmation that, from an administrative point of view, any such amount that has been taxed is evidence to support a claim for treaty relief by the taxpayer to the other state. I hope that that is reasonably clear, and that the Paymaster General can clarify matters for the Committee and for numerous individuals who rely on these matters in their daily business.
Dawn Primarolo: Let me start with the scope of the exchange of information and safeguards, about which both hon. Members who have spoken have sought clarification. Information may be exchanged only between the Canadian and UK competent authorities. The exchange must be necessary for carrying out the provisions of the treaty or of the UK or domestic law. It must relate to taxes covered by the treaty, be treated as secret, not disclose any trade, business, industrial, commercial secret or trade process, and must not be contrary to public policy. That answers the points made by the hon. Member for Torridge and West Devon (Mr. Burnett) and the points on data protection. The obligation to exchange information does not require either country to carry out administrative measures at variance with existing practice, or to supply information not obtainable under domestic law. There is nothing in the Mauritius convention on exchange of information, so those remarks relate specifically to the Canadian order.
The hon. Member for Hertford and Stortford (Mr. Prisk) asked, as I thought he might, about stamp duty.
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