Draft Double Taxation Relief (Taxes on Income) (Georgia) Order 2004
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Third Standing Committee on Delegated Legislation
Monday 6 December 2004
[Mr. Jonathan Sayeed in the Chair]
Draft Double Taxation Relief (Taxes on Income) (Georgia) Order 2004
4.30 pm
The Paymaster General (Dawn Primarolo): I beg to move,
That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Georgia) Order 2004.
The order deals with the new comprehensive double taxation agreement. As the Committee will be aware, double taxation agreements aim to relieve double taxation where income arises in one country, flows to a resident of the other country and would otherwise be taxed in both countries. To achieve that, each country agrees to limit its taxing rights and to give credit for the other country's tax. Such agreements help businesses to plan their investment by providing them with certainty about their tax treatment. They also provide for two tax authorities to exchange information and consult to try to resolve difficulties by mutual agreement.
As the Committee will know, the Government, like their predecessors, are committed to maintaining and developing the United Kingdom's network of double taxation agreements. We currently have 108 bilateral tax agreements—one of the largest networks of such agreements in the world. So far this year, we have made good progress on negotiating new arrangements and revised agreements with several countries. Earlier this year, the Committee approved a protocol with New Zealand, which has now entered into force.
The new comprehensive double taxation agreement with the Government of Georgia was signed in London on 13 July and covers all categories of income, capital and gains. It fills a gap in our treaty network that has existed since Georgia regained her independence in 1991.
Georgia has a relatively small economy, but it is rich in arable land, forest and woodland. Its major industries include steel, aircraft, machine tools, wood products, tea and wine. Indeed, hon. Members will be interested to hear that Georgia discovered wine in about 6000 BC. Georgia's gross domestic product is growing at 8.6 per cent. per annum, and the UK is one of its major trading partners. In 2002, we exported goods worth £17 million to Georgia and imported goods worth about £2.6 million. In 2003, however, our exports increased to £73 million, due in part to the start of construction on the Baku-Tbilisi-Ceyhan oil pipeline in April 2004. As BP is the main partner in the BTC construction, the pipes and other materials imported into Georgia were accounted for as imports from the UK.
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Caspian energy reserves are an important source of alternative supply, which will help to give the UK and the European Union security and diversity of energy supply in the next two decades. As its name suggests, the pipeline is routed through Georgia, and BP and other countries have invested in the development. The double taxation agreement will play an important role in facilitating such investment.
Hon. Members may also be interested to know that the Georgian authorities recently ratified the UK-Georgia air service agreement and that the inaugural flights by British Mediterranean Airways took off on 31 October. The UK and Georgia also enjoy cordial relationships outside the economic field.
The double taxation agreement covers the usual types of income, such as property rents, business profits, income from international transport, dividends, interest, royalties, capital gains, employment income, pensions and annuities. It largely follows the principles enshrined in the Organisation for Economic Co-operation and Development model, and the terms secured by the UK are at least as good as those that Georgia has agreed with other countries. In some areas, such as the treatment of dividends, interest and royalties, the agreement demonstrates a major shift in treaty policy by Georgia away from source-country taxation. That will surely encourage investment flows.
The agreement contains a measure to counter capital gains tax avoidance schemes that aim to exploit the interaction between tax treaties and the domestic laws of the UK and other countries, which is commonly known as treaty shopping. The measure appears in paragraph (6) of article 13, and it follows the wording of similar provisions in recent protocols with Mauritius and New Zealand.
Unfortunately, a mistake in the printing of that paragraph in the English language version of the signature text came to light only last month, when officials were preparing the documents for the parliamentary process. That mistake was corrected by an exchange of diplomatic notes, but I am sorry to say that it was perpetuated in the version originally published on the Inland Revenue website. That, of course, has now been corrected. I assure the Committee that the version of the agreement before it today represents what was agreed in negotiations between the United Kingdom and Georgia.
I am pleased that we are introducing the agreement now; and I am confident that, for many years, it will provide a stable framework in which trade and investment between the UK and Georgia can continue to flourish. I am confident that the agreement will be welcomed by British business and that it will aid competitiveness. I commend the draft order to the Committee, and I will be happy to respond to questions.
4.36 pm
Mr. Andrew Tyrie (Chichester) (Con): I think that we can welcome the treaty. It looks like a pretty standard OECD-style treaty, although in some
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respects it goes further, particularly in ways that might favour the UK on the treatment of interest and dividends.
The heart of the treaty lies in articles 10, 11 and 12—the three articles that deal with dividends, interest and royalties. We do not have a domestic withholding tax on dividends. We set a favourable climate for inward investment, and we do not want to change it. We do not want to sign agreements that might imperil it. Under the treaty, neither side will levy withholding tax. That is good news, and it is favourable for us. However, some conditions need to be met in order for us to pick up that benefit. First, the dividends have to flow from direct investment rather than portfolio investment. Secondly, they have to come from the majority ownership of a subsidiary—in other words, a minority shareholding will not be enough. Thirdly, the investment has to be at least £2 million.
The overall effect of those conditions seems regrettable, but mainly from the Georgian side. Investment on the stock exchange scarcely exists. Perhaps the Paymaster General can give us a rough idea of the size of its capitalisation, but I would expect it to be very small indeed. Investment on the stock exchange will be discouraged by those conditions. The country has a choice between maintaining revenue in the short term, which is what would be achieved under those articles, and attracting portfolio investment in the long term, which is what they should be trying to accomplish.
Looking at the issue from a broader perspective—the Paymaster General certainly did so—Georgia has only just emerged from the shadow of the Soviet Union. President Saakashvili has, to some degree, accomplished what we hope will be accomplished in Ukraine—wresting itself free of the indirect control of the former Soviet Union and, in this case, Russia. That process has only just begun. There is now considerable US presence in Georgia; it is heavily engaged in assisting Georgia develop. For us, it is a crucial part of the world politically and geopolitically.
As the Paymaster General mentioned, the Caspian pipeline—the pipeline that will take oil out of the Caspian sea and bring it to western markets—has a crucial significance for the UK. We have a very heavy investment in it through BP, which is the lead partner in the consortium. A long time ago, I had a passing involvement in the pipeline when I was working for the European Bank for Reconstruction and Development. I met BP officials in Baku several times to discuss where the pipeline should go. It is crucial that a success is made of it. I agree with the Minister, who implied strongly that the double taxation agreement will enable us to benefit from any investment involved in working on the pipeline.
Overall, we should welcome the agreement. Our current investment is low, and our trade, despite the increase in it last year, is still relatively low. The sooner the agreement is implemented, the better. It will benefit both parties, and the Opposition support the measure.
<<6>>4.41 pm
Mr. John Burnett (Torridge and West Devon) (LD): Welcome to the Chair, Mr. Sayeed. I do not know whether I have had the privilege of serving under your chairmanship before. I shall not be in this place for much longer, but I look forward to serving under your chairmanship in at least one more sitting.
I thank the Paymaster General and her officials for their excellent briefing on the treaty late last week. Like the hon. Member for Chichester (Mr. Tyrie), I welcome the treaty, as I have said many times when debating double taxation treaties. They assist international trade and business and the free flow of trade in manufactured goods and services, which is to be much encouraged, and I am sure that this treaty with Georgia is no exception.
As the Paymaster General said, our trade with Georgia is growing, and the treaty will encourage further growth. The trade flow is going in our direction, and I am grateful for the figures that she gave us. As we have heard, BP is heading a very important oil pipeline consortium, which is making a massive investment in Georgia. This country is a huge overseas investor, and tax arrangements that are as reciprocal as possible under these double taxation treaties overcome unnecessary bureaucracy.
The treaty achieves no source-state taxation on dividends—provided, I understand, that the UK company owns 50 per cent. of the Georgian subsidiary, with a minimum investment of £2 million. I presume that that is £2 million overall, not £2 million per annum. I am sure that that is right, but the Paymaster General will be able to satisfy the Committee and me on that point.
Some tax will be withheld on interest and royalties. Will the Paymaster General say a few words about that and the differing rates? If we are to lose out—I should not put it so crudely—will she say whether there will be complete reciprocation on withholding tax on interest and royalties?
Georgia, I understand, has a wealth tax. Fortunately, there is no similar UK tax to set against that. I do not know whether companies are liable to that wealth tax, but certainly any individual in Georgia who is liable to it will not receive any tax relief in this country. I presume that unilateral relief will not be available because there is no similar or identical tax in this country. I am sure that the Paymaster General will confirm that.
I shall say a few words about the exchange of information. The treaty follows the old OECD model. I understand the reason for that. A new model has been agreed, and I wonder whether by some subsequent protocol we will seek to improve the treaty by incorporating the new model into it. It would help if the Paymaster General explained the essential differences between the old model, which we are incorporating in the treaty, and the new one. When it comes to the exchange of information, a balance has to be struck between confidentiality and guarding against fraud, tax fraud and money laundering.
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Can the Paymaster General say a few words about taxpayer safeguards? The Inland Revenue has an enviable and high reputation for protecting taxpayer confidentiality. Nevertheless, as we all know, where there is strong prima facie evidence of fraud, tax fraud or money laundering, it is sometimes in the national and international interest for information to be passed. I hope that the Paymaster General can reassure us that the evidence will have to be strong.
A new serious organised crime agency has been proposed for this country. As this is the first double taxation treaty that we have debated since that organisation was mooted, can the Paymaster General say a few words about the level of liaison that there will be with that agency, and about the ranks of the individuals in the Inland Revenue who will liaise with the serious organised crime agency and who will be able to sanction the release of confidential information about taxpayers?
Finally, can the Paymaster General let us know when she anticipates that the Georgian Parliament will take the important step of ratifying the treaty? I welcome again the treaty and pay tribute to the Paymaster General and to the Inland Revenue staff who go to great lengths to negotiate such treaties, which are very much in the public interest.
