The
Committee consisted of the following
Members:†
Brokenshire,
James (Hornchurch)
(Con) †
Cable,
Dr. Vincent (Twickenham)
(LD) Cooper,
Rosie (West Lancashire)
(Lab) †
Davies,
David T.C. (Monmouth)
(Con) Fallon,
Mr. Michael (Sevenoaks)
(Con) †
Francois,
Mr. Mark (Rayleigh)
(Con) †
Goldsworthy,
Julia (Falmouth and Camborne)
(LD) †
Heppell,
Mr. John (Vice-Chamberlain of Her Majesty's
Household)†
Heyes,
David (Ashton-under-Lyne)
(Lab) †
Hoey,
Kate (Vauxhall)
(Lab) †
Kaufman,
Sir Gerald (Manchester, Gorton)
(Lab) †
McGovern,
Mr. Jim (Dundee, West)
(Lab) †
Morgan,
Julie (Cardiff, North)
(Lab) †
Primarolo,
Dawn (Paymaster
General)†
Reed,
Mr. Andy (Loughborough)
(Lab/Co-op) †
Selous,
Andrew (South-West Bedfordshire)
(Con) †
Vaz,
Keith (Leicester, East)
(Lab) Mark Egan, John Whatley,
Committee Clerks † attended
the Committee Third
Standing Committee on Delegated
LegislationWednesday
17 May
2006[John
Bercow in the
Chair]Draft Tax Information Exchange Agreement (Taxes on Income) (Gibraltar) Order 20062.30
pm
The
Paymaster General (Dawn Primarolo): I beg to
move, That the
Committee has considered the draft Tax Information Exchange Agreement
(Taxes on Income) (Gibraltar) Order
2006.
The
Chairman: With this it will be convenient to discuss the
draft Double Taxation Relief (Taxes on Income) (Botswana) Order 2006
and the draft Double Taxation Relief (Taxes on Income) (Japan) Order
2006.
Dawn
Primarolo: Good afternoon, Mr. Bercow. May I say what a
pleasure it is to see you in the Chair today. It is a lovely surprise,
and I am pleased to see that you have joined the Chairmen’s
Panel. I am sure that we all look forward to your using your expertise
to keep us in order.
As the Committee will know,
the European Union directive on the taxation of savings income was
agreed on 3 June 2003, and it came into effect on 1 July 2005. It
applies to savings income payments made in one member state to a
resident in another member state. It aims to combat cross-border tax
evasion by collecting and exchanging information about foreign
residents receiving savings income from outside their resident state.
European member states also agreed that the adoption and implementation
of the directive should be contingent on the application of the same
measures by certain dependent and associated territories of member
states and a number of third countries. It is to that agreement that we
return today. In the
United Kingdom, reciprocal agreements made under the taxation of
savings directive with the dependencies in question are given effect by
way of a tax information exchange agreement. We are debating the
Gibraltar agreement. At sittings last year, the Committee dealt with
all the other agreements.
The terms of
Gibraltar’s membership of the European Union, as a European
territory for whose external relationship the UK is responsible,
require it to apply EU directives in certain policy areas, including
direct taxation. The savings tax directive requires the application of
the measure in question between European Union member states, and it
therefore requires both the UK and Gibraltar to apply the measures to
residents of other member states. However, because Gibraltar and the UK
are not separate member states, the directive provides for no legal
basis for applying its measures to savings income passing between our
two jurisdictions. I shall not go into all the constitutional
arrangements: I see that a number of
hon. Members are nodding, so they obviously understand the importance of
having an agreement between us and Gibraltar. It was nevertheless the view
of the UK and Gibraltar, in the light of the directive’s
objectives, that we should introduce a pan-European application of the
measures. It was inappropriate that no equivalent arrangement existed
between our two jurisdictions. The UK and the Gibraltar Governments
therefore took steps to address the gap in the application of the
directive as quickly as possible. A joint statement was made to that
effect on 1 July 2005, and the UKand Gibraltar Governments
signed an agreement on19 December 2005, setting out the
details of the
arrangements. Under
those arrangements, Her Majesty’s Revenue and Customs will
automatically provide information to the Government of Gibraltar on the
UK savings income of Gibraltar tax residents; and the Government of
Gibraltar, in line with the approach taken by three other EU member
states and several non-EU jurisdictions, will apply a withholding tax
to the Gibraltar savings income of UK tax residents during the
transitional period of the directive, as provided by the directive, and
pass the tax withheld to HMRC. The Government of Gibraltar adopted the
legislation giving effect to that agreement on 30 March 2006. Today, we
seek the Committee’s approval of the agreement in order to give
effect to the arrangements in the UK.
I turn now to the double
taxation agreements. As the Committee will know, they are designed to
relieve double taxation where income arises in one country, flows to a
resident of another country and would otherwise be taxed in both
countries. In order to achieve that, each country agrees to limit or
forgo its taxing rights and, where appropriate, to give credit for the
other country’s tax. Tax treaties also help businesses to plan
their investments; they provide certainty in their tax treatment. They
are enormously important, both for Revenue authorities and for
business. The United Kingdom has, for a considerable time, been
committed to maintaining and developing its network of double taxation
agreements and conventions.
The new treaty with Botswana
replaces the one that was signed in 1977—the oldest of the
Botswana current conventions. Renegotiation was initiated by Botswana,
which felt that the existing double taxation agreement no longer met
its needs. In particular it wanted to secure the right to withhold tax
from technical fees paid by Botswanan residents to UK residents. That
is not in the Organisation for Economic Co-operation and Development
model tax convention, which the UK does its best to follow in such
negotiations, so it is not something that the UK would seek. However,
it is important to some developing countries, including Botswana. We
have agreed it with other developing countries, so saw no reason not to
agree to Botswana having the same provisions.
In return for agreeing the tax
on technical fees, we have secured reductions in the rate of
withholding tax on dividends and interest. We have also included some
updated anti-abuse provisions and improved the exchange of information
article. In addition, the exchange of notes that was signed at the same
time as
the convention provides the UK with protection against possible abuse by
companies using Botswana’s new offshore financial services
regime. It does that by requiring Botswana to renegotiate the treaty
with a view to excluding such companies from the scope of the double
taxation treaty if the rate of Botswanan tax that they pay is reduced
in future. That is a safeguard to enable us to have a protocol that
complements the double taxation agreement. Turning to Japan, the Japanese
ambassador and I signed a new treaty with an accompanying protocol and
exchange of notes on 2 February. Those instruments will replace the
treaty between the United Kingdom and Japan that was signed in 1969.
The new treaty both reflects and is an important element of the
transformed economic relationship between the United Kingdom and Japan
over the past 40 years. Japan’s economy experienced remarkable
growth until 1990, and since economic problems in the early 1990s, it
has been growing strongly, thanks to healthy exports, business
investment and solid growth in private consumption.
According to a recent Japanese
Government survey, Japanese consumers are now more confident than at
any time since the 1990s—a factor that bodes well for UK exports
to Japan. Japan is the UK’s largest market after Europe and the
United States, and Britain is Japan’s eighth largest market. UK
exports to Japan have increased by more than 50 per cent. in the
past10 years, and in 2004 they reached £7.7 billion,
split equally between goods and services. Japan is the world’s
second largest economy and is now more open than ever to buying
technology services and high quality goods from overseas.
Trade flows are only part of
the picture. There are nearly 1,500 Japanese corporate investors in the
UK, and their total investment amounted to £12 billion in
2004—a fifteenfold increase over the past 20 years. Those
companies have projects in software, telecommunications, e-business,
pharmaceuticals, financial services and all the major undertakings that
are part of our economy.
UK companies’ total
investment in Japan was£6 billion in 2004—a
tenfold increase over the past20 years—and, again, was
in sectors such as securities and financial assets, aerospace and
biotechnology. There are also large portfolio investment flows between
our two countries, with residents of each holding financial assets
worth more than £200 billion in the other country.
I am confident that the new
treaty will be welcomed by British business, as it will allow trade and
investment to continue to flourish between the United Kingdom and
Japan. The agreement has several improvements over the present treaty,
the most important of which is the reduction in source-country
withholding tax on income from cross-border investments. As compared
with a 10 per cent. rate in the present treaty, withholding tax will be
eliminated in the new treaty on four major cross-border income
flows. Another
important change in the new treaty is the addition of anti-abuse rules,
in the form of anti-treaty shopping provisions in the passive income
articles, improved provision of counter profit stripping through
excessive interest or royalty payments and a limitation
on benefits article. Other features of the treaty are that it makes the
provision for gains on share options, eliminating double taxation by
allocating taxing rights between the two countries according to the
amount of time spent in each between the grant and the exercise of the
option, and confirms the UK’s right to tax temporary
non-residents on capital gains made abroad.
The treaty sets out
helpful rules to clarify the new treatment of income received by and
through fiscally transparent entities operating in each country, and
obliges a country to adjust the profits arising to one of its resident
companies where the other country has made an appropriate transfer
pricing adjustment.
I am pleased to be introducing
the agreements. I am confident that they will be welcomed by British
business and will aid competitiveness. I commend the orders to the
Committee and will be happy to respond to any
questions.
2.42
pm Mr.
Mark Francois (Rayleigh) (Con): It is agenuine
pleasure to serve under your chairmanship,Mr. Bercow. We were
both active in Conservative youth politics well back in the last
century, so we go back a long way. For the reassurance of the Paymaster
General, however, I should say that I am sure that I can expect no fear
or favour as a result of that
relationship. We are
debating two tax treaties and a related tax information exchange
agreement. I thank the Paymaster General for her courtesy in arranging
a briefing for me on these admittedly quite complex orders. I should
also like to thank her officials for patiently taking me through some
of the issues and highlighting areas of importance.
The legislative basis for the
instruments at the UK end is the Income and Corporation Taxes Act
1988—or ICTA 1988, as it is more popularly known in tax
circles—which facilitates the passing of such treaties and
instruments by order. However, we are in the midst of debating the
Finance Bill in Standing Committee, and I note that clauses 174 to 177
permit the potential exchange of information on other matters as well,
including indirect taxation. I mention that because the Japanese treaty
includes provision to take advantage of those provisions in the Finance
Bill, should those clauses be agreed. It is important in that context
to note that the Japanese order could go wider, assuming those clauses
are successful. To
take the three measures in turn, beginning with the Gibraltar
agreement, I declare an interest, in that I am proud to be a member of
the all-party group on Gibraltar and have visited the rock as a guest
of the Government of Gibraltar, as have others here. As Gibraltar is
effectively part of the United Kingdom member state of the European
Union and its people vote in our European elections as a result, this
measure takes the form of an agreement rather than a treaty between
member states, as the Paymaster General said. None the less, its
provisions are binding on both parties.
As the Paymaster General said,
this agreement was necessitated by the EU savings directive. It is
similar in form to that already negotiated with other jurisdictions
such as Jersey, Guernsey and the Isle of Man. The agreement permits the
Government of Gibraltar to
exchange information with the tax authorities in the UK and vice versa,
and also in certain circumstances to opt to levy a withholding tax.
That provision will pertain until the transitional period negotiated
under the directive expires. Forgive the complication, but that is the
state of play. I
understand that there is an additional nuance here in the form of an
additional transitional provision which we agreed at the request of the
Government of Gibraltar. That is to provide a special one-year
phasing-in period in respect of certain fixed-interest securities. That
is something on which Gibraltarians were apparently keen and to which
the UK acceded. Will the Paymaster General give us a brief explanation
of what was behind the Gibraltarian intent and why the United Kingdom
Government felt happy to accede? It is a particular feature—I
will not say anomaly—of this agreement and not of the other
two. As you may
recall, Mr. Bercow, a few years ago relations between the United
Kingdom Government and the Government of Gibraltar became somewhat
strained as a result of negotiations undertaken with Spain over the
future of the Rock, in which the people of Gibraltar were not
effectively included. I spent many an hour in Westminster Hall and
indeed in the main Chamber with other members of the all-party group
debating that issue.
For the avoidance of doubt, I
do not intend to reprise all of that this afternoon; tempted though I
may be, Mr. Bercow, I know that I would never get it past you. It is
really FCO, not Treasury business. There were two reasons for raising
the issue. First, I could not resist; secondly, it is worth pointing
out in the context of this agreement that relations between the UK and
the Rock appear to have improved somewhat in terms of the spirit under
which the agreement was negotiated. Given what went wrong a few years
ago, it is worth placing that on the record.
In that connection, I
corresponded with Mr. Albert Poggio OBE, who was the United Kingdom
representative of the Government of Gibraltar on the matter. He wrote
back the following reply dated 4
May: “Dear
Mark, Thank you for
bringing to my attention the draft statutory instruments number 2006
titled ‘Income Tax’. I am happy to confirm that this
agreement has been negotiated with the relevant authorities of
Gibraltar and is considered to be fair and reasonable and therefore
have no objections to
raise”. It is important
to record that, at least in terms of the negotiation of this agreement,
the spirit between the UK and the Rock is more positive than it was a
few years ago, which I welcome.
I turn to the treaty with
Botswana, which is a formal tax treaty with another state. It
supersedes the previous agreement with that country, which was signed
in 1977. The explanatory notes which accompany that treaty give a good
summary of the potential benefit of double taxation treaties. It is
encapsulated in the following terms:
“Double taxation
conventions aim to eliminate the double taxation of income or gains
arising in one State and paid to residents of another State. They do
this by dividing the taxing rights that each partner has under its
domestic law over the same income and gains. They provide additional
protection for
taxpayers by specific measures combating discrimination in tax
treatment. More generally, conventions benefit the taxpayer by ensuring
certainty of treatment and, as far as possible, by reducing compliance
burdens”. That is a
good summary of why these agreements between states can benefit all
parties. The
Organisation for Economic Co-operation and Development—the
OECD—has a model double taxation treaty, which it encourages
countries to adopt. As I understand it, this model is used in both the
treaty with Botswana and the other instrument relating to Japan at
least as the starting point as the basis for negotiations. Apparently
the Government of Botswana initiated the request that the previous 1977
agreement with the United Kingdom should be updated, as the Paymaster
General alluded to. From their perspective, that would help to
stimulate investment into a developing country, which I suspect that
all members of the Committee would welcome, not least yourself, Mr.
Bercow—without wishing to draw you directly into the
debate—because I know that you have a strong interest in such
matters. In return, the Government of Botswana are apparently reducing
their rates of withholding tax, which could be of potential benefit to
the UK. So it is fair to say that we are getting something in
return. Will the
Paymaster General confirm, for the record, the likely extent of the
reduction? In other words, what will we gain back from the Government
of Botswana? She talked in general about the benefits, but it would be
handy to have that on the record. Will she also tell the Committee what
stage the parallel ratification process in Botswana has reached, and
therefore when we expect the treaty to go live in both jurisdictions? I
would like an update on
timings. The treaty
with Japan is a parallel agreement to the one with Botswana, in a
sense. The principle is similar, but realistically it is likely to
cover a much larger and greater level of trade. The Paymaster General
helpfully gave the Committee the statistics on the extent of our trade
relationship with Japan, so I do not propose to repeat them, but
clearly it is
considerable. There
is an interesting point on that treaty. Historically, the Japanese have
been slow to make such agreements. It is fair to say that it is not
always the easiest of countries with which to negotiate. Apparently,
the trail was blazed several years ago by our cousins from the United
States; they got there first, but we have got there second. I am keen
to understand from the Paymaster General why Japan was so keen to
strike such an agreement with us at this time, given perhaps its
historical reticence. Before we pass this into law, it would be helpful
to understand the Japanese rationale for coming to the
table. In addition, I
understand that although the treaty is based on the OECD agreement, Her
Majesty’s Treasury requested the inclusion of certain
anti-avoidance provisions. We try to insert that clause into most
double-taxation treaties, above and beyond what is laid out in the OECD
model. Apparently, in return, the Japanese made a reciprocal request
for certain anti-avoidance provisions that they favour for their own
reasons. However, as I understand it, their anti-avoidance provisions
are much longer than ours, which makes a change for Her
Majesty’s Treasury—
they came up with a more wordy version than ours—and by their
nature they are quite
prescriptive. I would
like an assurance from the Paymaster General that the anti-avoidance
measures that the Japanese have asked us to adopt will not be overly
burdensome on British business so that we do not sign up to something
that we believe will be overly burdensome on our companies and their
ability to trade with Japan. Will she provide the Committee with
reassurance on that important point before we are tempted to pass the
measure into the
law? On timings, the
accompanying explanatory notes suggest that there is a considerable
sense of urgency in seeking approval for this treaty. It said that it
was “vitally important” that we be able to take advantage
of the measures as soon as possible. That is fairly firm language for
Her Majesty’s Treasury. Will the Paymaster General explain
briefly why we consider it “vitally important” that we
pass it this afternoon? I understand that it is currently going through
parallel ratification in the Japanese Parliament, the Diet. Will she
give us an update on timings? If we pass the order this afternoon, when
does she anticipate that it will come into force? I think that that
answer may be 2007, but it would be helpful to have that confirmed for
the record. To
summarise, the instruments seem reasonable in principle, and Her
Majesty’s Opposition do not intend to oppose them this
afternoon. The agreement with Gibraltar on the exchange of information
is comparable with those with Jersey, Guernsey and the Isle of Man, and
appears to have been negotiated in a more positive spirit than that
which existed between the United Kingdom and the Rock just a few years
ago. The
double-taxation treaties with Botswana and Japan will hopefully
increase our trade with both countries, in the first instance,
stimulating growth in a developing country, and in the second, boosting
our trade with one of the largest economies in the world. Let us hope
that that will be of considerable benefit to British exporters. These
are important treaties. On principle, the orders should not go through
merely on the nod, which is why I have attempted to raise at least a
few questions with the Paymaster General. I would be grateful if she
would answer them in her usual thorough manner when she sums
up. 2.55
pm Julia
Goldsworthy (Falmouth and Camborne) (LD): Thanks to the
Finance Bill, it is an increasingly frequent pleasure to encounter the
Paymaster General and the hon. Member for Rayleigh (Mr. Francois). Of
course, it is also a pleasure to welcome you to the Chair, Mr.
Bercow. I would like
to thank the Paymaster General and her officials for the offer of
advice and the helpful telephone call yesterday on these technical
treaties. I would like to start with the double taxation treaties and
finish with the agreement on
Gibraltar. The
purpose of double taxation relief is clear. It removes or reduces the
disincentive that double taxation represents to outward investment. It
brings benefits to business because the conventions protect against the
risk of a double tax burden, provide certainty of treatment in respect
of cross-border
economic activity, and prevent fiscal discrimination against UK business
interests
abroad. Obviously,
such relief brings benefits to the Exchequer as well. It counters
avoidance and evasion and provides for greater exchange of information
between the various revenue authorities. It also promotes closer
economic and political
ties. As has already
been said, the treaties under discussion today follow the OECD model,
which I understand the UK was instrumental in developing and
formalising. That model deals with how taxing rights are allocated
between resident and source countries and requires the resident country
to eliminate double taxation if there are competing tax rights. It is
no surprise, given the UK Government’s involvement in developing
the OECD model, that both of these taxation treaties are basically
founded on that
structure. We have no
major issue on the order for Botswana. I understand that the request
for renegotiation came from the Government of Botswana, who wish to
update their 1977 treaty, and that it followed a series of requests
that they made to other countries to update their respective double
taxation
treaties. The point
has already been made that the part that deals with the technical
facilities fee is slightly different from the OECD model. I thank the
Paymaster General for explaining exactly how it works and what the quid
pro quo is, but, to aid my understanding as much as anything else, I
would be interested in further explanation of the rationale behind the
decision on how the technical fees are treated and why it is
beneficial. On the
double taxation treaty with Japan, I am not sure whether I am required
to declare an interest. I lived in Japan for a year. I was a student
there, so I am not sure that I was paying any tax at all, let alone
having to understand the intricacies of the 1969 double taxation
treaty. As has been said, Japan’s desire to renegotiate the
treaty is an important signal that it wants a new economic approach and
is a sign of improving relations with that
country. Again, the
treaty largely follows the OECD model. It replaces the 1969 treaty,
which very much focused on the source state in dealing with
cross-border income flow. The UK approach has been to try to restrict
the rights of the source state as compared with the resident state, and
I understand that in this treaty the source country withholding taxes
have been eliminated in areas such as royalty income, certain interest
income, including interest income earned by financial institutions, and
dividend income paid to parent companies with a controlling interest in
the paying company. The result will be that British companies with
investments in Japan will become more profitable, and of course I
welcome the additional anti-abuse measures. For those reasons, I have
no reason to oppose the
agreement. I can
think of nothing that is particularly controversial in the Gibraltar
tax information exchange agreement. The aim is to ensure that the
measures in the Council directive on savings income in the form of
interest payments are pan-European. At present, Gibraltar falls through
a gap that was left in the directive, so this tax information exchange
agreement
has been drafted to facilitate the exchange of information between tax
authorities for direct tax purposes and to counter cross-border evasion
and avoidance. Parallel to that are the withholding tax arrangements
for the transitional part of the
directive. The
agreement specifies confidentiality rules surrounding the agreement.
The information is confidential and can be used only for direct
taxation purposes, and can be disclosed only to certain specified
persons. As one of the wider aims of the double taxation treaties is to
aid the sharing of information, I should like to know whether similar
safeguards are in place to ensure that any information exchange remains
for the benefit of the Revenue and is solely for taxation
purposes. I notice
that article 14 of the Gibraltar agreement says that information may be
used for other purposes if the relevant government authorities give
written consent. I should like to have clarification of the
circumstances in which those authorities would give such consent, what
kind of bodies might receive consent, and for what purposes the
information could be
used. Those two,
straightforward questions apply particularly to the Gibraltar agreement
but to the other double taxation agreements as well, and I hope that
the Minister will clarify the position in relation to
them. 3
pm James
Brokenshire (Hornchurch) (Con): I rise briefly to support
the double taxation relief order relating to Botswana. I declare an
interest, as I am a member of the all-party parliamentary group on
Botswana and was recently there as a guest of the Botswana Government,
so I am pleased that we are attempting to facilitate greater trade and
investment with that country. Botswana is seeking to diversify its
economy to a greater extent—there is the issue of financial
services—and to reduce its dependence on natural resources,
particularly diamonds. It is cognisant of the need to develop its
economy further, to expand job opportunities, and to seek to address
some underlying issues within the economy such as that of AIDS, which
is a terrible problem for that country with regard to its long-term
economic
well-being. David
T.C. Davies (Monmouth) (Con): Does my hon. Friend agree
that one of the reasons to support this type of order, particularly
when the order relates to third-world countries, is that we are far
more likely to be successful in increasing living standards if we
encourage a regime that allows trade and free flow of capital, rather
than if we simply hand out money that sadly is all too often syphoned
off by people who already have
plenty?
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