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Standing Committee Debates

Draft Tax Information Exchange Agreement (Taxes on Income) (Gibraltar) Order 2006

The Committee consisted of the following Members:

Chairman: John Bercow
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 Legislation

Wednesday 17 May 2006

[John Bercow in the Chair]

Draft Tax Information Exchange Agreement (Taxes on Income) (Gibraltar) Order 2006

2.30 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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