House of Commons
|Session 2006 - 07|
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Public Bill Committee Debates
Draft Double Taxation Relief (Taxes on Income) (Macedonia) Order 2007
The Committee consisted of the following Members:
Sara Howe, Committee Clerk
attended the Committee
Second Delegated Legislation Committee
Tuesday 10 July 2007
[Mr. Bill Olner in the Chair]
Draft Double Taxation Relief (Taxes on Income) (Macedonia) Order 2007
That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Macedonia) Order 2007.
The Chairman: With this it will be convenient to discuss the draft International Mutual Administrative Assistance in Tax Matters Order 2007.
Jane Kennedy: May I say what a pleasure it is to serve under your chairmanship, Mr. Olner? It is a pleasure to see you in your position and a double pleasure for me to be in my position working with you. We shall be going down a very well-worn route, and this exercise has been gone through many times before, but I shall try to answer any questions about the specifics as best I can, and I hope that colleagues will find the issue interesting.
The taxation orders deal with a new comprehensive double taxation agreement with Macedonia and the provisions of the Council of Europe and Organisation for Economic Co-operation and Development multilateral convention on mutual administrative assistance. I am delighted to be able to introduce them and to discuss them together, but if you will permit me, Mr. Olner, I will speak first about the Macedonia order.
Double taxation treaties aim to relieve double taxation when income arising in one country flows to a resident of another country and would otherwise be taxable in both countries. Under such a treaty, each country agrees to limit or forgo its taxing rights and, where appropriate, to give relief for the other countrys tax.
Tax treaties help businesses to plan their investments by providing certainty about tax treatment. They also provide for the exchange of information between the two tax authorities and for consultation between them to resolve difficult cases through mutual agreement.
We are committed to maintaining and developing the UKs network of double taxation treaties. The Committee might be interested to learn that we currently have comprehensive treaties with 113 countries or territories, which is one of the worlds largest networks.
The new treaty with Macedonia was signed in Skopje on 8 November 2006 by my right hon. Friend the Member for Ashfield (Mr. Hoon), the then Minister for Europe, and by Mr. Nikola Gruevski, the Macedonian Prime Minister. It will replace the 1981 convention with the former Yugoslavian republic. After independence, Macedonia agreed to adhere to Yugoslavias treaty
Our bilateral trade and investment are small in absolute terms, but the UK is an important trading partner for Macedonia. In 2006, UK exports totalled £17.6 million and imports totalled £25.5 million. UK exports to Macedonia consist mainly of clothing, textiles, office machinery, vehicles and telecommunications apparatus.
The agreement covers the usual types of income included in tax treaties, such as property rents, business profits, income from international transport, dividends, interest, royalties, capital gains, employment income and pensions. Of course, it also contains all the usual safeguards to deter tax avoidance and evasion.
The new treaty provides benefits by reducing the withholding of taxes on dividends, interests and royalty payments, as compared with the existing treaty. That will boost cross-border investment and be welcomed by businesses in Macedonia and the UK. The new treaty will also play a significant role in cementing and developing our bilateral relations.
I turn now to the draft International Mutual Administrative Assistance in Tax Matters Order 2007these statutory instruments have wonderful titles. The purpose of the order is to incorporate into UK domestic law the provisions of the joint Council of Europe and OECD convention on mutual administrative assistance in tax matters.
The Government first announced our intention to ratify the convention in the November 2005 pre-Budget report. Following the introduction of the necessary enabling legislation in the Finance Act 2006, when the issue was debated at length, the UKs ambassador to the OECD signed the convention on behalf of the UK on 24 May 2007. Copies of the convention have been placed in the Library of the House of Commons, and I have arranged for copies to be made available to every member of the Committee to assist our deliberations. The existing parties and signatories to the convention are, in alphabetical order, Azerbaijan, Belgium, Canada, Denmark, Finland, France, Iceland, Italy, the Netherlands, Norway, Poland, Sweden, Ukraine and the United States.
The order will extend the UKs capacity to obtain assistance in the enforcement of our national taxes, in particular through the exchange of information. We in the UK are at the forefront of the drive to promote tax information exchange as widely as possible because it is the most effective way to combat international tax evasion and avoidance. The UK already has more than 100 bilateral agreements that provide such exchange. The new treaty with Macedonia adds to that tally.
There is already a well-established framework in the EU for mutual assistance on direct and indirect taxes, including for the recovery of debts and the service of documents, as well as information exchange. By ratifying the convention, the UK will be able to seek such assistance from, and provide such assistance to, a number of non-EU states. In particular, ratification will allow us for the first time to exchange information with a number of non-EU states in the field of VAT and other indirect taxes.
VAT is a tax on consumption, so it should be paid at the rate voted for by the Parliament in the country in which consumption occurs. As a result of globalisation, deregulation and technological advances, a range of services can now routinely be purchased by private individuals from suppliers in other jurisdictions, including suppliers outside the EU. Extending mutual assistance arrangements with such countries will support our efforts to ensure compliance and to help to tackle tax fraud.
Ratification is, of course, only a partial answer to the problem of VAT fraud, and we shall continue to look for other potential avenues of co-operation outside of the EU. We might, for instance, enter into other bilateral agreements similar to the new Macedonia treaty. My hon. Friends might wish to note that the Government expect to bring a number of such agreements before the House in the coming months.
I come to the detail of the arrangements referred to in the draft order. The convention contains provisions on exchange of information, simultaneous tax examinations, assistance in tax collection, and assistance in the service of documents. Naturally, the convention balances the facility for co-operation between the tax authorities with respect for the fundamental rights of taxpayers. It contains important safeguards on the confidentiality of taxpayer information. In particular, information covered by the convention is to be treated as confidential in the receiving state in the same manner as information obtained under its own domestic laws, or under the conditions of secrecy that apply in the supplying state, if they are stricter. It is to be noted that the stricter of the two arrangements will apply. The convention also sets out instances in which states are not obliged to provide assistance, such as when a states domestic laws would not allow it to obtain information on public policy grounds, or when the tax liability in question is considered contrary to generally accepted taxation principles.
I am pleased that we are introducing the Macedonia agreement now and that we are taking the necessary steps to ratify the Council of Europe-OECD convention. I commend the draft orders to the Committee and I shall be happy to do my best to answer questions from hon. Members.
Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to serve under your chairmanship once again, Mr. Olner. I enjoyed that experience during the Committee stage of the Statistics and Registration Service Bill, and I know that you will keep us in order. Before I turn to the specific provisions in the instruments, may I formally welcome the Financial Secretary to her new Front-Bench post? She is well regarded and popular among hon. Members on both sides of the House and I look forward to working with her in future.
The Ministers predecessor in role, if not in title, was the former Paymaster General, the right hon. Member for Bristol, South (Dawn Primarolo), who is now a Minister of State at the Department of Health. She performed her former role with some distinction for many years and we wish her well in her new post. She could occasionally be combative, but she nevertheless remained popular and was something of an institution in the Treasury by the end of her time there. I congratulate her on her ultimate release from her former role.
I shall begin with the order on Macedonia and raise one or two technical points. First, I understand that the greatest practical change on dividends compared with the 1981 Yugoslavia agreement is a new zero per cent. rate on dividends when the beneficial shareholder is either a company owning at least 25 per cent. of the capital for 12 months or more, or a pension fund. That is set out in article 10(3) of the order. I thank the Financial Secretary and her officials for the briefing that I received from them. I know that the provision is a substantial advance on what was in place before, and I would be grateful for guidance on whether, at a practical level, many transactions will benefit from the zero per cent. band.
Secondly, how does the treaty compare with other double taxation treaties entered into by Macedonia? Do the terms that we have obtained compare favourably with those secured by other countries?
I have a technical point on the protocol in the order that has been agreed with Macedonia. I know that paragraph (2) contains important provisions on the treatment of partnerships that protect the position of the Exchequer. Will the Financial Secretary confirm that the protocol is legally binding to the same extent as if it had been in the treaty, and that it does not, to coin a phrase, have the legal effect of The Beano? Perhaps she can explain why that provision is not contained in the treaty itself.
Both the Financial Secretary and I are new to double taxation orders, but I believe that it is almost standard form on these occasions for an Opposition Member to raise the question of whether the Government are satisfied with the confidentiality procedures of the other contracting state and for the Government Minister to respond by saying that they are. If I may, I should like to go through that formality.
Finally on the Macedonia order, I would be grateful for an update on the progress that has been made on double taxation treaties with other former Yugoslavian successor states. The Financial Secretary mentioned that the Governments intention is to enter into double taxation agreements with those other states.
I turn to the mutual administrative assistance order. As the Financial Secretary said, we debated many of the issues surrounding it on 20 June 2006 in the Standing Committee that considered the Bill that became the Finance Act 2006. My hon. Friend the Member for Chipping Barnet (Mrs. Villiers), the former shadow Chief Secretary, raised a number of points on that occasion, so I have no intention of rehearsing the arguments again.
One particular point that is worth mentioning, however, is the concern raised by several independent expert organisations, such as the Institute of Chartered Accountants in England and Wales, the Chartered Institute of Taxation and the Law Society, that the convention might mean enforcing tax judgments made by jurisdictions that do not have the same respect for human rights, due process and the general integrity of the tax system as we do. As I understand it, there is no concern about confidentiality, which is explicitly addressed in section 173(5) of the Finance Act 2006.
I am sure that the Financial Secretary will make the point that to be a party to the 1988 convention on mutual administrative assistance, a state must be a
There is a wider point that relates to new signatories to the 1988 convention, even if we accept that such a state must be a member of the Council of Europe. What would happen if Russiathe Russian Federation is a member of the Council of Europebecame a signatory to the convention? What would the process be and how would Parliament have a role in deciding whether that was acceptable? Would there be a further statutory instrument, or an opportunity for Parliament to vote on the issue? I mention Russia because, without naming names, there are a number of Russian oligarchs in the UK.
Mr. Gauke: I am not a Chelsea fan, but there is one name that springs to mind in relation to Chelsea. I am an Ipswich Town supporter and there is no sign of a Russian oligarch anywhere near there as far as I can see.
Will the Financial Secretary inform the Committee what process would be used? There would be a potential for controversy if Russia sought to use UK authorities to collect debts from a resident in the UK who is or was a Russian national. That would obviously be a sensitive matter.
I am sure that the Financial Secretary can confirm whether, when enforcing debts, there is no right of appeal within the UK. I understand that to be the case and that this is a question of a person exhausting their rights of appeal within the other contracting state. Once that has happened, there is little that can be done in the UK and someone cannot appeal separately. If I have misunderstood that, I would be grateful for further clarification.
A point made during proceedings on last years Finance Bill was that there used to be a convention dating back to the Government of India, Ministry of Finance v. Taylor case of 1955 under which courts in the UK would not enforce the tax laws of other countries. As I understand it, that principle has been abandoned, but I would be grateful if the Minister would confirm that.
Finally, on costs and benefits, what will happen if Her Majestys Revenue and Customs is bombarded with requests? Is the Financial Secretary confident that that could be dealt with out of existing HMRC resources, and what would happen if applications were to flood in? Will HMRC be able to prioritise? I know that the benefits are difficult to quantify, given their nature, but can she estimate what she hopes we will gain from the convention by being able to obtain more information from other convention states, or indeed being able to enforce debts in other convention states? I would be grateful if such figures were available.
Mr. Oliver Heald (North-East Hertfordshire) (Con): May I ask one question? Does the draft International Mutual Administrative Assistance in Tax Matters Order 2007 apply only to individual casesso that information on an individual taxpayer can be exchangedor does it apply to a class of cases? Is there any prospect that large numbers of taxpayers, as a group, will have their information matched with another country?
Jane Kennedy: I welcome the hon. Member for South-West Hertfordshire to his new position. I congratulate him on his appointment and look forward to working with and against him across the Chamber and in Committee. I wish him long and happy enjoyment of his position in opposition.
May I also take this opportunity to pay tribute to my right hon. Friend the Member for Bristol, South? When I came into this post, I was acutely aware of how extremely competent and knowledgeable on tax matters she was, as the hon. Gentleman said. She is thus a very tough act to follow. I wish her well in her new post, which I know she will perform very competently indeed.
The hon. Member for South-West Hertfordshire asked a number of questions, as did the hon. Member for North-East Hertfordshirewe have a Hertfordshire takeover here. I will do my best to answer them. If I miss any points, I will read Hansard afterwards and certainly write to the hon. Gentlemen. If I write to them, I will copy any letter to every member of the Committee.
The hon. Member for South-West Hertfordshire asked a couple of questions about article 10 of the Macedonia order, in particular about how that aspect of the treaty compares with others that Macedonia has agreed with different countries, and how many companies will benefit from the provision. The rates in article 10 represent a good deal for UK residents and match those obtained from Macedonia by other comparable countries. The provisions include the elimination of withholding tax on dividends paid to companies that hold a 25 per cent. share of the subsidiary company paying the dividends, and the elimination of withholding tax on dividends paid to pension schemes. Only a handful of countries have achieved a zero withholding rate for direct investors. To date, as far as I am aware, only Denmark has achieved a zero rate for pension schemes.
The hon. Gentleman asked how many companies would benefit from the article 10 changes. As one would expect, that is difficult to estimate, as we hope that the treaty will encourage trade and investment. However, the zero rate will benefit UK companies with subsidiaries in Macedonia. Of course, the pension provisions will also benefit UK pension funds that invest in Macedonia.
The hon. Gentleman asked about safeguards against the enforcement of tax claims from jurisdictions with systems of tax process that are perhaps not up to UK standards. I assure him that the appropriate safeguards are already provided for in the articles of the convention. For example, a state would not be required to implement
The hon. Gentleman asked about the right of appeal. As far as I am aware, it is as he described, but I will check that his description is correct. If any clarification is required, I will pass it on to him.
Since independence in 1991, Macedonia has signed treaties with 27 jurisdictions in the EU and beyond, including France, Germany, the Netherlands, China and Turkey. Additionally, Macedonia continues to honour about half a dozen older treaties agreed by Yugoslavia prior to 1991. However, as one might expect, there is considerable variation among these treaties. The key point is that the new treaty with the UK compares favourably with them all. In particular, no other country has obtained a significantly better overall deal on withholding rates. My compliments thus go to the officials who have been engaged in those negotiations. The hon. Gentleman asked whether the protocol was legally binding. I can assure him that it is, in so far as it relates to partnerships.
The hon. Gentleman asked what we were doing about double taxation agreements with the other former Yugoslav republics. We have held negotiations with Serbia, Croatia and Slovenia. Agreement has been reached at official level on a new treaty with Slovenia and I hope that it will be possible to sign that agreement before the end of the summer. If Slovenia is having better weather than we are, I volunteer to be the representative who goes to sign it. Talks with Serbia and Croatia are continuing.
The hon. Gentleman also asks if we are satisfied that Macedonia safeguards information to the same acceptable standards of confidentiality that we use. Yes, we are satisfied. We have had no problems under the existing 1981 treaty, so we are confident that that will continue to be the case.
Let me turn to the convention. The hon. Gentleman asked about human rights rather than confidentiality. I accept that that subject was explored at some length during debates on the 2006 Finance Bill. I assure him that our domestic law already provides that the UK may not provide information to another stateeven with the treatyunless we are satisfied that that country has provisions to safeguard the confidentiality of the taxpayer information that are of a standard no less strict that our own.
The convention that we are discussing also contains specific limitations on the use and onward disclosure of information received. Normally, only persons concerned with the assessment and enforcement of tax have access, so parties to the convention have a right to decline to provide information on public policy grounds, as I have said more than once, and when the state receiving the
The hon. Gentleman asked whether Parliament would have a say before arrangements under the convention were made with future signatories. I assure him that that would be the caseit is absolutely for the House to determine.
The hon. Gentleman also asked about two other countries. We have had a bilateral tax treaty with Azerbaijan since the mid-1990s and no problems have arisen to date. We also have a tax treaty with Russia. There were some problems a few years ago, but Her Majestys Revenue and Customs took steps to ensure that only reasonable and practical requests for information were made. The arrangements are now working well.
The hon. Gentleman asked two other questions. One escapes meI am having a senior moment. The other was about resources. HMRC tells me that it is confident that it can manage the additional number of information requests with existing resources.
I have remembered the other question. On the recovery of tax debts, our experience is that we make many more requests for assistance than we receive, and that is likely to continue to be the case. That is a fairly self-explanatory way of saying that this will be of enormous benefit to the UK. I thus commend the orders
Mr. Heald: I asked the right hon. Lady if the arrangements for administrative assistance could operate only in individual taxpayers cases, or whether it would be possible to take a class of taxpayers and ask for information to be matched with a database in another country.
Jane Kennedy: I apologise to the hon. Gentleman. I do not have an answer with me, but I can dig out some detail for him. If he will be happy for me to do so, I shall write to him and copy that reply to the members of the Committee.
I commend both orders to the Committee.
Question put and agreed to.
That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Macedonia) Order 2007.
Draft International Mutual Administrative Assistance in Tax Matters Order 2007
That the Committee has considered the draft International Mutual Administrative Assistance in Tax Matters Order 2007.[Jane Kennedy.]
Committ ee rose at one minute to Five o clock.
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