The
Committee consisted of the following
Members:
Cable,
Dr. Vincent
(Twickenham)
(LD)
Challen,
Colin
(Morley and Rothwell)
(Lab)
Farrelly,
Paul
(Newcastle-under-Lyme)
(Lab)
Gauke,
Mr. David
(South-West Hertfordshire)
(Con)
Goldsworthy,
Julia
(Falmouth and Camborne)
(LD)
Heald,
Mr. Oliver
(North-East Hertfordshire)
(Con)
Hogg,
Mr. Douglas
(Sleaford and North Hykeham)
(Con)
Jenkins,
Mr. Brian
(Tamworth)
(Lab)
Kennedy,
Jane
(Financial Secretary to the
Treasury)
Laxton,
Mr. Bob
(Derby, North)
(Lab)
Mudie,
Mr. George
(Leeds, East)
(Lab)
Mullin,
Mr. Chris
(Sunderland, South)
(Lab)
Newmark,
Mr. Brooks
(Braintree)
(Con)
Penrose,
John
(Weston-super-Mare)
(Con)
Skinner,
Mr. Dennis
(Bolsover)
(Lab)
Watts,
Mr. Dave
(Lord Commissioner of Her Majesty's
Treasury)
Wright,
David
(Telford)
(Lab)
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
4.30
pm
The
Financial Secretary to the Treasury (Jane Kennedy):
I beg
to move,
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
obligations, but it was always our intention to agree
new treaties with the successor states when the
opportunity arose. I am pleased to have the opportunity to bring the
first of those new treaties before the Committee today.
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.
4.39
pm
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
member of the OECD or the Council of Europe. I would be grateful to
receive an assurance that in this case there are no particular concerns
about Azerbaijan and the Ukraine. I have picked those countries because
they are neither EU nor European economic area states. They are also
not major north American countries, such as the USA or
Canada.
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.
Jane
Kennedy:
The hon. Gentleman is not a Chelsea
fan.
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.
4.48
pm
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?
4.49
pm
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
measures that were at variance with its own laws or administrative
practices, or, as I said, that it considered contrary to public policy.
That would not be required if the state considered that the taxation in
the applicant state was contrary to generally accepted taxation
principles.
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
request considers that that is not in line with generally accepted
taxation principles.
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.
Resolved,
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
Resolved,
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.