The Chairman: Before we begin formally, it will be convenient for gentleman Members to take off their jackets, if they so wish.

The Paymaster General (Dawn Primarolo): I beg to move,

It gives me great pleasure to see you in the Chair keeping us in order, Lady Winterton, and to introduce the order.

Double taxation treaties, as the Committee will be aware, are intended to relieve double taxation when income arises in one country, flows to a resident of another and would otherwise be taxable in both. To achieve that, each country agrees to limit or forgo its taxing rights and, where appropriate, give relief for the other country’s tax. Tax treaties also help businesses to plan their investments by providing certainty about tax treatment, and they provide for the exchange of information between the two tax authorities and consultation to try to resolve difficult cases by mutual agreement.

As you will know, Lady Winterton, following on from the previous Government, the Government have been committed to maintaining and developing the UK’s network of double taxation conventions. We currently have comprehensive tax agreements with112 countries and territories—one of the largest networks of tax treaties. This year, we have made good progress in negotiations on new and revised agreements with a number of countries. Earlier this year, this Committee approved new treaties with Botswana and Japan, both of which have now come into force.

The new treaty with Poland, which its Deputy Minister of Finance and myself signed on 20 July, will replace the existing one signed in 1976. Poland’s accession to the European Union in 2004 was the catalyst for the renegotiation of an old treaty that both sides agreed was in need of modernisation. A great deal has changed since 1976, and it was desirable to agree a new treaty that will better serve the new and deepening economic relationship between the two countries. That will include appropriate measures to protect taxpayers in both countries.

Poland is one of the largest European Union economies, and the relationship between Poland and the UK is of great importance. Bilateral trade and contacts are growing—in 2005, UK exports of goods and services to Poland exceeded £2.4 billion, making Poland the UK’s 24th largest export market. Polish exports to the UK were more than £2.7 billion, and by the end of 2004 UK companies had cumulatively invested £2.3 billion, making the UK the sixth largest investor in Poland. The British-Polish chamber of commerce in Warsaw has more than 350 members, covering a wide range of industries, and UK companies have been expanding their operations in Poland, notably in water management and pollution monitoring and the supply of refrigerants and specialist fibres to Polish businesses. I hope that members of the Committee will not ask me to expand on that specialist area.

Poland’s contribution to the economic life of the UK is no less visible. As hon. Members will be aware, workers from Poland are now making a valuable contribution to the UK economy, notably in thehealth, agriculture, catering and transport sectors. The agreement covers the usual types of income that are included in tax treaties, such as property rents, business profits, income from international transport, dividends, interest royalties, capital gains, employment income and pensions, and it contains the usual safeguards to prevent tax avoidance and evasion. The new treaty will provide valuable benefits in the reduction of withholding taxes on dividends and royalty payments, which will boost cross-border investment and, I am sure, be welcomed by business in Poland and the UK.

Another important feature of the new treaty is that it revises the rules governing income earned in the UK by Polish workers. Under the present arrangement, Polish people employed in the UK without being permanently settled here, and who pay tax here on their earnings, can face the burden of an additional tax bill when they return to Poland, even though Poland recognises the tax that those workers have already paid. Under the new treaty, however, Poland will exempt income where it has already been subject to tax in the UK. The new rules will therefore ease the tax burden on those workers without eroding the UK tax base.

I am pleased that we are introducing thisnew convention. I am confident that it will aid competitiveness and that it will be welcomed by British business. I commend the draft order to the Committee.

Mr. Mark Francois (Rayleigh) (Con): It is a pleasure to serve under your chairmanship, Lady Winterton. In order brazenly to attempt to curry favour with the Chair, may I say that you were absolutely robbed at Prime Minister’s questions earlier today? It is a travesty that we never got to question No. 11. I hope that you enjoy better luck in the ballot for next week.

I thank the Paymaster General for her courtesy in arranging a briefing for me on the contents of the tax treaty with Poland. In particular, I want to express my thanks to her officials in Her Majesty’s Revenue and Customs tax treaty team for their kindness and for the time they took to inform me about some of the details of the order.

I understand that the principal legislative basis for this measure at the UK end is the Income and Corporation Taxes Act 1988, or ICTA as it is more popularly known, which facilitates the passing of such agreements and treaties by order—the method that we are employing this afternoon. It is supported by section 173 of the Finance Act 2006, which facilitates the exchange of information across borders that might be relevant to the administration of the treaty in practice. That is the framework for what we are, hopefully, about to do.

The explanatory notes provide a good summary of the potential benefit of double taxation treaties:

In principle, therefore, such agreements are usually positive. Governments of both colours have, over the years, attempted to negotiate such agreements where possible. Not only do such agreements help to provide clarity, but they also help to facilitate commerce between the countries concerned. We should certainly like to see an increase in trade between the United Kingdom and Poland.

As the Paymaster General has said, the new treaty supersedes the previous UK-Poland treaty, which dates back to 1976, when Poland was not only not a member of the European Union, but still under communist rule as a part of the old Warsaw pact. I hazard a guess that some of the contracts for British companies in Poland with regard to environmental work, water and pollution concern cleaning up old airbases and military installations occupied by the Warsaw pact. It is largely due to the fact that the west stood firm and won the cold war that we are now negotiating a treaty with an independent, free nation. Given her own history, I am sure that the Paymaster General will agree with that sentiment.

The treaty does not appear to be particularly contentious. It is based on the standard model recommended by the Organisation for Economic Co-operation and Development, which is the usual start point for treaty negotiations on double taxation. Nevertheless, this is a treaty between states, so it is proper that it should be subject to parliamentary scrutiny, and it would not be right if it went through purely on the nod.

I should like to put several points to the Paymaster General about how the treaty is designed to operate in practice. My first question relates to commencement. As she has said, the treaty was signed by her on behalf of the UK in July 2006, and I hope that we will approve it this afternoon. I understand that the treaty will commence in Poland in January 2007 and in the United Kingdom in April 2007. At first glance, there appears to be a discrepancy between the commencement dates. I take it that the difference is because the Polish tax year works on a calendar-year basis, while it traditionally runs from April to March in the UK, so it makes perfect sense to start in those different months. However, for the avoidance of doubt, I would be grateful if the Paymaster General were to confirm that my understanding is accurate when she winds up the debate.

Secondly, with regard to some of the specific provisions, I note that we have reduced the withholding tax on dividends and royalties, but not in relation to the payment of interest. In fact, on interest, we appear to have moved slightly in the opposite direction with regard to the 1976 treaty. A withholding tax will now be levied on certain elements of non-bank interest, which is an important distinction, at about 5 per cent. I think that that was on the insistence of the Polish Government, but will the Paymaster General confirm that? If it was, will she explain why, in the course of negotiations, the United Kingdom Government thought it appropriate to grant the Poles that request? I am sure that there is a reasonable explanation, but it would inform the Committee if we knew what it was.

Thirdly, there is a further point on the background to the agreement. As I understand it, part of the genesis of the new treaty was a campaign by the Polish community in the UK about the fact that they were effectively being taxed twice—first, in the UK on the income that they earned while working here and, secondly, when they took that income back to Poland. Historically, Poland has experienced lower wage rates than the United Kingdom, so it has also had much lower tax thresholds. Polish workers have therefore been taxed at a relatively high rate when they have repatriated income to Poland after finishing their contracts. Given those circumstances, it does not seem unreasonable from their point of view that they should look for some relief, bearing in mind that there are compensatory provisions for UK workers in Poland and also that Polish workers in the United Kingdom are still paying their taxes to the British Treasury. They are concerned with what happens to the remaining money when they go home to Poland.

In itself, that does not seem unreasonable. However, having done a little more research, I believe that part of the campaign originated in the south-west. In fact, according to the Personnel Today website, part of itwas orchestrated specifically by the campaigning organisation known Polski Bristol. I have no doubt, therefore, that the campaign will find great favour in the city of Bristol, which I am given to understandis represented in the House of Commons by the Paymaster General—I must add that Bristol is a great city and has a wonderful university. However, I caution her: this could set a dangerous precedent for her personally. If word gets out about what happened when we debated the Finance Act 2006, we could soon see the development of “Tax Trusts Bristol”. That has worked for her once, but she must be wary of the possibility of setting a precedent.

Having issued that gentle personal warning, Lady Winterton, to my opposite number, the treaty appears to be relatively straightforward. Nevertheless, I ask the Paymaster General to address the questions that I have put to her for the record. However, we do not oppose the treaty and, in fact, we welcome the principle that is being passed into law.

Julia Goldsworthy (Falmouth and Camborne) (LD): Thank you very much, Lady Winterton. I believe that this is the first time that I have served under your chairmanship, and it is a pleasure to do so. I, too, would like to extend my thanks to the Paymaster General and her officials for the assistance and information that they have provided, which was very helpful in preparing for the order.

As has been established, this is a fairly straightforward update of the double taxation agreement that seeks to avoid the situation by which more than one country regards the same taxpayer as a resident. In particular, the statutory instrument relates to income and corporation tax and their equivalents in Poland. As has been said, it updates the last agreement in 1976 and largely follows the OECD model. In particular, I want to highlight article 26, which relates to the exchange of information. It contains the most up-to-date OECD article, and it covers tax of every kind and description. I understand that it previously covered only taxes mentioned in the treaty, and this is one of the first double taxation agreements to do so. The agreement with Japan is another such arrangement, but it was not quite as standard as this.

Article 26(5), which covers bank secrecy, ensures that Poland will provide the UK with information held by a bank and vice versa. That exchange of information is already in place, and it is duplicated by the mutual assistance directive. The point is underlined by section 173 of the Finance Act 2006, which provides the mechanism for arrangements for the exchange of information regarding enforcement or the recovery of tax.

A few other areas are worth briefly highlighting, such as tax charges on inter-company debts in article 11. Will the Paymaster General confirm that the 5 per cent. rate will be brought down to zero by the interest and royalties directive when it applies to Poland? I understand that there is an eight-year derogation dating from 2000 on that. There has also been a reduction in withholding taxes, which the Paymaster General and the hon. Member for Rayleigh have mentioned.

Finally I have a few questions about the impact that the agreement will have in the UK. We know that the treaty achieves a change in the rules for double taxation for Poles working in the UK. We have already heard that Poles who work in the UK but who are not permanently resident here face double taxation because they continue to fall within the Polish tax system. Many such people stay here for substantial periods, but because they have family or property back in Poland they are still subject to the Polish tax system. They may end up paying tax twice, because Poland taxes on worldwide income and then gives a credit for any tax incurred in the UK. Because the thresholds are lower, there is often another tax bill waiting for them when they go home. This treaty changes the rules and will exempt UK earnings from further taxation in Poland. That will clearly have a beneficial effect on those paying tax in the UK and Poland, and it removes a potential barrier to the exchange of goods and services between countries.

The British tax guide explicitly recognises the benefits of double taxation agreements. It states that double taxation should be avoided, as it raises a barrier to the exchange of goods and services and the movement of capital and persons between countries. Persons will be unwilling to provide capital goods or services in an overseas country if they are likely to be taxed on income derived both in that country and in their country of residence. If that barrier has been removed, has there been any estimate of what additional exchange of goods and services and movement of capital there may be between the two countries as a direct result of this order? I understand that there has not been a regulatory impact assessment, but there could clearly be an impact on behaviour. I would appreciate the Paymaster General’s comments on that.

The explanatory notes state that as far as possible the intention is to reduce compliance burdens as well as providing certainty of treatment. Does this instrument offer reduction in the compliance burden? Has the Treasury estimated how many additional taxpayers will have to make a claim directly to either HMRC or the equivalent in Poland in order to benefit from this new treaty? We will not oppose the order, and I very much look forward to hearing the Paymaster General’s response.

Mr. David Gauke (South-West Hertfordshire) (Con): Thank you, Lady Winterton. It is a great pleasure to serve under your chairmanship.

I will be brief. I should first declare a family interest, but not the usual one. My father was born in Poland but left at a very early age. I have a great interest in the progress that Poland has made, which my hon. Friend the Member for Rayleigh alluded to earlier. As he also mentioned, that progress has been made since it abandoned its left-wing ideology—I am sure that the Paymaster General has some sympathy for that. The Paymaster General mentioned that one reason why we have a new double taxation treaty with Poland is because of its accession to the EU. Have similar double taxation treaties been entered into with the other accession countries or are there plans to do so? If there are any such negotiations, how are they progressing?

Dawn Primarolo: The family connections of the hon. Member for South-West Hertfordshire to any Finance Bill or any measure with Treasury interests never cease to amaze me. I do not know whether it is a good thing that Mrs. Gauke has not yet had an opportunity to scrutinise the double taxation treaty.

In answer to the hon. Gentleman’s question about the accession countries, where the treaties are older, or where they are no longer relevant or would stand improvement, yes, negotiations would be opened. In deciding which treaties to negotiate every year, the Department consults closely with business on particular issues. I cannot at this moment tell the hon. Gentleman where we are with the various treaties, but I am happy to write to him and the hon. Member for Rayleigh to let them know the position.

I return to the points made by the hon. Member for Rayleigh on Poles who are employed in Britain and where there is the highest density of residence. I have been a Finance Minister for some time, and I know that it is not unusual for people who make representations to the Treasury to claim credit for a change. It is also not unusual for aggrieved taxpayers to try to attract Ministers’ attention—they sometimes put up posters around my house. One man who thought he had been overtaxed put up posters around my house that said, “This woman is responsible”, and so on. I would not recommend that as a way forward for any taxpayer, but it happens.

The hon. Gentleman does not need to give meany personal warnings, although his contributionwas a jolly good probe to try to ensure that people understand that representations were made. Representations on issues relating to Polish residents employed in Britain were made to the Polish Government, the British Government and a number of others.

On the hon. Gentleman’s first question, he is correct: we are following our normal practice in using a model as close as we can to that of the OECD, which is very much dependent on the negotiations with our treaty partners. The hon. Gentleman is right about the commencement date: the Polish tax year starts on1 January 2007, which is when the treaty will become active, but for us it will follow the commencement of our tax year. There is no discrimination and no loss of potential for businesses.

On withholding tax on interest, the answer is rather complex, in the sense that Poland has hardly ever agreed a zero rate in a modern treaty, and it varies as to how it provides the rates across different forms of income. That was the best outcome we could get in the negotiations, but it fits with the point made by the hon. Member for Falmouth and Camborne about moving the rate from 5 per cent. to zero, because the Polish Government have a derogation from the interest and royalties directive for six years and at the end of that period the rate will be 0 per cent.

With regard to Polish workers in the United Kingdom, a number of complex things were going on: first, they were earning an income here and were liable to tax here. As the hon. Gentleman has rightly pointed out, two other questions arose: the definition of residency in Poland and the issue of how long Polish citizens can remain within that definition of residency, even though they qualify for residency in the UK. The thresholds are lower and therefore people became liable to tax in Poland. There was also a rather odd calculation in relation to exchange rate fluctuation that led to substantial additional tax on Polish workers. Representations were made, not only in Bristol, but all around the country, asking why our arrangements were not the same as under Ireland’s double taxation treaty. That would certainly have made things a lot easier, and as the negotiations were live, the Polish authorities were approached and were pleased to agree.

The final point is on exchange of information. The hon. Member for Falmouth and Camborne asks the same question about every double taxation treaty and, although I hate to be boring, she will get the same answer, because our policy does not change between double taxation treaties. The hon. Lady is quite right that article 26 on exchange of information closely follows the new arrangements in the OECD model. That fits well with the policy of this and previous Governments on protecting confidentiality of information with respect to those with whom information is exchanged, and on what basis. I can confirm to her that the arrangements are exactly the same as always, and the point remains the same—it is covered in Finance Acts and in the legislation that amalgamated the Customs and Excise with the Inland Revenue, which ensures the same thing.

The treaty is uncontroversial. It provides for the future by providing for ease of investment between the two countries—particularly by British business into Poland. That will provide for a stronger economic partnership to develop between the two countries. I commend the order to the Committee.