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Public Bill Committee Debates

Draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Saudi Arabia) Order 2008

The Committee consisted of the following Members:

Chairman: John Bercow
Blizzard, Mr. Bob (Waveney) (Lab)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hopkins, Kelvin (Luton, North) (Lab)
Jones, Mr. Kevan (North Durham) (Lab)
Keeble, Ms Sally (Northampton, North) (Lab)
Keen, Alan (Feltham and Heston) (Lab/Co-op)
Kennedy, Jane (Financial Secretary to the Treasury)
Newmark, Mr. Brooks (Braintree) (Con)
Redwood, Mr. John (Wokingham) (Con)
Tredinnick, David (Bosworth) (Con)
Vis, Dr. Rudi (Finchley and Golders Green) (Lab)
Wilson, Phil (Sedgefield) (Lab)
Wright, David (Telford) (Lab)
Celia Blacklock, Committee Clerk
† attended the Committee

Thirteenth Delegated Legislation Committee

Thursday 3 July 2008

[John Bercow in the Chair]

Draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Saudi Arabia) Order 2008

8.55 am
The Financial Secretary to the Treasury (Jane Kennedy): I beg to move,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Saudi Arabia) Order 2008.
The Chairman: With this it will be convenient to consider the draft International Tax Enforcement (Bermuda) Order 2008.
Jane Kennedy: When I looked at the Opposition spokesmen, I thought, “When shall we three meet yet again?” We shall be talked about, if we carry on like this.
The taxation orders deal with a new, comprehensive double taxation agreement with Saudi Arabia—the first with that country—which will be very welcome, particularly with the business community, and a tax information exchange arrangement with Bermuda, which again is the first of its kind. Both will be welcome. Both are fairly straightforward, based on OECD advice and models. I am happy to present them to the Committee and to answer any questions.
8.56 am
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to say for the fourth time, in the third such debate this week, that it is a great pleasure to serve under your chairmanship, Mr. Bercow. I also thank the usual channels or whoever is responsible for scheduling this morning’s business, given that we completed the marathon of the Finance Bill last night. [Interruption.] The Minister says it was the Treasury, so we know who to blame. Presumably, the Committee was scheduled to prevent any of us from enjoying ourselves by going out late and celebrating—perhaps also to prevent too many celebratory drinks given that one of the measures relates to Saudi Arabia.
I thank the Minister for making her officials available, once again, to provide a briefing, and I thank them for the help they provided by discussing some of the issues relating to the orders. The measures are not controversial, but I have one or two points of clarification to raise with the Minister.
Article 26 relates to the exchange of information. My understanding is that the article 26 in the treaty is not necessarily the full standard provision. There has been a carve-out, at the request of the Saudi Arabian authorities. Again, I would be grateful if the Minister could clarify the significance of the carve-out and the reasons for that agreement. The article refers to exchange of information, but does not contain any particular wording on assistance in collection. Part of that is a matter of timing—when the treaty was negotiated. If the Minister has any points in that regard, I am sure the Committee would be grateful.
It is customary within such treaties to include an article referring to non-discrimination, yet the Saudi Arabian treaty contains no such article. My understanding is that Saudi Arabian tax law does discriminate—that is the nature of the system—so perhaps the Minister could provide details about the significance of that and explain, from the perspective of the Exchequer and of British taxpayers, what potential disadvantages flow from the fact that the treaty contains no article on discrimination.
Presumably, this double taxation treaty will benefit British firms which operate in Saudi Arabia in the oil and construction sectors, where they have considerable business activity, and it is welcome that steps have been taken to avoid issues of double taxation. Withholding tax rates are not as low as in some other jurisdictions, but I would be grateful for confirmation that we have achieved a deal that is comparable with the most favourable rates achieved by other countries in their dealings with Saudi Arabia.
On Tuesday, the Liberal Democrat spokesman— not the hon. Member for Taunton, who was otherwise engaged, but the hon. Member for Southport (Dr. Pugh) —raised the issue of what progress was being made regarding jurisdictions such as Bermuda, and here we are two days later with an order on that very subject. However, that is not an example of undue Liberal Democrat influence—the Minister and I will be pleased to agree on that; the matter had been negotiated some time ago.
The order is slightly unusual. In most cases, provisions relating to international tax enforcement tend to be bolted on to a double taxation treaty. However, as I understand that Bermuda does not have tax, such a treaty with Bermuda would be otiose. The order is a separate arrangement regarding tax enforcement. The Minister will correct me if I am wrong, but I understand that this is a new treaty that creates new rights and agreements with Bermuda and as such, we welcome it. I understand that it is broadly the same as the new, standard provisions that are inserted in double taxation treaties, normally at article 25 or 26, subject to a couple of points that are worth noting.
First, paragraph 5(5) contains carve-outs from the obligation to obtain or provide information, which I assume have been insisted on by the Bermudan authorities. I will not read through those various carve-outs, but perhaps the Minister could tell us whether she thinks that any of them are particularly significant or whether there are any that the Government hope to renegotiate in the future. I hope she will assure the Committee that the carve-outs are not so significant as to undermine the whole basis of the treaty—I do not make the case that they do, but perhaps the Minister would comment on that point.
My second comment regards paragraph 10 of the Bermudan treaty, which relates to costs. It is a relatively unusual provision:
“Incidence of costs incurred in providing assistance...shall be agreed by the competent authorities of the Territories.”
In practice, one assumes that the tax enforcement assistance will come entirely from the Bermuda authorities. Given that they have no tax to collect, I see no circumstances in which the UK authorities would assist the Bermuda authorities in raising tax, so this is rather a one-way street. It seems entirely reasonable, therefore, that some of the costs should be shared, given that only the UK Exchequer would benefit from actions taken in accordance with the treaty.
I should be grateful for further clarification on how cost-sharing will be assessed. All we know is that it
“shall be agreed by the competent authorities of the Territories.”
Are we looking at a full imbursement—in effect, an indemnity—provided by the British Government to the Bermudan authorities in respect of any costs incurred under the treaty? Will it be negotiated case by case, or will it be based on a percentage? Clarification would be helpful. However, subject to those points, we have no objections to either order, and welcome any comments from the Minister.
9.6 am
Mr. Jeremy Browne (Taunton) (LD): I echo the comments of both previous speakers about the enormous pleasure that we all derive from your chairmanship, Mr. Bercow, and from spending more time in each other’s company. I have spent a lot time already getting to know their characters much better. I shall be brief—[Interruption.]—unless I am tempted otherwise.
We are discussing double taxation in Saudi Arabia and Bermuda, and I hope that the Minister will help the Committee by answering a few questions. My first question is a broader one about double taxation: what measures are the Government taking to ensure that people pay the right amount of tax and that they are not pursued by tax authorities in both countries for the same slice of income? Those individuals want some security from excessive interference in their lives from Her Majesty’s Revenue and Customs or its equivalent in Saudi Arabia when they feel that they have already answered all relevant questions to the satisfaction of one or other of those bodies.
My second question is a straightforward factual one. When such proposals are put forward, I am always curious to know the Treasury’s estimation of how much money we will make as a consequence of implementing them. How much additional tax revenue do we expect to collect? Will we be disadvantaged? Will people pay their taxes in other countries instead of our own? It is not entirely hypothetical that one of my constituents might ask me, “How much revenue has the United Kingdom managed to bring in to its coffers to spend on public services in this country as a result of the proposals that you were debating this morning in Committee Room 12?” If they did, I would want to be able to give them an answer.
I have a couple of further points about Bermuda. When public finances are so short, it is entirely appropriate that we should be looking in the Bermuda triangle for further funds. However, paragraph 3 of the Bermuda order talks about all taxes imposed by either territory and
“similar taxes imposed after the date of signature”.
Will the Minister expand on what is meant by “similar” and on what happens when the taxes are dissimilar?
Finally, on a broader point that might have been touched on in similar Committees at which I was not present, what protection exists for UK citizens where the tax laws vary between countries, or where the penalties for failing to comply with tax laws vary markedly? One might, for example, wish to incur the wrath of the British tax authorities more than that of the Saudi Arabian tax authorities, depending on the punishments that were applied in either case. I am curious to know what safeguards exist—this may be more of a home affairs or Foreign Office point than a Treasury point—for people who feel that there is a dispute between themselves and the tax authorities in the two countries and do not want that dispute resolved in a way that they feel would be particularly disadvantageous to them if it were resolved in one country rather than the other.
9.10 am
Jane Kennedy: As I said, the orders deal with the new double taxation agreement and a new, first, tax information exchange arrangement. Saudi Arabia has frequently appeared in representations from businesses for new treaties, and I am pleased to bring this treaty before the Committee today. The treaty is substantially based on the OECD model tax treaty, and covers all the usual types of income tax included in tax treaties such as property rents, business profits, income from international transport, dividends, interests, royalties and all the usual forms of income.
The hon. Member for South-West Hertfordshire put a number of specific questions about the treaty. He asked about the conclusion of the treaty without a commitment from Saudi Arabia to exchange information held by banks under article 26. Although Saudi Arabia agreed in principle with the OECD model provision on that, Saudi law currently prevents information being obtained from banks and other financial institutions for another country. That is under review by a special ministerial committee in Saudi Arabia, but it is not yet known when the committee will reach a conclusion.
Paragraph 9 of the protocol ensures that exchange of information from banks or other financial institutions will commence as soon as the law of both countries allows that to happen. We do not think that we are likely to make many information requests to Saudi Arabia and the HMRC assessment is that Saudi Arabia presents a low risk for evasion and avoidance. We thus decided to conclude the treaty on those terms, as all Saudi Arabia’s other treaty partners have done, so that UK residents could enjoy the wider benefits provided by the convention.
The hon. Gentleman put a fair question when he asked why article 11 is described as “Income from Debt-Claims” instead of “Interest”, as the model suggests. It was done at Saudi Arabia’s request, and as the meaning was the same it was worth agreeing in order to achieve the treaty.
Why does the measure not include a non-discrimination article? That is a feature of all Saudi Arabia’s tax treaties. It reflects the fact that they discriminate between Saudi nationals who are subject to the Zakat, which is an Islamic tax charged on a combination of income and capital, and non-Saudi nationals. Saudi Arabia discriminates between its nationals and non-Saudi nationals who are subject to income tax. The UK has concluded a treaty that is at least as good as those of other countries that have concluded treaties with Saudi Arabia; in particular, the withholding tax rates on dividends, interests and royalties are competitive with other countries. The provision on assistance in collection was not included, as Saudi Arabia did not wish it and it was not a priority for the UK. It was considered, but we decided not to press it.
I turn briefly to the Bermuda tax exchange information agreement. Paragraph 5(5) adds a number of limitations to the obligation to exchange, and the hon. Gentleman wanted more detail about that. This is the first comprehensive tax information exchange agreement that we have concluded with an overseas territory. We have agreements relating to the taxation of income from savings with the overseas territories in the Caribbean, but this is the first bilateral TIEA to come before the House, providing for exchange of information relevant to a wide range of taxes. I hope and expect that it will be the first of many. I welcome the commitments made to the OECD by a number of countries: Anguilla, Bermuda, the British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, the Isle of Man, Jersey, Montserrat and Turks and—[Hon. Members: “Caicos.”] I should have practised that. They have committed to refrain from harmful tax practices, which is very welcome.
I also put on record my welcome to commitments made by Gibraltar, the BVI, Guernsey, Jersey and the Isle of Man to amend their business tax regimes so that they are compatible with the EU code of conduct—I chair the EU committee on business taxation that governs the code. That goes a little wider than the two treaties we are considering, but I wanted to set them in context and explain why this is an important tax exchange agreement.
Bermuda’s consistent policy is to diverge from the OECD model by referring to information which, as it puts it, is relevant to a tax matter. That makes it clearer that the competent authorities may not indulge in fishing expeditions, although that is not the intention of the OECD wording. None the less, the measure makes that absolutely clear. The incidence of administrative costs is covered in a separate memorandum of understanding, which has been signed by HMRC and the Bermuda Ministry of Finance. The text is available to the House.
In response to the hon. Member for Taunton, it is not possible to give a precise figure for the revenue effects of this or any other convention. The overall costs or benefits of a convention are a function of the income flows between the two countries. The convention itself is likely to change both the volume and nature of those flows by encouraging cross-border investment. Such provisions have proved of enormous benefit to the British economy and I commend the orders in that context.
The hon. Gentleman asked about paragraph 3. Similar taxes may be any tax equivalent to what is imposed now, such as income tax or VAT in the UK or a payroll tax in Bermuda.
The hon. Member for South-West Hertfordshire asked about paragraph 5(5). Bermuda’s policy is to include the right to decline to provide information that is not physically present in its territory to ensure that the agreement is not used as a conduit or portal by countries to obtain information held by persons in third countries merely because of some minor connection with a Bermudan resident. The provision in the agreement is consistent with the rights of Bermudan citizens under Bermuda’s domestic law. However, there is nothing to prevent a requested territory from obtaining or providing the information if it so wishes, but we will keep the provision under review. Bermuda has indicated that if information exchange is frustrated in practice because of its domestic law, it is prepared to revisit the relevant legislation.
The hon. Member for Taunton asked about safeguards for taxpayers. The whole point of a double taxation agreement is that double tax is eliminated. All agreements contain an article on mutual agreement, which means that a taxpayer can apply to HMRC if they do not believe that they have been taxed in accordance with the treaty. I welcome the strong relationship and continued partnership between Bermuda and the UK. So far Bermuda has hosted successful visits from the Foreign Affairs Committee, the Under-Secretary of State for Foreign and Commonwealth Affairs, my hon. Friend the Member for Sheffield, Heeley (Meg Munn) , and Sir James Sassoon, the president of the Financial Action Task Force. We note that next year Bermuda will celebrate the 400th anniversary of the first settlement in 1609, following the wreck of the Sea Venture. I am sure that a visit from the Financial Secretary to the Treasury, whoever that may be, would be of benefit to both countries.
Question put and agreed to.
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Saudi Arabia) Order 2008.

draft International Tax Enforcement (Bermuda) Order 2008.

That the Committee has considered the draft International Tax Enforcement (Bermuda) Order 2008—[Jane Kennedy.]
Committee rose at twenty minutes past Nine o’clock.

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