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Session 2007 - 08
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Public Bill Committee Debates

Draft Double Taxation Relief (Taxes on Income) (Switzerland) Order 2007

The Committee consisted of the following Members:

Chairman: John Bercow
Breed, Mr. Colin (South-East Cornwall) (LD)
Cawsey, Mr. Ian (Brigg and Goole) (Lab)
Chaytor, Mr. David (Bury, North) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Goldsworthy, Julia (Falmouth and Camborne) (LD)
Holloway, Mr. Adam (Gravesham) (Con)
Hoyle, Mr. Lindsay (Chorley) (Lab)
Jenkin, Mr. Bernard (North Essex) (Con)
Kaufman, Sir Gerald (Manchester, Gorton) (Lab)
Kennedy, Jane (Financial Secretary to the Treasury)
Leigh, Mr. Edward (Gainsborough) (Con)
Linton, Martin (Battersea) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Spellar, Mr. John (Warley) (Lab)
Taylor, Ms Dari (Stockton, South) (Lab)
Ward, Claire (Lord Commissioner of Her Majesty's Treasury)
Wright, David (Telford) (Lab)
Ms S. Howe, Committee Clerk
† attended the Committee

Third Delegated Legislation Committee

Monday 26 November 2007

[John Bercow in the Chair]

Draft Double Taxation Relief (Taxes on Income) (Switzerland) 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) (Switzerland) Order 2007.
The Chairman: With this it will be convenient to consider the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Faroes) Order 2007.
Jane Kennedy: As you will have heard, Mr. Bercow, the spirits of my colleagues soared as the invitation to attend this debate came through their letterbox. I was entertained for a moment by wondering who would declare an interest on the first of the orders.
The treaty on the Faroes was signed in London on 20 June by the Minister of State, Department of Health, my right hon. Friend the Member for Bristol, South (Dawn Primarolo), who was then the Paymaster General, and by Mr. Magni Laksafoss, the Faroese Finance Minister. Bilateral trade and investment are currently small in absolute terms; however, the possibility of the discovery of offshore oil or gas in the Faroes is already attracting UK business, and the new treaty will ensure that they can operate there within an agreed taxation framework.
The agreement covers the usual types of income that are included in tax treaties such as property rents, business profits, dividends, interest and royalties, and, of course, it contains all the usual safeguards to deter tax avoidance and evasion, including the latest Organisation for Economic Co-operation and Development article on exchange of information and the new article dealing with assistance in the collection of taxes.
In addition, the agreement includes a specific provision covering operations in the offshore oil and gas industry. It ensures that the benefits of such natural resources will be enjoyed by the country within which they lie.
The protocol with Switzerland was also signed by my right hon. Friend—she was very busy in June—and by the Swiss ambassador on 26 June. It amends the double taxation agreement between the UK and Switzerland, which was originally signed in 1977. The impetus for this latest protocol was the EU-Swiss savings agreement. Switzerland agreed to enter into talks with member states to implement its acceptance of wider exchange of information for tax purposes. At the same time, we took the opportunity to update the existing treaty in several important areas.
Let me say something about the changes to article 25 of the treaty, which governs the exchange of information. They may be of the most interest to hon. Members. Under the existing provisions of the treaty, the conditions under which information can be exchanged are limited. Under the new arrangements, information can be exchanged if it is foreseeably relevant for the application of any tax law in the case of holding companies. In cases of tax fraud or the like, Switzerland will supply any relevant information, including banking information. That change is welcomed by the UK. I am, of course, sorry that Switzerland is not yet able to sign up to the OECD standard of full exchange of information, but I welcome the step forward that the protocol represents.
The protocol also implements Switzerland’s commitment to apply the terms of the EU parent and subsidiary companies directive, and it contains several anti-avoidance measures, most notably the insertion of an anti-conduit rule. More may be said about that in questions. At this point, I shall leave the rest of my comments until the end, in the event that there are questions.
4.34 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship, Mr. Bercow. Normally, we tend to meet in our respective neighbouring constituencies to discuss issues such as too many lorries using country lanes. It is a pleasure to turn our attention to something that is somewhat different from that. Such is your dedication to your role as Chairman, I know that you were brushing up on your Faroese earlier today.
I thank the Financial Secretary for her courtesy in asking her officials to provide me with a briefing. I thank them for a helpful briefing on these matters earlier today.
I shall deal first with the Swiss order. For the avoidance of doubt and for the Financial Secretary’s benefit, I do not have an interest to declare, but I know exactly to what she referred.
The Opposition welcome the reduction of withholding rates from 5 per cent. to 0 per cent. in some circumstances. We also welcome the fact that those circumstances have been expanded so that the participation threshold has dropped from 25 per cent. to 10 per cent. As she said, the key issues relate to the exchange of information, particularly in the light of Swiss banking secrecy laws, and I want to ask her one or two questions about that.
Article XII of the new treaty, which replaces existing article 25, contains a couple of carve-outs regarding the circumstances in which information needs to be exchanged, and those carve-outs are set out in paragraphs (3)(a) to (c). Sub-paragraph (b) refers to
“information...not obtainable under the laws or in the normal course of the administration of”
one of the contracting states, while sub-paragraph (c) refers to
“information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy.”
However, paragraph (5) says that in
“cases of tax fraud or the like, banking and other professional secrecy provisions shall not preclude the furnishing of information to the competent authority of the requesting State.”
On the fact of it, there may be a conflict between the point relating to
“information...not obtainable under the laws or in the normal course of”
administration and that relating to something
“the disclosure of which would be contrary to public policy.”
I would be grateful if the Financial Secretary confirmed this, but my understanding from her officials is that paragraph (5) essentially overrides the carve-outs in paragraph (3) and, therefore, that banking and other professional secrecy provisions will not preclude the furnishing of information in cases of tax fraud or the like.
I turn now to the exchange of notes in relation to article 25, which is also contained in the order. Paragraph (3) defines tax fraud as
“fraudulent conduct deemed to be an offence under the laws of both States”.
Paragraph (4) says:
“It is further understood that the term ‘[tax fraud] or the like’ includes”
and then adds two further circumstances, one of which broadly relates to the full disclosure of certificates and the other of which relates to the destruction of records. Again, my understanding is that paragraph (4) extends the definition of tax fraud or the like so that it is broader than merely
“fraudulent conduct deemed to be an offence under the laws of both States”.
The UK’s position on what constitutes tax fraud is somewhat broader than the Swiss position, so the provisions in paragraph (4) remedy that potential limitation.
There is, however, one limitation in the exchange of notes and it relates to paragraph (1), which states:
“The Contracting States agree that under sub-paragraph (b) of paragraph (1) of Article 25, only information which is in the possession of the tax authorities and which does not necessitate specific investigation measures may be exchanged.”
That appears to limit the provisions in paragraph (4) of article 25, which relates to the provision of information even though the
“other Contracting State may not need such information for its own tax purposes.”
That appears to be a limitation, and I would be grateful if the Financial Secretary could confirm that and perhaps give her view on whether that is of practical significance.
I have one final point specifically on the Swiss order, although I do not know whether the Financial Secretary has the necessary information to hand, and she may need to write to me on this. Although the present treaty is not necessarily the first exchange of information treaty that Switzerland has entered into, it is one of the first. We may therefore be ahead of other major EU countries, and I would be grateful if the Financial Secretary could confirm that.
The Financial Secretary referred to the anti-avoidance provisions contained within the Swiss order, which related specifically to conduit arrangements, which is something that we see increasingly in double taxation treaties, partly as a consequence of the Indo Foods case. The Faroes order does not contain any reference to conduit arrangements and my understanding is that that is not significant, that there are different ways in which a particular issue can be addressed. However, I should be grateful for the Financial Secretary’s confirmation that it does not cause any problems.
The Faroes order contains provisions relating to assistance in the collection of taxes. I believe that that is a consequence of Council of Europe and OECD conventions on mutual administrative assistance in tax matters, the treaty concerning which we debated in July. If so, I believe it is the first such treaty to include it.
I have not given the Financial Secretary due notice of the question but I want to ask whether the Faroe islands is, like Denmark, a member of the OECD or Council of Europe. Has that happened under the umbrella of Danish membership of those organisations?
In the last double taxation treaty order we debated, which concerned Macedonia, I made the point that it is almost customary in these circumstances and given the increased exchange of information between the parties, for an Opposition Member to raise the question whether the UK is satisfied that the information we will provide to the contracting state will be held with sufficient confidentiality. In the light of recent events, I should be grateful if the Financial Secretary would, first, confirm that we are satisfied with the procedures in place for both Switzerland and the Faroe islands and, secondly, question whether we are satisfied that our own procedures are adequate to hold the information provided by foreign countries in these circumstances.
Have any concerns been raised by the Faroe islands, Switzerland or any other country with whom we are negotiating double taxation treaties about information that is provided to us by a contracting state with regard to their own taxpayers? They would have a legitimate concern to ensure that that information is held with due confidentiality in the UK. Can they be assured that such information will be held in confidence?
4.43 pm
Mr. Colin Breed (South-East Cornwall) (LD): First, I want to say that overall we support the two measures. However, I have one point of clarification and one of concern. Liberal Democrat Members are concerned about security of information and the obligations that it places not only on the Swiss and Faroese Administrations but on the UK, as we will be receiving information from them and we will have a potential liability if such information is inadvertently released. It is summed up rather neatly in the Faroese statutory instrument under paragraph (k) of article 3, general definitions, which states that the term “competent authority” means commissioners for Her Majesty’s Revenue and Customs.
Some people may seek to suggest that in view of recent events the competence of HMRC may be under scrutiny. However, if that is what the document says it is for the Government to demonstrate that the proposed competent authority is indeed competent. I hope that the Minister will say something about that, which will cover the points raised by me and by the hon. Member for South-West Hertfordshire.
The point of clarification concerns article 5, which contains the lists of permanent establishments. The term “permanent establishment” includes a place of management, a branch, an office, a factory and a workshop. Bearing in mind that significant amounts of information are held at call centres, would a call centre in another country be part of the permanent establishment? For example, many banks have call centres in other countries. Does a call centre come within the term “permanent establishment”?
4.44 pm
Jane Kennedy: As he usually does, the hon. Member for South-West Hertfordshire asked a number of searching questions and I shall do my best to answer them now, but if on reading the Hansard report of our debate I notice that I have missed anything I will endeavour to write to him about it.
I will deal with the two matters separately, although there are one or two crossover points which I will come to at the end, particularly the one mentioned by the hon. Gentleman.
Switzerland has concluded similar agreements on exchange of information with Austria and Spain. No doubt it is also in discussion with other member states, but those two agreements and this one with the UK appear to be the only ones that have been signed so far. In that respect, yes, we are ahead of the game in respect of their work across Europe.
I want to make a general point about Switzerland and the improvements that we have been able to secure in this treaty. Standards on the exchange of information have moved on a great deal in the last few years and it is increasingly important for countries to be able to co-operate with each other in matters of tax enforcement—at least, we think so.
However, not all countries have the same view or have moved to the same position as quickly as we have. Everyone knows which way the wind is blowing and it would be counterproductive not to work co-operatively with Switzerland. Furthermore, it would not be in the interests of countless UK companies and individuals who benefit from it. We are pleased with the progress we have made with Switzerland, although it is not as far as we would want to go in a perfect world.
The hon. Member for South-East Cornwall raised a number of questions about the exchange of notes and I will deal with them as far as I can in the light of what we had prepared arising out of the discussion earlier. If I can provide greater clarity later I shall be happy to do so.
Item 1 of the exchange of notes modifies the obligation of a state to obtain information in relation to the exchange of information about holding companies. It is a departure from the OECD standard and it was included at the insistence of Switzerland. Item 5 refers to a direct connection between the fraudulent conduct and the requested administrative assistance measures. That simply confirms that countries will not go on fishing expeditions and ask for bank information without evidence that a fraud has been committed. Again, that was included at Switzerland’s insistence. For our part, the UK would have been happy to exchange information on bank interest automatically as we do with most EU member states.
Item 6 requires there to be legal and actual reciprocity. Although it is not found in the OECD model and it was added at Switzerland’s insistence, in practice it repeats principles that countries accept underpin information exchange. We would give as much detail as possible when sending a request for information, which would include the reasons for wanting the information. I think that is a reasonable position to take.
The hon. Member for South-West Hertfordshire asked about paragraph 5, which does override paragraph 3. In brief, paragraph 3 says that states do not have to carry out administrative measures at variance with their laws and administrative practices. However, in the event that there is tax fraud or the like, bank secrecy cannot be invoked as a reason for not providing information.
There were one or two questions about the Faroes—including about the anti-conduit rules. The UK’s traditional anti-treaty-shopping provisions in the passive income articles have been recast in the treaty in the form of an anti-conduit rule, in much the same way as was done in the 2001 UK-US tax treaty. A conduit arrangement is defined in article 1 of the protocol, and arrangements which have a main purpose of treaty-shopping will fall within the definition.
Switzerland preferred a more objective test of the main purpose rule, which is covered by the requirement that the income be paid at any time and in any form. The anti-conduit rule also explicitly focuses on the structure of the arrangements. The hon. Member for South-West Hertfordshire asked whether there was a cost to the Exchequer. Briefly, no, because in the absence of a double taxation agreement the Faroes’ right to tax is unconstrained. In answer to another of the hon. Gentleman’s brief questions, I am sure that he knows that the Faroes is not a part of the EU; as a consequence the directive on mutual assistance in recovery of claims does not apply to the Faroes. It is an EU-wide directive, so the Faroes does need to enter into bilateral agreements of this kind if it wishes for mutual assistance to recover tax debts.
Finally, in response to both hon. Gentlemen’s concerns about the security of data, the House will know that I deplore the serious breach of security in HMRC last month, which we disclosed to the House last week; but exchange of information under our tax treaties takes place between only a handful of named senior officials, who take their duties in handling sensitive data very seriously—all the more since last week’s statement.
Mr. Adam Holloway (Gravesham) (Con): How much annual additional revenue to the Exchequer does the Financial Secretary anticipate from the measure?
Jane Kennedy: That is a hard question to answer; my reply would involve estimates. Somewhere there is an inspirational note, which gives an accurate answer; but we do not have figures, and each agreement is different. If the hon. Gentleman will allow me, I shall write to him with our closest estimate and predictions, but it is extremely difficult. The Faroes agreement, in particular, comes at the beginning of what we expect will be a time of increasing trade and increasing numbers of UK companies investing there, particularly in the light of exploration for oil and gas. It is extremely hard to make such predictions, but I shall do my best.
Question put and agreed to.
That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Switzerland) Order 2007.

Draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Faroes) Order 2007.

That the Committee has considered the Draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Faroes) Order 2007.—[Jane Kennedy.]
Committee rose at six minutes to Five o’clock.

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