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Public Bill Committee Debates

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

The Committee consisted of the following Members:

Chairman: Mr. Jim Hood
Blizzard, Mr. Bob (Waveney) (Lab)
Cable, Dr. Vincent (Twickenham) (LD)
Devine, Mr. Jim (Livingston) (Lab)
Etherington, Bill (Sunderland, North) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Iddon, Dr. Brian (Bolton, South-East) (Lab)
Kennedy, Mr. Charles (Ross, Skye and Lochaber) (LD)
Lilley, Mr. Peter (Hitchin and Harpenden) (Con)
Luff, Peter (Mid-Worcestershire) (Con)
Main, Anne (St. Albans) (Con)
Marsden, Mr. Gordon (Blackpool, South) (Lab)
Meale, Mr. Alan (Mansfield) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Pugh, Dr. John (Southport) (LD)
Purchase, Mr. Ken (Wolverhampton, North-East) (Lab/Co-op)
Wright, David (Telford) (Lab)
Glenn McKee, Committee Clerk
† attended the Committee

Fifth Delegated Legislation Committee

Tuesday 1 July 2008

[Mr. Jim Hood in the Chair]

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

10.30 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) (Moldova) Order 2008.
The Chairman: With this it will be convenient to discuss the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Slovenia) Order 2008 and the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (New Zealand) Order 2008.
Jane Kennedy: It is such a beautiful day, Mr. Hood, that it would be injurious to our health to be sitting out in the warm sun. We are better off in here, debating these three orders relating to double taxation treaties. Each one builds on a previous treaty. I believe they are extremely straightforward, and hope they will find the support of the Committee. I know that the hon. Member for South-West Hertfordshire has been discussing with my officials some of the concerns that he has. I think it would be helpful to the Committee if I hear those concerns now and respond to them later.
10.31 am
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship once again, Mr. Hood. It was not long ago that I had the pleasure of doing so in the Finance Bill Committee.
We are looking today at treaties with regard to Moldova, Slovenia and New Zealand—an unlikely combination, but one that has attracted a great deal of attention from Members on this side of the Committee who represent Hertfordshire constituencies. That throws in another strange geographical combination.
I am grateful to the Minister for making her officials available to provide me with a briefing on the treaties. It was a very informative briefing, and I thank her and her officials. We have not had one of these debates on double taxation relief and international tax enforcement for some months, and I am grateful to the powers that be for scheduling them on the same day as the Report stage of the Finance Bill; otherwise, we would be unduly detained by preparing for those matters.
As the Minister says, the orders are of a technical nature, and are not controversial. However, it is customary on these occasions to press the Minister on the specific issue of the confidentiality procedures in place in the jurisdictions with which we have negotiated the treaties. The New Zealand treaty relates more to international tax enforcement in that it amends the existing article 25 regarding double taxation relief.
New Zealand is a jurisdiction which, I think it fair to say, does not throw up a great many concerns. There are many similarities between our countries, and one would expect it to have a very well developed tax system. However, with regard to all three jurisdictions, will the Minister reassure the Committee that there are no concerns that information of a confidential nature provided to those jurisdictions would be treated inappropriately?
The treaties with Slovenia and Moldova both include provisions relating to the exchange of information but do not include provisions with regard to assistance in the collection of taxes, as the more advanced treaties, such as the amended New Zealand treaty, do. Why is that the case, and is there any intention to look at the issue of assistance in the collection of taxes with regard to those jurisdictions?
Turning specifically to Slovenia, I note that there is a 15 per cent. withholding tax on dividends, which was higher than negotiated in some cases, including that of Moldova. My understanding is that this is just where the negotiations got to—not that there was a particular demand on the part of Slovenia for a lower withholding tax and they were prepared to go to 15 per cent—but I should be grateful if the Minister would just explain the background to those negotiations.
Article 19 of the Slovenia treaty also contains a provision related to professors, teachers and researchers. That provision is not contained in the Moldovan treaty and I think is increasingly not used, but could the Minister clarify why the Slovenians wanted to insert that particular provision?
Equally, with regard to article 26(6) of the Slovenian treaty, there is a reference there to pension schemes which, as I understand it, is limited to employees but does not include the self-employed. Again, I do not think that was a case of its being something that we were particularly keen on but were prepared to concede. If the Minister has anything to say with regard to the significance of that, we would be grateful.
I know, having done the debate on Macedonia, that this is at least the second double taxation treaty entered into with a republic of the former Yugoslavia. I should be grateful if the Minister would provide details to the Committee more generally as to where we are with those republics.
Briefly turning to Moldova, article 5(3) of that treaty defines “permanent establishment” to include consultancy services. Again, I think that was something that the Moldovans were keen to include but which is perhaps not normally the case. If the Minister would like to say a word or two as to the significance of that, we would be grateful. My understanding is that, prior to this treaty, there was no double taxation treaty with Moldova. I think that double taxation treaties are now in place with most of Europe—with the possible exceptions of Albania and Armenia, I was informed by the Minister’s officials. I know there are a number of African and South American countries where there are still no double taxation treaties, but if the Minister has any information as to whether there are any other gaps in Europe, as it were, it would be helpful to the Committee if she would let us know.
Subject to those various questions and queries, we have no objections to these treaties.
10.38 am
Dr. John Pugh (Southport) (LD): I am not sure that one realises when one enters Parliament that, some sunny Tuesday, one will be discussing the Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Slovenia) Order 2008. It is a privilege. On the face of it, it is a perfectly obvious necessity following from freedom of movement and global capitalism for the avoidance of the appreciable ills of tax evasion and double taxation—people either paying no tax or paying far too much tax. Clearly there is an onerous task for the Treasury officials in harmonising, integrating and regularising different fiscal regimes. One has to admire the skill and ability they put to the task, because they have to put up with not only changes of Government policy but, in the case of two countries here, changes of nationhood.
I understand that treaties such as this are meant to last 20 years and, given the amount of effort that goes into constructing them, I would not want to be doing them any more frequently than one should. The task is clearly being made easier over time—I think there are 100 of these treaties—by a greater number of EU and international protocols which are setting some kind of standard, particularly on transparency. That is, I think, where the New Zealand statutory instrument comes from.
I was privileged to have a very educational briefing from Treasury officials who told me about matters beyond my ken. On this issue, for individual companies or individuals who want to check out where they stand, the Treasury website is surprisingly clear about what is a pretty complex problem. What we have before us is a technical task that has been completed, which has followed from detailed negotiation over a considerable time and within different financial cultures, and we place a huge responsibility upon officials to get it right. It is a difficult task and in some ways it is almost presumptuous for elected Members to want to unpick it all here and now without going back to Moldova, Slovenia or wherever to discuss it further.
However, I should like some clarification on a couple of points. One has already been raised—the special Moldovan professors regulation, which seems to allow Moldovan professors coming here to have a privilege of tax exemption which would not apply to other nationals, which seems odd. I should like to know why that was put in place and why the British Government thought it appropriate to accept it.
The second is an article that is in both the Moldovan and Slovenian legislation—article 16, which applies specifically to sportsmen and entertainers, who, of course, are highly mobile individuals. In particular, it is paragraph (2) that concerns me, where it says that income that a sportsman acquires, if paid to somebody else, may be taxed within the country where the income is acquired. That would seem to indicate that if a football player got a huge transfer fee as a result of moving from one premier league club to another, his agent, even though domiciled elsewhere, would be eligible for UK tax. That falls within the remit of a particular treaty and if it were a Moldovan player and a Moldovan agent, it would all be straightforward and hunky-dory, but the world of football and entertainment is much more complex than that and it may be that the player’s agent, who benefits from the transaction taking place in the UK, is actually resident in a third country. Is there any way of ensuring that tax would be paid in such circumstances?
Finally, I should like to come to a slight anomaly I have found. This is a result, not so much of this particular statutory instrument, but of activities elsewhere, on the Public Accounts Committee.
Mr. Ken Purchase (Wolverhampton, North-East) (Lab/Co-op): This is far too exciting for me.
Dr. Pugh: The hon. Gentleman might find this bit quite exciting. There is an enormous amount of energy going into getting things right, so that we do not get Moldovan tax evaders, or British tax evaders going to Moldova, and one totally appreciates that—the thrust is quite right—but a recent National Audit Office report established that, if we have a problem with tax evasion on an international basis, it is far closer to home, in particular with British overseas territories.
Bermuda, for some peculiar reason, has the highest GDP per head on earth, with a population less than that of my constituency. The Cayman Islands has 80 per cent. of the world’s hedge funds and its financial regulations have been very severely criticised by the National Audit Office; yet it is seen largely as a problem for the Department for International Development rather than the Treasury. These are not foreign countries; they are places that we provide Governors for, they are British overseas territories, and I simply wonder whether we will, one day, see similar documents. I did look on the Treasury website to see what agreements we had with these various places to ensure that tax evasion could be addressed in some substantive way, because clearly it is going on on a massive scale in connection with the British overseas territories. I know it is slightly outwith this particular SI, but might I tempt the Minister to say what progress is being made on that?
Mr. Purchase: Would the hon. Gentleman give way?
The Chairman: Order. I think the hon. Member for Southport identified that he was straying away from the orders and I advise Members not to be tempted to join him.
Dr. Pugh: I take your point, Mr Hood.
10.44 am
Jane Kennedy: May I just say that tax evasion is illegal and very serious and is pursued very vigorously by tax authorities, not just in the UK, but in all the countries with whom we have double taxation agreements? Tax avoidance is a different matter and is a legal activity, although we take a dim view of artificial steps to shelter income from tax. That is all I will say on that point, Mr. Hood. The hon. Gentleman needs to be careful with the language he uses in reference to the tax systems, particularly of the countries with whom we are making these treaties.
On the point of confidentiality, the hon. Member for South-West Hertfordshire is quite right to emphasise the need for all of these agreements to be couched in terms that protect the confidentiality of the tax information that may only be exchanged between the competent tax authorities within each country. The exchange must be foreseeably relevant for the administration or enforcement of the provisions of the convention or of the UK or any of these three countries’ domestic law. The exchange must comply with the restrictions on the use and disclosure of information exchanged. For example, it can only be used for tax purposes, not for any other. That is a standard that we apply to all our taxation agreements and these are perfectly within that standard.
The hon. Gentleman also asked about the OECD article 27, regarding assistance in the collection of taxes. He is right to draw attention to the fact that that is not included in two of the orders. The treaty was negotiated before we had changed the law to allow such a provision to be included. Although we do now generally seek to include such articles in new treaties, we did not consider that it was expedient to reopen the treaty on this point, which it would have required, before bringing it before the House.
I was asked by both hon. Gentlemen who spoke about teachers. A professor from Moldova was quoted. We agreed to Slovenia’s request to retain a teachers’ article similar to the one that used to appear in the 1981 Yugoslavia convention upon which this treaty is based. Although it is no longer in the OECD model, this provision is in several UK treaties. It allows teachers to work in the UK and prevents them from being taxed twice for a period of two years. They do pay tax to their home nation. This is not an unusual measure.
The OECD wording on pension scheme contributions, which we normally seek to include in our treaties, goes wider than this and includes pension arrangements made by the self-employed. Slovenia was unable to agree to the full OECD wording because the treaty provision operates on the principle of reciprocity and at the time it was negotiated Slovenia’s domestic law on the tax treatment of private pension scheme contributions was still developing. We do not negotiate these treaties very often, but when we do, we have to do so within the context of the law within each country as it stands.
The hon. Member for South-West Hertfordshire asked for the background to the rate of withholding tax on dividends in the case of Slovenia. It is again a product of negotiation. Rates are as good as other EU countries have achieved. I compliment officials on the work they have done.
Article 5 in the Moldovan treaty, on the treatment of services, represents a concession to Moldova. We were prepared to make that in the interests of achieving a balanced agreement. We do not believe the impact is great, as the service provider needs to spend six months in a country in order to trigger the permanent establishment threshold. The wording does not appear in the OECD model but we have agreed it with several other countries.
Although Slovenia has agreed to honour the treaty obligations of the former Yugoslavia it is appropriate now to have a new treaty that recognises Slovenia’s status as a member of the EU and one that reflects the growing importance of our bilateral relationship. Members will be aware that Slovenia has just completed a successful presidency of the EU and was the first new member state to hold the presidency. There are hon. Friends of mine who take a close interest in the former Yugoslavia.
The hon. Member for South-West Hertfordshire pressed me on a number of points and I think I have covered most of them. He asked about progress we were making with other countries. We have held negotiations with Croatia, Macedonia and Serbia. A new agreement with Macedonia came into force this year. Talks with Croatia and Serbia are continuing. There is other work with Montenegro and Bosnia and Herzegovina, and those two states are continuing to honour the previous agreement. We still have no treaty with Kosovo, but in the longer term we hope to agree modern treaties with all the former Yugoslav republics as and when our resources allow.
Dr. Pugh: Are there supposed to exist treaties with regard to the British overseas territories, or is some other arrangement in place, such as a document similar to the orders we are considering?
Jane Kennedy: The hon. Member for South-West Hertfordshire pointed out that we have another debate similar to this on Thursday, in which we will consider precisely that.
In the case of the USSR and of the former Yugoslavia, there were agreements in place. As I said at the outset, the treaties we are considering today build on existing agreements; they are not completely new documents. The main difference is that they will bring real improvements for UK residents, including the elimination of withholding tax on dividends paid to companies that hold a 20 per cent. share of the subsidiary company paying the dividends, compared with a maximum withholding tax rate of 5 per cent. permitted by the current convention with the former Yugoslavia. There are a number of other benefits, but I will not detain the Committee by mentioning all of them.
Moldova is one of a group of former Soviet countries that chose not to adhere to the treaty obligations of the former USSR after independence, and we have so far agreed new treaties with several members of that group, including Georgia, Lithuania, Estonia and Latvia. I can see a ministerial visit to see exactly how these treaties are operating going down extremely well at this time of year.
The protocol with New Zealand is very straightforward. I heard what the hon. Member for South-West Hertfordshire said about our tax authorities and regimes being very similar. Regarding Bermuda, we are negotiating tax information exchange agreements with our Caribbean overseas territories and have already signed such an agreement with Bermuda. I hope that reassures the hon. Member for Southport. I am grateful to my hon. Friends for attending on such a beautiful day, and hope that these three double taxation agreements will see their way on to the statute book.
Question put and agreed to.
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Moldova) Order 2008.


That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Slovenia) Order 2008.—[Jane Kennedy.]


That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (New Zealand) Order 2008.—[Jane Kennedy.]
Committee rose at seven minutes to Eleven o’clock.

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