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House of Commons
Session 2008 - 09
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Public Bill Committee Debates

The Committee consisted of the following Members:

Chairman: Mr. Greg Pope
Abbott, Ms Diane (Hackney, North and Stoke Newington) (Lab)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Browne, Mr. Jeremy (Taunton) (LD)
Clelland, Mr. David (Tyne Bridge) (Lab)
Dorrell, Mr. Stephen (Charnwood) (Con)
Duddridge, James (Rochford and Southend, East) (Con)
Fallon, Mr. Michael (Sevenoaks) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Keeble, Ms Sally (Northampton, North) (Lab)
Mudie, Mr. George (Leeds, East) (Lab)
Murphy, Mr. Denis (Wansbeck) (Lab)
Pound, Stephen (Ealing, North) (Lab)
Pugh, Dr. John (Southport) (LD)
Redwood, Mr. John (Wokingham) (Con)
Timms, Mr. Stephen (Financial Secretary to the Treasury)
Wilson, Phil (Sedgefield) (Lab)
Rhiannon Hollis, Georgina Holmes-Skelton Committee Clerks
† attended the Committee

First Delegated Legislation Committee

Monday 19 January 2009

[Mr. Greg Pope in the Chair]

Draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (France) Order 2008
4.30 pm
The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (France) Order 2008.
The Chairman: With this it will be convenient to consider the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Netherlands) Order 2008 and the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Isle of Man) Order 2008.
Mr. Timms: I welcome you warmly to the Chair of our Committee, Mr. Pope. It is the first time that I have served under your chairmanship, but I know by reputation that you bring an assured and expert touch to your task from which the Committee will benefit. The orders deal with new, comprehensive double taxation agreements with France and the Netherlands, amendments to our current double taxation agreement with the Isle of Man and a new tax information exchange agreement with the Isle of Man.
To start with the France order, the new agreement with France was signed on 19 June last year by my right hon. Friend the Chancellor and the French Finance Minister, Christine Lagarde. It will replace the current agreement, which dates from 1968, a significant year in French history. Since then, there have been many changes in both countries’ tax laws and treaty policies, and the intention has been to reflect them in a modern agreement based on the OECD model tax convention.
France is the UK’s third largest trading partner, accounting for 7 per cent. of total UK trade, and the third most important source of foreign direct investment after the US and the Netherlands, to which we will come in a moment. France is the fourth biggest recipient of UK outward investment; over 1,700 French firms, subsidiaries and branches are established in the UK, employing some 330,000 people; and about 1,800 UK firms are now established in France.
We signed a double tax agreement with France in January 2004. Around the time when that agreement was signed, France made quite significant changes to its system of dividend taxation, notably by abolishing its tax credit, the avoir fiscal. Although the treaty would still have worked, the two sides decided that it would be much better to restructure and simplify the dividends article to reflect the French change.
At the same time, we were considering plans to introduce a real estate investment trusts regime in the UK, and the exchange of information article of the OECD model convention was being updated as well. As the 2004 text did not take account of those changes, we took the opportunity to make wider revisions. The 2004 text will not come into force, it was not presented to Parliament, and it will for ever remain “unperfected”, as they say in treaty parlance.
The channel tunnel provision may be of some interest. It was introduced into the 1968 treaty by a later protocol, and is being extended to include income from immovable property as well as business profits. That will deal with a point raised by Eurotunnel about rental payments made by the UK railway operator to the French tunnel company. We have here a modern treaty with France that will address the complexities of the economic relationship between the two countries across the range of cross-border activities.
On the second order, the comprehensive agreement with the Netherlands was signed in September by my right hon. Friend the Secretary of State for Scotland, who was then Minister for Europe, and Laurens Westhof, the chargĂ(c) d’affaires from the embassy of the Netherlands. It replaces the present treaty, which in the case of the Netherlands dates from 1980.
The new convention is, of course, based largely on the OECD model convention, but it also includes some non-standard provisions to deal with particular situations arising from the close economic relationship between the UK and the Netherlands. We are old as well as close trading partners. The Dutch have a long trading history with us, and the Netherlands is the UK’s fourth largest bilateral trading partner and second largest foreign investor, behind only the US. It is also the second greatest recipient, behind the US, of UK direct investment.
The new convention extends the applicability of zero withholding tax on dividends to dividends paid to pension funds and charities, which is good news for the UK pension fund industry. The Netherlands withholding tax on dividends paid to small portfolio investors is also reduced from 15 to 10 per cent. At the same time, the convention preserves the UK’s right to apply a 15 per cent. withholding tax to dividends paid by UK real estate investment trust companies.
In line with the latest OECD thinking, the taxation of pensions is simplified, and provision is made for mutual recognition of pension contributions, which facilitates cross-border movement of employees and the self-employed. The new convention includes the revised OECD article on exchange of information and assistance in collection, consistent with the UK’s change of approach. Also in line with the latest OECD thinking, the dispute resolution procedure is enhanced with a provision that allows reference to arbitration if disputes are not resolved within a set time limit. There are not many unresolved cases with the Netherlands, but the presence of such a provision is often requested by businesses.
Of the two agreements with the Isle of Man, one provides for information exchange, and the other amends our existing double taxation arrangement. The agreements were signed in Douglas in September last year. The information exchange agreement will come into force when both parties have completed domestic legislative procedures, and the DTA amendments will have effect from the relevant tax year following entry into force.
This is the second comprehensive tax information exchange agreement that we have concluded with a dependent territory—the first such agreement was signed with Bermuda last year. The agreement broadly follows the OECD model agreement, which provides for exchange on request, which is to say that one territory can make a request of the other for assistance in relation to a particular case under examination or investigation. The tax information exchange agreement also provides for officials to visit the other territory to pursue cases or to take part in tax investigations.
I should emphasise that the UK and the Isle of Man already have good co-operation on direct taxes, including spontaneous exchange of tax information, under the existing agreement, which has been in place for more than 50 years. We have a separate arrangement with the Isle of Man governing the sharing of VAT, excise and customs information. However, we have been unable to obtain information on direct taxes held by persons within the Isle of Man’s jurisdiction that the island’s tax authorities do not need for their own domestic law purposes, which could include, for example, information about accounts held by UK residents in Isle of Man banks, or information about the true owners of companies registered in the Isle of Man. The new agreement closes that gap and provides for the two authorities to agree the incidence of administrative costs arising from its operation. To that effect, a separate document has been signed, the text of which is in the explanatory memorandum before the Committee.
The amendment to the double taxation agreement adds a new provision on the taxation of pensions, provisions on the taxation of the profits of associated enterprises and a mutual agreement procedure. The essence of the pensions provision is that any UK-source pension other than a Government service pension paid to an individual who is a resident of the Isle of Man, and not a UK resident, will no longer be subject to tax in the UK. The same applies in reverse to Isle of Man-source pensions paid to UK residents, which will now be paid free of Manx tax.
I commend the orders to the Committee.
4.39 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship, Mr. Pope—like the Financial Secretary, this is first time that I have done so. The Financial Secretary has been a Treasury Minister for many years, but I believe that this is the first time that he has introduced a double taxation treaty. I thank him for his explanation of the treaties, and for discussing three or, arguably, four measures at once. Also, may I thank him for making his officials available for a briefing last week? I appreciate that, and, through him, thank his officials for their assistance, which aided my understanding of some matters relating to the treaties.
We clearly have, in double taxation terms, some important treaties before us, in that both the Netherlands and France are major trading nations. Furthermore, because of current and historical corporate structures in the Netherlands, a number of corporate groups contain Dutch holding or mixer companies. Although we broadly welcome the treaties, I shall ask the Financial Secretary a number of questions about the detailed provisions.
I shall deal first with the French treaty. The Minister touched on the issue for real estate investment trusts. It may help the Committee if he elaborates on the significance of the treaty for UK REITs. He mentioned that matter in the context of the renegotiation, if that is the word, of the 2004 treaty, which he described but which did not take effect—it was not perfected, to use the terminology. It is clearly a long time since the last double taxation treaty with France—1968. Can he give further details on why the 2004 treaty was not perfected? I take his point that there were changes in French corporate taxation—in particular, changes in dividend taxation treatment—but 2004 was a few years ago. Given that this treaty involves some improvements on previous tax rates, for example, why did we not take the bird in the hand in 2004? There may be a perfectly adequate explanation—I believe that there is, having discussed the matter with officials—but I would be grateful if the Minister were to enlighten the Committee on that point.
I note, as the Minister has noted, the arbitration measures in both the Dutch and the French treaties. I understand that there is not a particular issue with the French authorities and that there is therefore no particular need for arbitration provisions in such cases, but I would be grateful to know whether it is a general policy to include such provisions. Will the Minister also indicate how useful and effective the measure has proved to be in other treaties?
With regard to the Dutch treaty, there is a particular issue, of which I suspect the Minister is aware—I have certainly discussed it with his officials. This point was raised by, among others, the Institute of Chartered Accountants in England and Wales. I am referring to the tie-breaker provision in article 4(4), which relates to companies that have dual residence. It states that an otherwise dual resident company could be determined by the relevant competent authorities to be resident in one or other of the relevant states—the UK or the Netherlands. The Institute of Chartered Accountants has raised the concern that that provision may well be ultra vires. The argument is that although the treaty provisions may well be agreed between the parties, it is necessary, in respect of application and enforceability within UK domestic law, for the treaty provisions to fall within section 788 of the Income and Corporation Taxes Act 1988. The provisions in subsection (3) relate to income tax relief, corporation tax relief and how one attributes the income, but it is arguable that the provisions in article 4(4)—the tie-breaker provisions—do not fall within section 788. Does the Financial Secretary accept that it is necessary for the provisions to fall within section 788(3) in order for them to be enforceable? If he accepts that, exactly how do those provisions fall within that subsection?
A related concern has been raised as to whether the provisions are retrospective, and the extent to which they are retrospective. When do they date back to? A concern has also been raised with Treasury officials as to how article 4(4) relates to article 25, the mutual agreement procedure. Article 25 states that if a person is not taxed properly, they can invoke the competent authority procedures contained under that article, but the logic of article 4(4) appears to be that one can invoke the provisions only if one is treated as resident. Will the Financial Secretary explain the interrelationship between those two articles?
A further element of the tie-breaker point concerns the various factors set out in the explanatory memorandum as to which authority will be competent. Will the Financial Secretary give some guidance on whether the factors contained in the explanatory memorandum should be treated equally, or whether some have greater priority over others? For the benefit of the Committee, the various factors are the location of the senior management, the location of meetings of the board of directors or equivalent body, the location of headquarters, the extent and nature of the economic nexus of the person to each state and
“whether determining that the person is resident of one of the Contracting States but not of the other State for purposes of the Convention would carry the risk of an improper use of the Convention or inappropriate application of the domestic law of either State.”
The phrase
“improper use of the Convention”
caused some alarm bells to ring. It would be helpful if he were to provide some guidance on precisely what that means.
I suspect that the Financial Secretary will make the point that the tie-breaker provision is not entirely new. It has existed within the Canadian double taxation treaty for many years, and it exists within the US double taxation treaty, which is clearly of huge importance. My understanding is that it is only now that the provision has really been noticed, and there may be concern about why the issue is only being raised at this point. If any mischief is being addressed by those concerns, will it not be addressed in any event by changes to the treatment of foreign profits, with the introduction of a foreign profits exemption? I would be grateful if he were to enlighten the Committee on that point.
Finally, on the Isle of Man treaties, I welcome the exchange of information in that context and assume that it is of some significance to the UK authorities. With regard to the double taxation treaty, why is there a protocol rather than a new treaty? Are there any plans for a new treaty? More widely, on the exchange of information with Crown dependencies, the Financial Secretary rightly mentioned Bermuda, and I would like to know whether any other such agreements are in the pipeline.
Will the Financial Secretary set out the context in relation to the Isle of Man? In recent months, there have been issues with the Isle of Man with regard to Kaupthing and the branches of Icelandic banks on the Isle of Man, which might have created some tensions with the Isle of Man authorities. My understanding is that there have been no particular difficulties in ratifying the treaty and that the relationship remains good, but I would be grateful if the Financial Secretary were to confirm that.
I apologise to the Financial Secretary if some of the points that I have raised are detailed and technical, but unfortunately that is the nature of the treaties. However, by and large, we welcome progress in double taxation treaties and the exchange of information, and I look forward to his response.
4.51 pm
Dr. John Pugh (Southport) (LD): It is a pleasure to serve under your chairmanship, Mr. Pope—it is doubly delightful because we are debating a double taxation treaty. The subject being discussed today is a black art, even for the Treasury, and we hesitate to comment on too much of the detail—the mechanics are known only to about three people who are buried in the bowels of the Treasury never to see the light of day. Our job today is complicated a little more by the fact that one document breaks into Dutch—I was intrigued to discover that “loonbelasting” is the wages tax in Holland. I am sure that other Members knew that, but I did not.
Before us are three different documents, two of which—the orders dealing with the French and Dutch treaties—I shall pass. Those are standard items in the sense that we have come across double taxation before—I certainly have, unfortunately. The orders deal with the usual substantive matters such as dividends, students, pensions and capitals, and make certain substantive changes. However, the order relating to the Isle of Man is quite different. It deals more, but not exclusively, with transparency and access, and I would be intrigued to know what substantive changes are being made to the arrangements between us and the Isle of Man. The Financial Secretary has alluded to such changes, but a little more detail would help.
I ask the same question as was asked earlier: why is a new treaty not in place? The Isle of Man has no capital gains, wealth or inheritance tax, or stamp duty, and income tax is capped at 18 per cent. Ninety four per cent. of its economy is based on financial services. We are losing about £11 billion to £40 billion a year across the piece through tax havens such as the Isle of Man, so it is crucial that we get our arrangements with the Isle of Man right. At the moment, it is fairly easy for UK companies to locate investment vehicles in the Isle of Man, under—I think—the Isle of Man Companies Act 2006, and then to trade through what are called new Manx vehicles on stock exchanges in this country. That allows them to trade in the UK while paying no corporation tax, as long as they are solvent in the Isle of Man.
It is regrettable that UK financial institutions do that, because in a sense they are acting like leeches—putting nothing into, but getting much out of, the economic life of the country. It is particularly regrettable, because some of those financial institutions are partly responsible for the financial chaos that surrounds us today, which is the object of discussion in the Chamber. However, it will happen, and not just in the Isle of Man—the Financial Secretary has referred to Bermuda, which is another case in point. I point also to the Cayman Islands, where huge numbers of hedge funds and their like congregate. The Government’s job is to ensure that British organisations and financial institutions contribute to the society from which they profit. It is in the UK’s interest to track them down, but it is in the Isle of Man’s interest that they continue to engage in such practices, so a double taxation treaty creates special difficulties.
The treaty will not make much difference to whether such practices continue; it will simply make a difference to how we understand, calculate and measure what is going on. Clearly, to some extent, that is in the joint interest of the Isle of Man and the UK. There is a general concern that, if there is a lack of transparency, clarity and access, a lot of money will get into the system, either to be improperly used in the case of terrorism or with an improper origin as in the case of money laundering.
I shall concentrate on whether the measures are tough enough to get the transparency that is the only real gain from the statutory instrument. I have a couple of questions about some of the phrasing. I was concerned that the Isle of Man authorities might have some kind of get-out. Article 6 on “Tax Examinations Abroad” reads:
“At the request of the competent authority of the requesting party the requested Party”—
normally us, presumably—
“may allow representatives of the competent enter the territory of the requested Party, to the extent permitted under its domestic laws”.
I pondered whether the Isle of Man could, if the issue were to become a problem and it were losing business, simply change its domestic laws, in which case the transparency would no longer be there.
Article 7 states:
“The Competent Authority of the requested Party may decline to assist...where disclosure of the information requested would be contrary to public policy.”
That is a pretty broad get-out, and public policy is extraordinarily variable—more variable than ever in financial services right across the world at the moment. I wonder whether the Minister is satisfied. We all share the same objective—to ensure that the UK taxpayer gets a fair deal—and he, above all, would wish to see that that is so. What I want is a response indicating that, despite some of the articles not necessarily being in the Isle of Man’s direct interest, the Minister thinks there is enough bite in the statutory instrument to ensure that the desired degree of transparency is achieved in practice.
4.57 pm
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