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Mr. Timms: I am grateful to both hon. Members who have spoken for welcoming the measures. I am pleased that the hon. Member for South-West Hertfordshire was able to meet Department officials and have useful discussions ahead of the debate.
The hon. Gentleman asked how REITs are dealt with. As he knows, in the UK, income from a REIT or similar fund is exempt from tax in certain circumstances. Instead, tax is levied on dividends paid by the REIT at a rate of 20 per cent. In UK treaties, tax is limited to 15 per cent., in line with the approach advocated by the OECD. In the Dutch treaty before us, that is achieved by a special provision contained in article 10(2)(a)(ii), which is needed because the general portfolio rate under the treaty is 10 per cent. In the French treaty, the general portfolio rate is 15 per cent., at the insistence of France, so no special REIT provision is necessary. There is, though, a provision in the French treaty, at article 11(5), in line with OECD recommendations, allowing a country unlimited taxing rights over dividends paid by REITs and similar vehicles to shareholders who hold more than 10 per cent. of the capital of the REIT. In practice, that would generally only apply to dividends paid by a French REIT, as UK REITs have an ownership restriction of 10 per cent.
The hon. Gentleman also asked about the arbitration process. The two treaties are the first to contain an arbitration provision. Arbitration is a useful part of the mutual agreement process, and can be required by the taxpayer when the competent authorities have been unable to reach agreement on a case referred to them within two years. We would not expect the provision to be invoked very much, but it gives greater certainty, particularly to businesses, guaranteeing a resolution of disputes, and so it has been broadly welcomed.
The hon. Gentleman asked several questions about the tiebreaker arrangements in article 4 of the Dutch treaty. Where a company is dual resident, the treaty needs to award residence to one country or the other, to establish which country will forgo its taxing rights. In the conventional OECD model, the residence tiebreaker awards exclusive residence for the purposes of the treaty to the country where the company is effectively managed. Normally that is fine, but there may be circumstances in which a company tries to manipulate its residence status to take advantage artificially of the treaty or the domestic rules of the relevant country—for example, to get access to loss relief. In those circumstances the tiebreaker test that we have used in the Dutch treaty, which is also sanctioned by the OECD, allows the competent authorities to determine the country in which the company will be tax resident for the purposes of the treaty.
The draft statutory instrument was considered in December by the Select Committee on Statutory Instruments. That Committee, which is responsible for alerting the House if there appears to be any doubt about whether there is power to make a statutory instrument, approved it. I think that the Committee will find that reassuring. To answer the hon. Gentleman’s question, I accept that section 788(3) must apply. It is clear to the Government that section 788 of the Income and Corporation Taxes Act 1988 contains powers to include a company residence tiebreaker in a treaty for which it provides the vires. Where a company is dual resident, it is essential to know which single country it is to be treated as resident in, so that in certain circumstances the other country can forgo its taxing rights. That is the function of the tiebreaker.
The hon. Gentleman expressed a little concern about the possibility of a measure of uncertainty. Dual resident companies that have a residence determination under the existing treaty will not need to approach the competent authority for a fresh determination as long as the material facts are unchanged. Where a competent authority determination is required, it will be done quickly. As the hon. Gentleman said, there is already similar provision in the US treaty. It has been there for eight years and he said that no one had noticed it until now, so I do not think that it has caused much of a problem. Certainly, Her Majesty’s Revenue and Customs is not aware of problems. He asked about the weight to be given to the various factors set out in the explanatory memorandum. The weight given to each factor will depend on the circumstances of each case. That is the point of the flexible approach that the competent authority route allows.
As to the Isle of Man, we concluded that this is not the moment to undertake a full revision of the double taxation agreement, because we wanted to get the tax information exchange agreement in place for all the Crown dependencies. There is a programme of work going on in that respect. We recognise that several articles in the existing double taxation agreement need revision, which would require a fair amount of negotiating time, so it was agreed that some tax benefits on pensions would be written in by way of a quid pro quo for signing the tax information exchange agreement at this stage. However, it has always been our intention to renegotiate the existing double taxation agreement with the Isle of Man once the TIEA was signed. It is quite out of date and needs revision.
As to which other territories we are working with on tax information exchange agreements, we have just signed one with the British Virgin Islands. We are close to signing agreements with Guernsey and Jersey. We hope to complete agreements in the near future with the Cayman Islands, to pick up the point made by the hon. Member for Southport, and with the Turks and Caicos Islands and Anguilla. Achieving the agreement with the British Virgin Islands is a significant milestone.
The hon. Member for Southport, perfectly properly, wanted reassurance that the treaty with the Isle of Man would be of some good—that it would bite, as he put it. I can reassure him that the arrangement was modelled on OECD standards for tax co-operation. A great deal of work is going on in the OECD on tax information exchange, and a major initiative has been undertaken to tackle problems with the lack of information from some jurisdictions. There have been concerns in some quarters about the Crown dependencies in that respect, but the OECD and others have generally welcomed the progress being made in signing agreements along the lines of the OECD model.
The order for the Isle of Man is an important step in the right direction. It will provide for exchange of information with the UK to OECD standards. The OECD suggested a benchmark figure of 12 such agreements with OECD countries to which territories ought to aspire, depending on how many countries want one. The Isle of Man has agreements in force with the US and the Netherlands and has signed agreements with Denmark, the Faroe Islands, Finland, Greenland, Iceland, Norway, Sweden and the Republic of Ireland, so it is well on the way to achieving 12—the agreed standard for satisfying the OECD.
The agreement will help to combat money laundering, which the hon. Member for Southport mentioned. Such agreements discourage illicit flows by making it more difficult to hide the proceeds of crime from the authorities. We certainly expect to obtain information on transactions, structures and investments by UK taxpayers in the Isle of Man, including bank information as well as information on beneficial ownership and partnerships, companies and all forms of trust. It will help us to ensure that the correct amount of UK tax is paid by the taxpayers affected. We have had a good relationship with the Isle of Man on the issue—it has not been problematic—but the agreement nevertheless represents a welcome step forward. I am confident that it will be implemented in good faith.
Question put and agreed to.
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (France) Order 2008.


That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Netherlands) Order 2008.—(Mr. Timms.)


That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Taxes on Income and Capital) (Isle of Man) Order 2008.—(Mr. Timms.)
5.8 pm
Committee rose.
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