The
Committee consisted of the following
Members:
Chairman:
Sir
Nicholas Winterton
Barlow,
Ms Celia
(Hove)
(Lab)
Browne,
Mr. Jeremy
(Taunton)
(LD)
Cable,
Dr. Vincent
(Twickenham)
(LD)
Cawsey,
Mr. Ian
(Brigg and Goole)
(Lab)
Cryer,
Mrs. Ann
(Keighley)
(Lab)
Duddridge,
James
(Rochford and Southend, East)
(Con)
Fallon,
Mr. Michael
(Sevenoaks)
(Con)
Gardiner,
Barry
(Brent, North)
(Lab)
Gauke,
Mr. David
(South-West Hertfordshire)
(Con)
Hepburn,
Mr. Stephen
(Jarrow)
(Lab)
Kaufman,
Sir Gerald
(Manchester, Gorton)
(Lab)
Mates,
Mr. Michael
(East Hampshire)
(Con)
Mudie,
Mr. George
(Leeds, East)
(Lab)
Mullin,
Mr. Chris
(Sunderland, South)
(Lab)
Pearson,
Ian
(Economic Secretary to the
Treasury)
Viggers,
Sir Peter
(Gosport)
(Con)
Rhiannon Hollis, Emma Graham,
Committee Clerks
attended
the Committee
First
Delegated Legislation
Committee
Monday 11
January
2010
[Sir
Nicholas Winterton in the
Chair]
Draft
Double Taxation Relief and International Tax Enforcement (Libya) Order
2009
4.30
pm
The
Chairman: I welcome all members of the Committee on this
somewhat dull evening, and I know that we can anticipate a very lengthy
debate. With the leave of the Committee, which I hope will be given, we
will consider the orders
together.
4.31
pm
The
Economic Secretary to the Treasury (Ian Pearson): I beg to
move,
That the
Committee has considered the draft Double Taxation Relief and
International Tax Enforcement (Libya) Order
2009.
The
Chairman: With this it will be convenient to consider the
draft Double Taxation Relief and International Tax Enforcement
(Luxembourg) Order 2009 and the draft Double Taxation Relief and
International Tax Enforcement (Qatar) Order
2009.
Ian
Pearson: It is a pleasure to serve under your
chairmanship, Sir Nicholas; I know that there are people who think the
orders anything but dull.
The orders
deal with new comprehensive double taxation agreements with Qatar and
Libya and amendments to our current double taxation agreement with
Luxembourg. I am pleased to introduce them to the Committee.
I will start
with the order relating to Libya. The first-time comprehensive double
taxation convention between the UK and Libya was negotiated between
2005 and 2007 and signed in London on 17 November 2008 by my hon.
Friend the Member for Harlow (Bill Rammell), then a Minister
of State at the Foreign Office, and the Libyan Secretary for European
Affairs, Abdulatti al-Obidi. The treaty will be welcomed by British
business in Libya and Libyan investors in the UK as something that both
reduces tax-related barriers to international trade and investment and
provides certainty of treatment.
Historically,
Libya has been a strong market for the UK. Visible UK exports to Libya
amounted to £280 million in 2008, an increase of 21
per cent. on the figure for 2007, consisting mainly of industrial
machinery for the oil and gas sector.
The treaty
compares favourably with Libyas other recently signed treaties
and largely follows the UKs preferred wording, which is based
on the OECD model. In particular, it eliminates source-country
withholding tax on all interest payments, compared with Libyas
domestic rate of 15 per cent. Likewise, it contains a zero withholding
tax rate for royalties and dividendsexcept for dividends paid
by UK real estate investment trustsand
that will protect UK investors from any interruption of withholding
taxes in Libya in the future. It also reflects the current OECD
standard on exchange of
information.
James
Duddridge (Rochford and Southend, East) (Con): Will the
Minister explain why REITs are
excluded?
Ian
Pearson: That is standard practice, and it is one of the
areas where the UK has different legislation, but I will cover that,
and any other points hon. Members raise, in my concluding
remarks.
I
turn now to the treaty with Luxembourg. The protocol, which brings the
exchange of information article in the treaty up to international
standards, is the direct result of international pressure for tax
transparency. In the run-up to the G20 London summit last April, some
countries with a tradition of declining to supply tax information
covered by bank secrecy, such as Luxembourg, announced that they would
adopt the OECD standard on exchange of information. The protocol
follows that standard and allows the exchange of information on
request. The agreements provide for one territory to make a request of
the other for assistance in relation to a particular case under
examination or investigation. For the first time, that includes
information on bank accounts, where that is relevant to the assessment
of UK tax.
The exchange
of notes was added at Luxembourgs request. It sets out the
manner in which the exchange of information agreed to in the treaty
will be affected and reinforces the principle that tax authorities are
not at liberty to engage in fishing expeditions. That is one of 15 such
agreements that Luxembourg has signed, and one of 16 that the UK has
signed since the G20 London summit. There are more such agreements in
the
pipeline.
I
turn to the treaty with Qatar. My right hon. Friend the Financial
Secretary signed the first-time comprehensive double taxation agreement
between the UK and Qatar in London on 25 June 2009 with His Excellency
Yousef Hussain Kamal, Qatars Minister of Economy and Finance.
That treaty will be of great value in removing tax obstacles to closer
economic ties between the UK and Qatar. It will be good for British
companies doing business in that
country.
With
the downturn in the global economy and business in some export markets
diminishing, many UK companies are turning their attention to the Gulf
and in particular to countries such as Qatar, whose economy is growing
at a significant pace. In 2008, such UK exports of goods increased by
almost £70 million compared with 2007. Imports to the UK from
Qatar quadrupled in the first half of 2009, compared with the first
half of 2008. That was due mainly to liquefied natural gas
imports.
The
treaty is again based substantially on the OECD model tax treaty. It
covers the usual types of income included in tax treaties, such as
property rents, business profits, income from shipping and air
transport, dividends, interest, royalties, capital gains, employment
income and pensions. It also contains safeguards to deter tax avoidance
and evasion. Important features include the latest OECD model article
on the exchange of information; a zero rate of withholding tax on
dividends, apart from real estate investment trusts; and a zero rate of
withholding tax on interest, but with a provision to ensure that the
benefits of the interest article can flow only to Qatari residents and
companies owned by them.
Qatar
has recently signed a number of tax treaties with other countries. The
UKs treaty with Qatar is at least as good as those other
treaties, in particular with regard to withholding
taxes.
I
look forward to the debate and the comments of hon.
Members.
4.37
pm
Mr.
David Gauke (South-West Hertfordshire) (Con): It might be
a dull afternoon, but it has been enlivened by your chairmanship, Sir
Nicholas, under which it is a great pleasure to
serve.
I
thank the Minister for his introductory remarks. I appreciate that the
role of Minister in debates on double taxation treaties is usually
performed by the Financial Secretary, who I appreciate is engaged in
tax law rewrite matters as we speak. I am grateful to the Minister for
stepping in. I also express my gratitude to the officials who provided
me with a good briefing on the orders last week; that has enabled me to
construct more intelligent questions than I would otherwise have been
able to
ask.
Like
the Minister, I will discuss each provision, but in a different order.
I will deal first with the Luxembourg order, which we welcome. Nobody
can claim that tax havens and jurisdictions where bank secrecy is
prominent caused the recession, but we none the less welcome moves at
the G20 and OECD levels towards greater exchange of information between
tax authorities. The movement shown by Luxembourg in that area is to be
welcomed.
The
note from the Luxembourg Minister, Luc Frieden, dated 2 July 2009, to
which the Minister alluded, contains details of what should be required
of a competent state that is making a request for information. It
contains a list of information to be given and statements to be made by
the requesting authority. Will the Minister confirm that that
arrangement is normal and does not add anything beyond what is usually
required under an OECD model agreement whereby information is provided
on request, which is what is being agreed with the Luxembourg
authorities? Does the Minister envisage that this agreement will be
built on, and that there might be automatic or spontaneous exchange of
information between the Luxembourg and UK authorities whereby
information is automatically exchanged or, under a spontaneous
exchange, the Luxembourg authorities look out for information that is
of significance to the UK tax
authorities?
The
agreement could be significant. I know that it is difficult for the
Minister to make an assessment of the potential revenue benefits of the
change in approach by the Luxembourg authorities, and of the agreement
that has been reached. It might bring in significant revenue that
previously should have been paid to Her Majestys Revenue and
Customs, but has not been. If the Minister can speculate about the
revenue implications, I am sure that the Committee would be very
interested. Perhaps, however, it is more realistic to ask him to
provide the Committee with some indication of how HMRC will use the
information. Will there be resources within HMRC that will be directed
to potential gains as a consequence of the ability to obtain
information with regard to Luxembourg bank accounts? Such gains might
prove to be significant, and clearly HMRC must be set up to take
advantage of the new regime. Will the Minister also give some
indication of where Luxembourg is with its ratification
process?
Finally, with
regard to the Luxembourg order, I notice that the Financial Secretary
is referred to as Excellency. I do not know whether
many people make a habit of referring to him as
Excellency; if not, why
not?
Turning
to the Qatari order, I understand that Qatar has an unusual tax system
and that Qatari nationals are not taxed. Will the Minister confirm that
the agreement will be relevant to permanent establishments based in
Qatar, as they will benefit from the double taxation
treaty?
Paragraph
3 of article 11 of the agreement, which relates to the taxation of
interest, is somewhat unusual, so will the Minister say a word or two
about it? Will he also provide some clarification as to how Qatar
treats the taxation of interest? I understand that previously Qatar did
not tax interest, and then brought the taxation of interest into play
but immediately suspended it. I would be grateful for some
clarification on that point.
Will the
Minister confirm whether article 8 of the agreement, which relates to
shipping and aircraft, can, as I understand, be backdated to 6 January
2004? Is that normal practice? I understand that there are no
significant revenue implications either way. The provision avoids
confusion and it is significant for airlines based in Qatar and in the
UK. The process of reopening all that could prove to be difficult, so
will the Minister say a word or two on that
subject?
Finally,
I turn to the order on Libyaor, to be precise, the Great
Socialist Peoples Libyan Arab Jamahiriya. I understand that the
agreement is fairly standard and that there is little in it that is not
within the usual model for a double taxation treaty. One exception,
however, is article 6 of the convention, which
states:
Subject
to any other provision of this Convention, income arising in a
Contracting State may be taxed in that Contracting
State.
I
understand that that article in itself is not likely to be significant
because, as it states, it is subject to any other
provision of the convention, but that the Libyan authorities
were keen to include
it.
As
the Minister said, the agreement was negotiated between 2005 and 2007.
It was signed on 17 November 2008 by the hon. Member for Harlow, who
was then Minister of State at the Foreign and Commonwealth Office. We
are now in 2010, however, so will the Minister explain why there
appears to have been significant delay in approving the treaty? Another
example of an agreement signed on the very day that the double taxation
treaty was signed17 November 2008is the prisoner
transfer agreement, which it is fair to say was somewhat more high
profile. That agreement was operative by April or May 2009. In that
context, I must ask whether any discussions were held about
Mr. al-Megrahi during any part of the negotiations on the
double taxation treaty? He was clearly relevant to the prisoner
transfer agreement, but can the Minister indicate whether there was any
link between the prisoner transfer agreementand
Mr. al-Megrahi specificallyand the double taxation
treaty?
Will
the Minister explain where Libya is with regard to the agreement? There
has been considerable delay to the parliamentary debate on the Libyan
treaty, but has Libya itself ratified it? I understand that it has not
yet, but I would be grateful for confirmation.
I
have made my final point before, but I do so again in the context of
the delays. We welcome the double taxation treaties. It is good for the
UK to enter into double taxation treaties when we can so that we may do
whatever is possible to ensure that the UK is in a position to trade
with other countries. Our wealth and economy are dependent on us being
an outward-looking trading nation, and measures to address some of the
taxation difficulties that can arise when trading with other nations
are to be welcomed. However, there can be significant delays between
agreements being negotiated and Parliament having the opportunity to
approve them. We want to be positive and to assist the Government in
doing whatever is possible to progress the matters. Perhaps the
Minister will enlighten the Committee about any progress that can be
made on the speed with which such matters receive parliamentary
approval. If he has any proposals on accelerating the
processwhile ensuring, of course, that there is proper
parliamentary scrutinywe will be willing to engage
constructively with
him.
Subject
to my comments and questions, we have no intention of opposing any of
the
orders.
4.48
pm
Mr.
Michael Fallon (Sevenoaks) (Con): I do not wish to detain
the Committee, but I have one question for the Minister about the
Luxembourg order. Will he reassure me that paragraph (3)(c) of new
article XXVIII is similar to the provision in the old article XXVIII in
its reference to the ability of the Luxembourg Government to refuse to
give such tax information simply if it is contrary to their public
policy? That concerns me because Luxembourg, unlike the other countries
that we are considering, is a member state of the European Union, and
one in which it is alleged that various dictatorsspecifically
Kim Jong-il of North Koreahave stashed away considerable
amounts of money over the
years.
Had
that been done by a British citizen, I assume that it would still be
possible for the Luxembourg Government to say, No, it is
contrary to our public policy to release information of that kind,
because we welcome substantial bank deposits, and we dont ask
too many questions as to how those deposits are arrived at.
Will the Minister reassure me that in negotiating this treaty, on which
I congratulate him, with Luxemburgas a member state of the
European Unionthe definition of public policy is one to which
all member states subscribe, and that Luxemburg will no longer be
allowed to apply its own particular criteria, about which there has
been so much suspicion and criticism in the
past?
The
Chairman: Before I call the Minister to reply, I say to
the hon. Member for Taunton that I am disappointed he has not
contributed to the debate, because I was going to sayand I will
say it anywaythat I listened with interest to his robust
comments on last nights The Westminster Hour,
which I gather he made from his Taunton constituency, and which
certainly entertained me on a difficult journey back to
London.
4.50
pm
Ian
Pearson: I thank the hon. Member for South-West
Hertfordshire for his introductory remarks and the courtesy he extended
to officials. He asked a number of
questionsthey came thick and fastand I hope I can cover
all of them. If I do not, perhaps he will intervene or we can sort
something else out. However, I understand that he very much supports
the draft orders. Let me take the measures in the order in which the
hon. Gentleman raised them: Luxembourg, Qatar and then Libya. I will
also try to answer the questions asked by the hon. Members for Rochford
and Southend, East and for Sevenoaks.
On
Luxembourg, the text on exchange of notes sets out the manner in which
information can be exchanged and picks up the language used in the OECD
model tax information exchange agreement, so it is a standard text. On
the question put by the hon. Member for South-West Hertfordshire about
automatic exchange, my understanding is that Luxembourg would not agree
to that. However, what we have in the agreement is certainly a step
forward. We will have to see how things develop in the months and years
ahead.
The
protocol provides for exchange of information on request in relation to
a specific case, and any information that is foreseeably relevant to
direct tax liability in the requesting party may be sought. If
information is not already in the possession of the revenue
authorities, the requested party must use its information-gathering
powers to obtain the information from a person within its
jurisdiction.
In terms of
where we are in the process, Luxembourg has commenced its process,
which is expected to be completed in the first half of this year.
Assuming that UK processes are similarly completed, the protocol will
enter into force after the relevant notifications have been made, which
will clear the way for it to take effect from 1 January 2011. I think
it is the intention that all the agreements that we are discussing
today will be ratified this year. They always start at the beginning of
a calendar year, so they cannot start during the course of 2010, but
our intention is that they will all start at the beginning of calendar
year
2011.
The
hon. Member for Sevenoaks raised the question about public policy, and
my understanding is certainly that Luxembourg will not seek to apply
the measure in the way that he is concerned it might. It is not
possible to speculate about the amount of money raised by the
agreement, which the hon. Member for South-West Hertfordshire asked me
about, because it is not possible to know what any information that
might be disclosed will reveal. However, the transparency provisions to
which Luxembourg has agreed are a step forward; they conform to
international standards and have been widely
welcomed.
On
Qatar, the first question asked was about the taxation of interest. As
the hon. Member for South-West Hertfordshire will be aware, Qatar does
not tax interest received by its own nationals. It has introduced a
withholding tax on interest paid from Qatar, but our understanding is
that that is currently suspended. The hon. Gentleman is right to say
that the Qatar agreement is backdated to 2004 with regard to shipping
and air transport. Initially, negotiations with Qatar were for a
limited agreement dealing just with air transport; it was agreed during
those negotiations not to take any action to collect tax from each
countrys airlines.
That
undertaking continued during the negotiations for this agreement and
Qatar wished to see that reflected in the agreement, hence backdating
it to cover all years
open for assessment in the UK. There will be little or no cost, as we
have not been taxing Qatari airlines and Qatar has not been taxing
British ones. In the absence of the undertaking we could have done
that, but we would have had to give credit for any Qatari tax that
airlines had had to pay on their operations in Qatar, which would have
left overall receipts unchanged. The two parties have negotiated and we
both feel comfortable with what is
proposed.
With
regard to Libya, the hon. Member for South-West Hertfordshire asked
about article 6, which simply clarifies that, as a starting point and
subject to later provisions, income arising in a state is income that
has its source in a state and may be taxed there. It is not normal
practice to include such articles in Libyas treaties and this
provision was included at its request: it wanted that to be included
and we see no problem with
that.
With
regard to any delay in approval of the Libyan treaty, we are of course
subject to the constraints of parliamentary time, but we are ahead of
Libya and its process, so we are not on a critical path. Our intention,
as I have said, is that all the orders will go through their relevant
processes in both countries during this year and will be implemented
and effective from 1 January
2011.
I
want to state clearly that there is no linkage between the negotiations
on double taxation agreements and the prisoner transfer agreement.
Indeed, the al-Megrahi release was on compassionate grounds, and there
have been no discussions with tax officials on those
matters.
With
regard to the point made by the hon. Member for Rochford and Southend,
East on real estate investment trusts, the purpose of thatI
understand it is common to double taxation agreementsis to
reflect the UKs position, because we want to protect our
domestic withholding tax on real estate investment trust dividends. We
have a withholding tax because we do not tax the profits out of which
those dividends are paid, which is the feature of the REITs
regimethe hon. Gentleman will be aware that we do not have a
withholding tax in generalbut we have exceptions with regard to
REITs because of how it operates. That is why it is in our
interests that the wording in the orders should be as it is. I hope that
that explains matters for the hon.
Gentleman.
Mr.
Winterton, I think that I have
covered
The
Chairman: Sir
Nicholas.
Ian
Pearson: Sir Nicholas, I think that I have covered the
points raised by the hon. Member for South-West Hertfordshire. I note
that he has welcomed the draft orders and I hope that the Committee
will agree to
them.
The
Chairman: I have to say to the Minister that it took me
the best part of 33 years to get that title and I am not giving it away
lightly.
Question
put and agreed
to.
Resolved,
That
the Committee has considered the draft Double Taxation
Relief and International Tax Enforcement (Luxembourg) Order
2009.(Ian
Pearson.)
Resolved,
That
the Committee has considered the draft Double Taxation Relief and
International Tax Enforcement (Qatar) Order
2009.(Ian
Pearson.)
The
Chairman: I congratulate Committee members on concluding
this matter within half an hour and on their
contributions.
5
pm
Committee
rose.