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House of Commons
Session 2009 - 10
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General Committee Debates
Delegated Legislation Committee Debates



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 Libya’s other recently signed treaties and largely follows the UK’s preferred wording, which is based on the OECD model. In particular, it eliminates source-country withholding tax on all interest payments, compared with Libya’s domestic rate of 15 per cent. Likewise, it contains a zero withholding tax rate for royalties and dividends—except for dividends paid by UK real estate investment trusts—and 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 Luxembourg’s 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, Qatar’s 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 UK’s 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 Majesty’s 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 Libya—or, to be precise, the Great Socialist People’s 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 signed—17 November 2008—is 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 agreement—and Mr. al-Megrahi specifically—and 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 process—while ensuring, of course, that there is proper parliamentary scrutiny—we 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 dictators—specifically Kim Jong-il of North Korea—have 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 don’t 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 Luxemburg—as a member state of the European Union—the 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 say—and I will say it anyway—that I listened with interest to his robust comments on last night’s “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
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 country’s airlines.
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 Libya’s 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 that—I understand it is common to double taxation agreements—is to reflect the UK’s 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 regime—the hon. Gentleman will be aware that we do not have a withholding tax in general—but 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.

DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (LUXEMBOURG) ORDER 2009

Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Luxembourg) Order 2009.—(Ian Pearson.)

DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (QATAR) ORDER 2009

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.
 
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