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General Committee Debates
Delegated Legislation Committee Debates
|©Parliamentary copyright||Prepared 30th November 2010|
Publications on the internet
General Committee Debates
Delegated Legislation Committee Debates
Draft Double Taxation Relief and International Tax Enforcement Orders 2010 (Belgium, Cayman Islands, Georgia, Federal Republic of Germany, Hong Kong and Malaysia)
The Committee consisted of the following Members:
Glenn McKee, Committee Clerk
† attended the Committee
The Chair: With this it will be convenient to discuss the draft Double Taxation Relief and International Tax Enforcement (Cayman Islands) Order 2010, the draft Double Taxation Relief and International Tax Enforcement (Georgia) Order 2010, the draft Double Taxation Relief and International Tax Enforcement (Federal Republic of Germany) Order 2010, the draft Double Taxation Relief and International Tax Enforcement (Hong Kong) Order 2010 and the draft Double Taxation Relief and International Tax Enforcement (Malaysia) Order 2010.
The double taxation orders deal with comprehensive double taxation agreements with Germany and Hong Kong, a double taxation arrangement with the Cayman Islands, and protocols amending our existing treaties with Belgium, Georgia and Malaysia. I am sure that the right hon. Member for Delyn will have many questions, but I shall attempt to anticipate them and give a fairly full explanation of the treaties to save him the need of asking too many. As with the treaties that were debated earlier this month, all but one of them were negotiated and signed under the previous Government. The double taxation agreement with Hong Kong was the first such agreement signed under this Government, and I am pleased to introduce the orders to the Committee.
I shall speak first about the Belgium order. The protocol amends the 1987 double taxation agreement. Discussions with Belgium had been ongoing for some time on a range of issues in the treaty and, by happy chance, the final round of negotiations took place the week after Belgium announced that it would adopt the new OECD standard in the exchange of information article, which therefore forms one of the provisions of the protocol. The protocol is lengthy, so I shall outline its main features.
In addition to the inclusion of the OECD exchange of information article and several technical changes, the protocol provides that dividends paid to companies owning more than 10% of the capital of the paying company will be exempt from withholding taxes. Pension funds will also be exempt from withholding taxes on their Belgian dividends. Although the European Union parent subsidiary directive obliges member states to exempt direct investors, the exemption for pension funds is a value benefit for that large class of portfolio investors.
The dividend withholding rate for other investors is 10%, unless the dividend is paid by a real estate investment trust, in which case the rate generally applicable is 15%. That recognises the fact that REITs suffer no United Kingdom corporation tax on their underlying profits. The rate of withholding tax on interest has been reduced from 15% to 10%, but the treaty now has a zero rate for inter-company interest, interest paid to pension funds and interest paid to the Government. Together with domestic law exemptions, that means that virtually all cross-border interest between the two countries is free of tax in the source state.
Under the new provisions, profits from shipping and air transport will be taxed solely in the state of residence of the operator rather than the state of the place of effective management. Individuals employed in international transport will now be taxed solely in their country of residence, which will remove an unintended double exemption that some Belgium residents received under the existing treaty. The taxation of pensions will be changed for all new pensions from taxation solely in the country of residence of the pensioner, to taxation solely in the country from which it is paid. Belgium is one of the increasing number of countries that want to tax pensions when they have allowed tax relief on contributions from which the pensions are paid, but the protocol preserves the existing treatment for pensions already in payment in the year in which the protocol enters into force.
A provision providing for binding arbitration has been inserted into the article dealing with mutual agreement in the event of there being a protracted dispute between the two taxing authorities. Companies welcome the certainty that arbitration brings and, while arbitration of transfer pricing disputes is already available under the EU convention, arbitration will now be available for all issues arising under the tax treaty.
UK tax treaties often include a provision that lifts from the other country the obligation to apply the treaty to income arising in that country when it belongs to an individual resident in the UK who pays no tax on it because of the remittance basis. At Belgium’s request, the protocol goes further and, by virtue of the provision under article XIX, an individual resident in the UK will not be entitled to any treaty benefits from Belgium on income arising in the year for which he claims the remittance basis.
In the reverse situation, Belgium’s tax concession scheme to attract skilled expatriates to Belgium specifically provides that if they benefit from the Belgian tax concessions, they are not considered residents of Belgium for the purposes of Belgium’s tax treaties. Thus, the treaty partners are not obliged to give relief on income arising in their country. The new provision therefore provides symmetry of treatment.
The double taxation arrangement with the Cayman Islands provides tax benefits for pensioners, Government servants, students and enterprises engaged in international shipping and air transport activities. The arrangement is, therefore, more limited in scope than a standard tax treaty, but it has similarities with the agreement signed with the British Virgin Islands in October 2009. More importantly, the arrangement contains exchange of information provisions for taxes on income and capital gains, inheritance tax and VAT that conform to the OECD standard.
The protocol with Georgia was signed in Tbilisi on 3 February 2010 and amends the double taxation agreement with Georgia signed in 2004. It aids cross-border investment by removing the restrictions in the treaty on the zero rate of withholding tax with dividends, except for dividends paid by a REIT. It is pleasing that Georgia recognises the benefits of foreign investment and has sought to remove some restrictions on that investment. In the same way, the protocol raises the time threshold that must be exceeded before a building site may be regarded as a permanent establishment. In line with the OECD model tax treaty and the UK’s own preference, the limit is now 12 months rather than six.
The previous double taxation agreement with Germany had remained largely unchanged since its signing in 1964. Only one of the UK’s treaties with an EU partner is older—that with Greece. That is perhaps surprising, as Germany is the UK’s second largest export market worldwide after the US and provides the greatest share of UK imports. However, I am sure that the Committee will welcome the fact that we now have a modern tax treaty that will effectively serve the needs of UK companies and individuals doing business with their counterparts in one of the UK’s most important economic partners.
The UK and Germany had both wanted to update the treaty for some time, but progress was slow because of the differences between the two countries’ tax systems. Despite those difficulties, the new treaty, which was agreed last year, broadly follows the latest OECD model agreement, with only one or two significant differences to reflect the relevant laws of each country.
The existing dividends article requires that dividends are subject to tax in the hands of recipients, if they are to benefit from the reduced withholding tax in the source state. That does not fit with the exemption for foreign dividends that UK companies now enjoy. The new treaty therefore removes the subject-to-tax test from the dividends article, as well as from the interest and royalties articles.
The new treaty provides that dividends may be taxed at 5% for direct investors—that is to say companies having more than a 10% control—at 10% for pension funds and at 15% for other investors. As in the treaty with Belgium, the reduction in the withholding tax rate for dividends received by pension funds provides an important benefit to funds in the UK. Germany has also agreed that if it reduces the rate of tax on its own pension schemes in the future, the two countries will enter into negotiations for a corresponding adjustment to the article. As under the existing treaty, interest and royalties are exempt from source state taxation but, as I have mentioned, and following the generally accepted treatment, there is no requirement for them to be subject to tax in the other state.
The pensions article contains some unusual features. Germany is in the process of reforming its rules governing the taxation of pensions. Under the old system, pension contributions attracted no tax relief, investment income of pension schemes was taxed and pensions in payment were taxed at a low rate. The new system is more like the UK’s and is one in which contributions during a person’s working life attract tax relief, but pensions in payment are taxed at the normal rate. The change is being phased in roughly over a person’s average working life.
As a result, Germany wishes to retain its taxing rights over pensions paid to non-residents where they are paid out of funds that have received tax relief in Germany.
The treaty contains the latest exchange of information and assistance in collection articles. In addition, at Germany’s request, we agreed a provision in a protocol to the treaty setting out the rules for handling information exchanged under the treaty, which recognises Germany’s data protection rules.
The protocol also contains a provision designed to prevent the avoidance of UK tax by German companies that set up a permanent establishment in a third country and route dividends, interest and royalties through that permanent establishment. To benefit from the treaty under this anti-avoidance provision, the combined rate of tax payable by the company and the permanent establishment will have to be at least 60% of the rate that would be payable if the company had received the income direct.
I now turn to the agreement with Hong Kong, which is a first-time comprehensive agreement with that territory. I understand that negotiations originally began several years ago, but at a time when Hong Kong was unable to meet the OECD standard on exchange of information. Last year, Hong Kong announced that it would amend its domestic legislation to allow it to apply the OECD standard, and, on that basis, the previous Government were happy to recommence negotiations, as I understand it. Hong Kong has now made the necessary changes to its legislation and, on that basis, I signed the agreement on 21 June this year with Professor K.C. Chan, Hong Kong’s Secretary for Financial Services and the Treasury. Other key features of the treaty include the elimination of withholding tax on dividends, apart from dividends paid by REITs, where the agreement permits a 15% rate. The agreement eliminates the right of the source state to tax interest, but permits a 3% withholding tax on royalties.
As Hong Kong generally does not tax income arising outside the territory, the agreement contains a special measure to prevent its abuse by residents of third countries. This measure is along the lines that the UK has used with other low-tax or no-tax countries. The agreement represents a significant step in our relationship with Hong Kong. I am confident that it will be welcomed by UK businesses and will continue to strengthen our enduring commercial and historical ties with Hong Kong.
The protocol with Malaysia was signed under the previous Government on 22 September 2009, and simply updates the exchange of information article to the latest standard. The original treaty signed in 1996 does not cover persons entitled to certain special tax benefits, principally Labuan companies, which are exempt from Malaysian tax. These companies are still not entitled to benefits under the treaty, but the protocol amends the exclusion to permit the UK to request the Malaysian authorities to obtain and provide information about
I apologise for providing such detail, but I know that the Committee will have an insatiable desire to know more about the various treaties. I commend the orders to the Committee and will be happy to answer any questions about the provisions that members of the Committee might have.
Mr David Hanson (Delyn) (Lab): I, too, welcome you to the Chair, Mr Leigh. You will be pleased to know that the official Opposition have no great difficulty with the orders. As the Minister has indicated, the majority of the orders, with the exception of the order applying to Hong Kong, were negotiated and signed by my right hon. Friend the Member for East Ham (Stephen Timms) when he was a Treasury Minister in the previous Government. As the Minister has said, the orders are extremely helpful in regularising tax relations between the various countries specified and the United Kingdom. I am particularly pleased to see that both Belgium and Malaysia have now come into line with the OECD rules; the orders help them to meet the OECD standard. I am sure, as the Minister has indicated, that the timings of the signings are purely coincidental.
I have a couple of quick questions, one of which I have raised before and which I hope the Minister will answer. The agreement with Belgium was signed on 24 June 2009; with the Cayman Islands on 15 June 2009; and with Malaysia on 22 September 2009. I am asking again whether there is an agreed time scale from agreement between Governments until legislation is brought before authorities in the host nation and our Parliament, because the orders come into effect when both nations have completed their legislative timetables. From the middle of June last year until now is a considerable time, and I am not clear from what the Minister has said to date when each of the co-nations will sign and legislate on such matters. When does he expect the orders not just to go through the House but to be enacted for each of the nations and areas before us today? The agreements have to be considered by other administrative bodies and Parliaments, as well as our own. I want some indication, for future reference, of the likely time scale between initial discussion and signature and the agreement ultimately being put in place, because of the great difference between the Hong Kong measure being signed in June this year and the time at which the other measures were signed. What is his normal expectation of the procedures?
On Hong Kong, can the Minister give me some flavour of how that agreement will operate in relation to neighbouring China? Do the Chinese authorities have any view on that? Are there differences between the double taxation agreements currently proposed for Hong Kong and those that exist for China as a whole? Although Hong Kong is a separate jurisdiction at the moment, it is formally part of China, so I would welcome clarification of the views of both authorities and whether the Minister wishes to draw any particular matters to the Committee’s attention in relation to that measure.
My final question concerns the draft Double Taxation Relief and International Enforcement (Cayman Islands) Order 2010, which was signed and negotiated by my right hon. Friend the Member for East Ham. On page 7, in paragraph 7, on pensions, why was the period of six years chosen? Is there any particular reason for that length of time? Does a similar length of time operate in other agreements? I would like some clarity from the Minister, just to give his officials something to do. Can he indicate why the six-year period was selected, and is that the norm?
In broad terms, we have no problems with the orders. They regularise taxation arrangements between the UK and the nations to which they apply. The orders were negotiated by the previous Government—we supported them then and we support them now. We wish the Minister well in implementing them in due course.
Mr Gauke: I thank the right hon. Member for Delyn for the constructive manner in which he engages in such debates. This is not the first time we have debated double taxation or information exchange agreements, and he is right to highlight the significant time differences between when some of the agreements were signed and when we are able to complete the process here. We are keen to accelerate that process. We would normally aim to complete it in around six months—the parliamentary timetable can cause delays, of course, but that would be the target.
We found a backlog of treaties that needed to be completed—that is not meant as a criticism of the previous Government. As the right hon. Gentleman is aware, a number of agreements have been signed in recent years—there has been a change in the international mood in the area, and a greater desire to exchange information, which we welcome. As a consequence, we had a large number to deal with, and finding appropriate parliamentary time was not terribly easy for the previous Government or for us. As the right hon. Gentleman has pointed out, the Treasury already makes considerable demands on Committee time. I am pleased, however, that we are able to take a large number of treaties today, as we were earlier in the month—so we are catching up. It is pleasing that with Hong Kong, for example, we have been able to progress quickly with the signing on 21 June to our completing the remaining stages.
The right hon. Gentleman asked about the position of other signatories. Other countries’ procedures are out of our hands, of course. However, Germany and the Cayman Islands have completed their process; the other countries have yet to do so, but we hope that they will as quickly as possible.
Mr Hanson: I mentioned that because, on both counts, important issues are at stake in relation to our commitment to the other countries about when we complete our processes. Discussions and signings took place as long as 18 months ago, so I want to know the other countries’ understanding of the original time scale.
Secondly, although we are agreeing the proposals, the Minister has not indicated the time scale for when we expect other countries to complete their legislative proposals. It would be helpful if the House were informed when those matters are completed, rather than simply of our endorsing the measures today.
Mr Gauke: I shall take that point in the spirit in which the right hon. Gentleman has made it. Although it is not within our control, there might be an opportunity to inform the House about the completion of such matters. There is no issue of other countries considering the UK to be unnecessary dilatory; as far as I know, they have not complained that we have been taking too long to complete, and, in the clutch of orders, only two other countries have done so. My impression is that at an international level this is not necessarily the fastest moving process in the world.
Mr Hanson: May I help the Minister? Will he table written ministerial statements once or twice a year to update us on the completion of the orders, so that we will know exactly when they are brought into effect?
Mr Gauke: I am grateful for the right hon. Gentleman’s comments, to which I shall give due consideration. On the face of it, that suggestion sounds reasonable, but I shall check all the details to ensure that there is no downside. As I have said, we have had no complaints, but our intention is to move within six months or so, and I am pleased that we can complete a number of orders today.
The right hon. Gentleman raised a query about Hong Kong and the relationship with China. China is perfectly happy for other countries to sign agreements with Hong Kong. Hong Kong and China have separate tax systems and, consequently, there is no difficulty in our proceeding—the measure appears to be entirely welcome.
Finally, the right hon. Gentleman asked about the Cayman Islands and the six years for pensions. We want to ensure that only genuine Caymanians benefit from the provision. We do not want UK residents to retire to Cayman and immediately claim exemptions when no tax has been paid on pension contributions. We believe that six years is a good proxy for a connection with Cayman to be established. I agree that it is not the usual practice, but we think that the approach is sensible in those circumstances.
|©Parliamentary copyright||Prepared 30th November 2010|