The
Committee consisted of the following
Members:
Chair:
Mr
Edward Leigh
†
Blenkinsop,
Tom (Middlesbrough South and East Cleveland)
(Lab)
†
Dowd,
Jim (Lewisham West and Penge)
(Lab)
†
Drax,
Richard (South Dorset)
(Con)
†
Gauke,
Mr David (Exchequer Secretary to the
Treasury)
†
Glass,
Pat (North West Durham)
(Lab)
†
Gummer,
Ben (Ipswich) (Con)
†
Hanson,
Mr David (Delyn)
(Lab)
Heyes,
David (Ashton-under-Lyne)
(Lab)
†
Hopkins,
Kris (Keighley)
(Con)
†
Huppert,
Dr Julian (Cambridge)
(LD)
†
Johnson,
Joseph (Orpington)
(Con)
†
Jones,
Graham (Hyndburn)
(Lab)
†
Leadsom,
Andrea (South Northamptonshire)
(Con)
†
Love,
Mr Andrew (Edmonton)
(Lab/Co-op)
†
Sharma,
Alok (Reading West)
(Con)
†
Wiggin,
Bill (North Herefordshire)
(Con)
†
Williams,
Stephen (Bristol West)
(LD)
Wilson,
Sammy (East Antrim)
(DUP)
Glenn McKee, Committee
Clerk
† attended the
Committee
First
Delegated Legislation
Committee
Monday
29 November
2010
[Mr
Edward Leigh
in the
Chair]
Draft
Double Taxation Relief and International Tax Enforcement (Belgium)
Order
2010
4.30
pm
The
Exchequer Secretary to the Treasury (Mr David Gauke):
I
beg to
move,
That
the Committee has considered the draft Double Taxation Relief and
International Tax Enforcement (Belgium) Order
2010.
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.
Mr
Gauke:
It is a great pleasure to serve under your
chairmanship, Mr
Leigh.
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.
To achieve that, the pensions article provides that the normal rule,
which is that pensions are taxable only in the country where the
recipient is a resident, will not apply once a pension is paid from a
scheme in which more than 15 years’ contributions relating to
that pension have received tax relief. Once that point is reached, the
whole pension will be taxable solely in the country from which is it
paid. However, to protect the position of existing pensioners, the
treaty provides that they may elect to continue to receive the
treatment they currently receive under the existing
treaty.
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
these entities. The remaining provisions of the treaty with Malaysia do
not need amending at present as they compare well with
Malaysia’s other tax
treaties.
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.
4.43
pm
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.
4.48
pm
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.
I hope that
those clarifications are helpful to the Committee and I hope that it
will be happy to allow the orders to come into
effect.
Question
put and agreed to.
Draft Double
Taxation Relief and International Tax Enforcement (Cayman Islands)
Order
2010
Resolved,
That
the Committee has considered the draft Double Taxation Relief and
International Tax Enforcement (Cayman Islands) Order
2010.—(Mr
Gauke.)
Draft
Double Taxation Relief and International Tax Enforcement (Georgia)
Order
2010
Resolved,
That
the Committee has considered the draft Double Taxation Relief and
International Tax Enforcement (Georgia) Order 2010.—(Mr
Gauke.)
Draft
Double Taxation Relief and International Tax Enforcement (Federal
Republic of Germany) Order
2010
Resolved,
That
the Committee has considered the draft Double Taxation Relief and
International Tax Enforcement (Federal Republic of Germany) Order
2010.—(Mr
Gauke.)
Draft
Double Taxation Relief and International Tax Enforcement (Hong Kong)
Order
2010
Resolved,
That
the Committee has considered the draft Double Taxation Relief and
International Tax Enforcement (Hong Kong) Order 2010.—(Mr
Gauke.)
Draft
Double Taxation Relief and International Tax Enforcement (Malaysia)
Order
2010
Resolved,
That
the Committee has considered the draft Double Taxation Relief and
International Tax Enforcement (Malaysia) Order 2010.—(Mr
Gauke.)
4.55
pm
Committee
rose.
