Draft Double Taxation Relief and International Tax Enforcement (Bahrain) Order 2012
Draft Double Taxation Relief and International Tax Enforcement (Barbados) Order 2012
Draft Double Taxation Relief and International Tax Enforcement (Singapore) Order 2012
Draft Double Taxation Relief and International Tax Enforcement (Switzerland) Order 2012
Draft Double Taxation Relief and International Tax Enforcement (Liechtenstein) Order 2012

The Committee consisted of the following Members:

Chair: Mr Graham Brady 

Ashworth, Jonathan (Leicester South) (Lab) 

Blackwood, Nicola (Oxford West and Abingdon) (Con) 

Corbyn, Jeremy (Islington North) (Lab) 

Djanogly, Mr Jonathan (Huntingdon) (Con) 

Dobson, Frank (Holborn and St Pancras) (Lab) 

Donaldson, Mr Jeffrey M. (Lagan Valley) (DUP) 

Dowd, Jim (Lewisham West and Penge) (Lab) 

Farrelly, Paul (Newcastle-under-Lyme) (Lab) 

Gauke, Mr David (Exchequer Secretary to the Treasury)  

Hands, Greg (Chelsea and Fulham) (Con) 

Laing, Mrs Eleanor (Epping Forest) (Con) 

Lloyd, Stephen (Eastbourne) (LD) 

McCartney, Jason (Colne Valley) (Con) 

McKinnell, Catherine (Newcastle upon Tyne North) (Lab) 

Percy, Andrew (Brigg and Goole) (Con) 

Vaz, Valerie (Walsall South) (Lab) 

Wiggin, Bill (North Herefordshire) (Con) 

Williams, Stephen (Bristol West) (LD) 

Sarah Petit, Committee Clerk

† attended the Committee

The following also attended ( Standing Order No. 118(2) ) :

Adams, Nigel (Selby and Ainsty) (Con) 

Mowat, David (Warrington South) (Con) 

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First Delegated Legislation Committee 

Monday 5 November 2012  

[Mr Graham Brady in the Chair] 

Draft Double Taxation Relief and International Tax Enforcement (Bahrain) Order 2012

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 (Bahrain) Order 2012. 

The Chair:  With this it will be convenient to discuss the Draft Double Taxation Relief and International Tax Enforcement (Barbados) Order 2012, the Draft Double Taxation Relief and International Tax Enforcement (Singapore) Order 2012, the Draft Double Taxation Relief and International Tax Enforcement (Switzerland) Order 2012 and the Draft Double Taxation Relief and International Tax Enforcement (Liechtenstein) Order 2012. 

Mr Gauke:  It is a great pleasure to serve under your chairmanship once again, Mr Brady. 

There are a number of double taxation orders before the Committee today. They deal with comprehensive double taxation agreements with Bahrain, Barbados and Liechtenstein, and with protocols amending our agreements with Singapore and Switzerland. The consideration of the five draft orders means that, with the exception of the tax information exchange agreements with Brazil and with the Marshall Islands, and the protocol to our DTA with India, all of which were signed just last month, all signed agreements have now been presented to Parliament. 

The agreement with Bahrain is a further step in completing the agreements that we have with the Gulf states. It provides certainty to UK investors in Bahrain and vice versa. It also ensures that Bahraini airlines operating to the UK are in the same position as UK airlines operating to Bahrain. The treaty generally follows the OECD model double taxation convention, and it contains the exchange of information provision to current OECD standards. Other important features include a zero rate of withholding tax on dividends—except for real estate investment trusts—and on royalties, and a zero rate of withholding tax on interest, but with an initial anti-avoidance provision to ensure that the benefits can be received only by residents of the other state. 

The new treaty with Barbados replaces the previous DTA, which dated from 1970 and was out of date. In particular, it had some unusually high withholding taxes. The impetus for our talks was to update the exchange of information provision, but we agreed with Barbados that it would be worth while to renegotiate the whole treaty. The new treaty is close to the UK’s preferred approach in all material respects. All withholding tax

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rates on passive income, except for real estate investment trusts’ dividends, are zero. The permanent establishment threshold follows the definition in the OECD model. 

Given the tax privileges that they receive, Barbados’s international business companies and similar entities are excluded from receiving treaty benefits, but they are within the exchange of information provision. Barbados was not ready for arbitration and is constitutionally unable to agree to assistance in recovery. Otherwise, the agreement is a model agreement that we are pleased with, and I am sure that it will be welcomed by businesses in both countries. 

The agreement with Liechtenstein is a first-time comprehensive agreement with that country. A commitment to negotiate the agreement was given in a joint declaration that accompanied the introduction of the Liechtenstein disclosure facility in 2009. The facility allows investors in Liechtenstein who are liable to UK tax to legitimise their tax affairs for the past and ensure that they are tax-compliant for the future. To date, it has raised more than £450 million for the Exchequer. That figure is expected to rise to as much as £3 billion by the time the facility ceases in 2016. 

Although Liechtenstein is a small country that historically has been viewed as a tax haven, the progress it has made in a short time has made the agreement possible. It has introduced a conventional tax system, enacted laws to allow access to information by foreign tax authorities, and made a commitment that no undeclared money will remain in Liechtenstein. It is currently the only country in the European economic area with which we do not have a comprehensive double tax treaty. Liechtenstein has an important industrial sector—41% of its work force work for manufacturing companies—providing strong trade and investment links with the UK. 

In line with the commitment given in the joint declaration, the agreement broadly follows the OECD model agreement while including anti-treaty shopping measures to prevent it from being abused by residents of third countries. Additionally, any entity in Liechtenstein that is not liable to comprehensive taxation of worldwide income is excluded from benefiting from the agreement. The agreement contains the latest OECD exchange of information article, which will apply to matters not covered by the existing tax information exchange agreement signed in 2009. That was left in place as it provides necessary rules for the exchange of information during the period of the disclosure facility. 

The protocol to the agreement provides that regulated Liechtenstein investment funds will benefit from the treaty, provided that they are the beneficial owners of income derived from the UK. That measure was included at Liechtenstein’s request and simply confirms how the agreement operates. Regulated investment funds in the UK will also benefit from the agreement in the same way. 

The agreement with Singapore was updated in 2009 to include the latest OECD exchange of information article. The protocol now before the Committee makes several additional welcome changes to other articles of the 1997 agreement. In particular, it recognises that neither state has a general withholding tax on dividends, but permits tax to be withheld from dividends paid by real estate investment trusts at the UK’s preferred rate of 15%. It reduces the tax withheld on interest to 5% and provides for no tax to be withheld on interest paid

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to or by a bank or similar financial institution. It also reduces the rate of tax withheld on royalties to 8% and no longer classes equipment-leasing as generating royalties. 

Finally, I turn to Switzerland. In 2009 Switzerland, along with several other countries and territories, abandoned a long-standing refusal to provide bank information to tax treaty partners by lifting its reservation against the provision in the OECD model DTA. Shortly afterwards, the UK and Switzerland signed a protocol to the existing DTA that inserted the OECD model exchange of information article. 

However, in an additional protocol a requirement was added at Switzerland’s insistence. That was that if we wanted information from Switzerland, we had to provide the name and address of the person under investigation. The requirement meant the UK had to show that we had a particular person under investigation. Since then, however, the OECD-G20 Global Forum on Transparency and Exchange of Information has concluded that that requirement is unwarranted. It might be, for example, that we could provide a Swiss credit card number to Switzerland but not the name and address of its owner who we think is resident in the UK. The global forum has determined that, as long as there is a particular individual under investigation, it does not matter that we do not know his precise identity. Switzerland has accepted this, and has legislated to allow itself to provide information in those circumstances. Switzerland’s legislation is triggered, country by country, by an exchange of letters and it is that exchange of letters that is now before the Committee. Once approved, it will modify the DTA so it can apply in a reciprocal fashion, in the way I have described. 

I trust those explanations are helpful. In conclusion, I commend the orders to the Committee and am happy to answer any questions that right hon. and hon. Members may have on their provisions. 

4.38 pm 

Catherine McKinnell (Newcastle upon Tyne North) (Lab):  It is a pleasure to serve under your chairmanship for the first time, Mr Brady. I also thank the Minister for inviting me to be briefed on these instruments by his team this afternoon. The briefing was both instructive and interesting and I also had the pleasure of experiencing a cup of tea from the now almost famous cashless canteen. 

The agreements follow on from a series of similar agreements passed by Delegated Legislation Committees last November and last July. They all received cross-party support, and the Opposition will also support the orders before us today. 

Double-tax agreements were part of the previous Government’s international taxation strategy, and two of the orders we see today—the Singapore and Switzerland orders—are amendments to agreements that have been in force for some time. 

As the Minister explained, the Swiss order amends the agreement originally made in 1977, and subsequently amended in 1981, 1993, 2007 and 2009. The amendments refer most significantly to improving provisions for transparency and will ease restrictions designed to prevent fishing expeditions—inappropriate or speculative requests for account information. While such requests will still be disallowed, the order will now allow either state to request information without supplying the name and

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address of the individual involved, if sufficient information is held. My understanding is that names and addresses will still have to be supplied if held. That improvement to transparency is welcome. Information exchange is an important tool to prevent tax avoidance, and measures to improve it will continue to have support of the Opposition. 

Can the Minister tell us how much he hopes to raise from this agreement, or how many new records will be captured under the new transparency measures? Can he also confirm that the records of UK citizens will still have adequate protection from frivolous requests under the new provisions? 

Moving on to the Singapore agreement, which largely deals with amendments to the existing agreement with that country, the amendments relating to permanent establishment, in particular, will give double taxation relief to companies such as consultancy services, which only operate temporarily in the other state. Can the Minister give an indication of how many companies he thinks that provision will affect? Does he have any indication of whether that may result in a loss to the Treasury, as companies from Singapore that were previously taxed here are now given relief? Will he also comment on whether HMRC, which is tasked with making the distinction between companies that are permanently established and those that are not, has adequate resources to take on those responsibilities under the amendment? As we know, HMRC’s resources are particularly stretched at this time, and I hope an assessment has been undertaken to determine whether it has the capacity to deal with any additional work that may ensue from these amendments. 

The orders relating to Bahrain, Barbados and Liechtenstein are all new, putting in place double taxation relief orders where they did not previously exist. As the Minister referred to, the Liechtenstein agreement is particularly notable for its strength and the significant revenues that are expected to flow from it, all of which was successfully set in train by the previous Labour Government. The Minister also confirmed that the orders follow OECD guidance on tax co-operation and transparency, and therefore we will support them today. Can he give an indication of when he expects these new agreements to come into force? I know there have been requests in the past for written statements to be published to inform the House when the orders become effective, and I wonder whether he has given any further thought to that suggestion in relation to these particular orders. Finally, can he comment on the impact of the three agreements and what effect they are likely to have on the UK’s overall tax revenue? I would welcome his comments on all of these points. 

4.42 pm 

Paul Farrelly (Newcastle-under-Lyme) (Lab):  I know it is very unfashionable for Back Benchers to contribute on such dry pieces of delegated legislation as these, but when I scanned the list, and then the Minister mentioned Switzerland and Liechtenstein, my ears pricked and my hackles were raised. They are two of a number of countries, including Eire and Luxembourg, where corporations site subsidiaries. It is generally accepted that that allows those companies to avoid tax in the places—including, but not only, the United Kingdom—where their goods or services are actually consumed. 

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Members will have seen a growing number of reports recently, highlighting the tax avoidance activities of the likes of Google, Apple, Amazon and, heaven forbid, Starbucks. Tax avoidance is not just a problem here in the United Kingdom or in Europe; it is a problem in individual states and federally in the United States, where many of those multinational companies have their headquarters. Clearly, with the growth of the e-economy, that leakage can only grow over time. There are also disadvantages to businesses that are sited here in the UK and are willing to pay taxes here, because the playing field is not always level. 

I want briefly to highlight one area where the Treasury is taking steps to combat this problem, and repatriate the tax that should be paid in the UK, which is in the sphere of electronic gambling. The Treasury has just consulted on a point of consumption tax and an effective framework for enforcement of that tax. 

My purpose in these brief remarks is to ask the Minister what steps the Treasury is taking more widely to combat tax avoidance. That does not necessarily have to be done through a licensing system, as with gambling, but can be done through looking at the tax framework, the tax codes that we have in place and the whole system and framework of international agreements, so that companies have to report revenue where it actually arises, perhaps through having branches in a country in which they trade, so that we can start to recoup more of the tax revenue that is our due. 

4.45 pm 

Mr Gauke:  I thank the hon. Members for Newcastle upon Tyne North and for Newcastle-under-Lyme for their questions. The points raised by the hon. Member for Newcastle upon Tyne North relate more specifically to the orders, but I shall also touch on the broader questions raised by the hon. Member for Newcastle-under-Lyme. 

The hon. Member for Newcastle upon Tyne North asked the traditional question that arises when we consider such orders, which is about their revenue implications. I say that the question is traditional, because it is the same question that I asked when I was in her position, as indeed did my predecessor in that role. The question is perfectly reasonable, but it is difficult to answer, because it is not possible to put a precise figure on the revenue effect of any of these agreements, or of the agreements as a whole. The overall cost or benefit of an agreement is a function of the income flows between the two relevant countries, and any agreement is likely to change the volume and nature of those flows by encouraging cross-border investment. I therefore fear that I cannot provide an answer to the hon. Lady, but I would say that the UK benefits from a wide network of double taxation agreements because that allows us to exchange information with other tax authorities at appropriate times. Such a policy has been pursued by successive Governments. 

Catherine McKinnell:  The Minister says that the UK will benefit from the agreements, but will there be a net financial benefit, or does he anticipate a loss? Will he describe the position in broad terms? 

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Mr Gauke:  I was making a general point about the UK as a place to do business. It is to our advantage that we have a wide network of double taxation agreements, as that is among the UK’s many attributes as a place to locate a business. That is different from saying that there is a zero-sum game with any treaty meaning that, in any one year, one party receives more revenue than the other. My broad point is that the UK benefits from being an open economy with a lot of cross-border trade, which is something that the Government, like previous Governments, want to pursue. 

I was asked how many companies will be affected by the permanent establishment provisions in the measures, especially in relation to the Singapore order. Again, there are no precise estimates. I can confirm that I am confident that HMRC has adequate resources to deal with these matters. 

The hon. Lady asked whether there was any concern that there might be frivolous requests, especially from Switzerland. Our view is that it is most unlikely that Switzerland will make any extra requests as a consequence of this exchange of letters. 

I was asked when the agreements will come into force. The agreements with Barbados and Singapore will need to be ratified in those countries before they can come into force, but the agreements with Bahrain and Liechtenstein have been ratified in those countries, so they will come into force in the next few weeks. 

Let me turn to the wider questions on tax avoidance raised by the hon. Member for Newcastle-under-Lyme. He touched on an interesting point about offshore gambling. That is covered by a very different regime, which is based on activity in the country where consumers are based, whereas corporation tax is a tax on profits from economic activity in a particular country, so it is of a different nature. 

The hon. Gentleman raised a broad point about tax avoidance. I stress, as I have many times before, that the Government take tax avoidance seriously, which was why, as part of the spending review settlement, we increased HMRC’s resources for focusing on evasion and avoidance, and it was why we have closed down seven tax avoidance schemes in the past 12 months. It was also why we made a great advance on a general anti-abuse rule to deal with aggressive avoidance schemes, and why we are exploring what can be done about the promoters of such schemes. HMRC has taken a number of steps on enforcement, such as on transfer pricing, and the large business service is now achieving an increasing yield. 

Jeremy Corbyn (Islington North) (Lab)  rose—  

Mr Gauke:  I could go on and on about that point, but I shall first give way to the hon. Gentleman. 

Jeremy Corbyn (Islington North) (Lab):  The Minister will have heard the point made by my hon. Friend the Member for Newcastle-under-Lyme about companies that locate themselves in lower tax regimes to avoid tax here. There is also a problem with non-doms who allegedly come here for only 60 days a year. Is the Minister happy with that arrangement—this is particularly in relation to Switzerland—and what monitoring occurs of the time that such people spend in the UK? 

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Mr Gauke:  The hon. Gentleman may be aware that the Government are consulting on introducing a statutory residence test that will provide greater clarity. HMRC is also focusing on ensuring compliance with the existing rules, which are neither statutory nor perhaps as clear as they might be. Those who are resident here should be taxed as if they are resident here. That will be the case under a regime involving a statutory residence test, on which we are consulting and about which we will say more in the future. 

In many respects, it is important to work at an international level so that the international tax architecture ensures that economic activity performed in the UK is taxed appropriately in the UK. We are working with our international colleagues on that. 

Paul Farrelly:  Reports are appearing weekly about a number of companies, so may I commend to the Minister an excellent piece of research commissioned by The Bookseller, which was reported prominently on the front page of The Guardian several months ago? It demonstrated that Amazon had racked up £7.5 billion in sales in the UK over a number of years, but had paid no corporation tax because of its use of—I forget the technical term—double-Dutch or double-Irish arrangements in conjunction with other tax havens. Not only does the practice represent a massive leak for the Treasury, but it puts UK-based companies that do not mind paying their taxes at a competitive disadvantage. 

Mr Gauke:  Let me make two points about that. Corporation tax is a tax on economic activity performed in the UK. The appropriate tax for sales, as opposed to economic activity, is VAT. VAT on e-books has been based on the location of the seller as opposed to the consumer, but that will change after 2015, so the VAT issue will be addressed. Corporation tax is a tax on economic activity performed in the UK, so if a genuine economic activity is performed outside the UK, one does not normally expect to get corporation tax receipts from those profits, because they will be taxed elsewhere. None the less, I stress that the Government are determined to ensure that HMRC has the capability to deal with tax avoidance and, as we have demonstrated on several occasions, we are willing to act quickly on that front. 

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A greater ability to exchange information between tax authorities means that we are better placed to deal with tax evasion, and the orders make a contribution to that, as did the Liechtenstein disclosure facility. The agreement that the Government have reached with Switzerland also enables us to ensure that people pay the tax that is due. That is what the British public expect us to do, and we are fulfilling that obligation. 

Question put and agreed to .  

Draft Double Taxation Relief and International Tax Enforcement (Barbados) Order 2012


That the Committee has considered the Draft Double Taxation Relief and International Tax Enforcement (Barbados) Order 2012.—(Mr Gauke.)  

Draft Double Taxation Relief and International Tax Enforcement (singapore) Order 2012


That the Committee has considered the Draft Double Taxation Relief and International Tax Enforcement (Singapore) Order 2012.—(Mr Gauke.)  

Draft Double Taxation Relief and International Tax Enforcement (Switzerland) Order 2012


That the Committee has considered the Draft Double Taxation Relief and International Tax Enforcement (Switzerland) Order 2012.—(Mr Gauke.)  

Draft Double Taxation Relief and International Tax Enforcement (Liechtenstein) Order 2012


That the Committee has considered the Draft Double Taxation Relief and International Tax Enforcement (Liechtenstein) Order 2012.—(Mr Gauke.)  

4.58 pm 

Committee rose.  

Prepared 6th November 2012