Draft International Tax Enforcement (Marshall Islands) Order 2013
Draft Double Taxation Relief (China) Order 2013
Draft Double Taxation Relief and International Tax Enforcement Orders 2013 (Brunei Darussalam, Spain, India and Albania)
The Committee consisted of the following Members:
† Abbott, Ms Diane (Hackney North and Stoke Newington) (Lab)
† Bellingham, Mr Henry (North West Norfolk) (Con)
Cunningham, Sir Tony (Workington) (Lab)
† Donohoe, Mr Brian H. (Central Ayrshire) (Lab)
Gapes, Mike (Ilford South) (Lab/Co-op)
† Gauke, Mr David (Exchequer Secretary to the Treasury)
† Leech, Mr John (Manchester, Withington) (LD)
Liddell-Grainger, Mr Ian (Bridgwater and West Somerset) (Con)
† Lloyd, Stephen (Eastbourne) (LD)
† Mahmood, Shabana (Birmingham, Ladywood) (Lab)
† Metcalfe, Stephen (South Basildon and East Thurrock) (Con)
† Phillipson, Bridget (Houghton and Sunderland South) (Lab)
† Redwood, Mr John (Wokingham) (Con)
† Rudd, Amber (Hastings and Rye) (Con)
† Shannon, Jim (Strangford) (DUP)
Tomlinson, Justin (North Swindon) (Con)
† Wood, Mike (Batley and Spen) (Lab)
John-Paul Flaherty, Committee Clerk
† attended the Committee
Ninth Delegated Legislation Committee
Wednesday 27 November 2013
[Sandra Osborne in the Chair]
Draft International Tax Enforcement (Marshall Islands) Order 2013
2.30 pm
The Exchequer Secretary to the Treasury (Mr David Gauke): I beg to move,
That the Committee has considered the draft International Tax Enforcement (Marshall Islands) Order 2013.
The Chair: With this it will be convenient to consider the draft Double Taxation Relief (China) Order 2013, the draft Double Taxation Relief and International Tax Enforcement (Brunei Darussalam) Order 2013, the draft Double Taxation Relief and International Tax Enforcement (Spain) Order 2013, the draft Double Taxation Relief and International Tax Enforcement (India) Order 2013 and the draft Double Taxation Relief and International Tax Enforcement (Albania) Order 2013.
Mr Gauke: It is a great pleasure to serve under your chairmanship, Mrs Osborne. The six orders before the Committee deal with a first-time comprehensive double taxation agreement with Albania, a new treaty with Spain to replace the present one, protocols amending our agreements with Brunei Darussalam, China and India, and a tax information exchange agreement with the Marshall Islands. In addition to these orders, we have laid six others before the House, which will be considered tomorrow by another Delegated Legislation Committee. Those orders relate to the Netherlands, Norway, Panama and the three Crown dependencies.
First, the new agreement with Albania is a first-time comprehensive double taxation agreement with that country. Albania requested a DTA with the UK several years ago and we had the opportunity to conclude agreement on that in March this year. The order fills a gap in our DTA network and brings us in line with most major EU countries, which have already concluded agreements. The amount of UK investment in Albania is not large, but business interests were keen that the UK should have a treaty, not least to pave the way for closer economic ties between the two countries. The new treaty contains many welcome provisions, including worthwhile reductions to the rates on withholding tax on dividends, interest and royalties compared with the domestic rates that apply in Albania. The treaty includes the latest OECD exchange of information provisions. It also has the UK’s usual anti-treaty shopping provisions and an arbitration provision to assist the mutual agreement process.
Mr Henry Bellingham (North West Norfolk) (Con): Given that these double taxation treaties are important for Britain’s commercial relationships with these countries
and for building up bilateral trade, can the Minister tell the Committee what role UK Trade & Investment plays? Is there a close liaison with his Department—the Treasury—the Department for Business, Innovation and Skills and the Minister of State for Trade and Investment, Lord Green, who also operates partly out of the Foreign Office? Do we take a three-Department approach to using these treaties to increase further UK trade?Mr Gauke: My hon. Friend brings his considerable experience as a Foreign Office Minister to this subject, and I pay tribute to his record. Double taxation agreements are very much led and negotiated by the Treasury. As a Government, we look at various investment opportunities, and we look at strengthening our relationship with particular countries and at creating closer economic ties from which all parties can benefit. There is a degree to which BIS and UKTI, which reports to BIS, the Foreign Office and the Treasury will work closely together to pursue our economic interests and ensure that we can strengthen ties wherever necessary.
The order that amends the arrangement with Brunei Darussalam is what we would normally think of as an amending protocol. Following the G20 summit in 2009, Brunei approached us seeking an amendment to our current treaty that would update the exchange of information provision to the latest OECD standard. We responded positively to the request. The amending agreement and the protocol annexed to it simply update the exchange of information article and make some minor amendments to bring definitions up to date.
China approached us last year, as it wished to make a technical change to the DTA signed in June 2011, which we had already ratified in the UK. The subsequent protocol was agreed and signed in February this year in Beijing. The protocol provides that the reduced withholding tax on dividends paid to a company investor will apply when the recipient company is the direct holder of at least 25% of the paying company. The 2011 treaty also permitted an indirect holding to be taken into account, and the protocol amends the 2011 treaty accordingly. China has now ratified both the 2011 DTA and this protocol. The DTA will therefore enter into force as soon as the UK has ratified the protocol. The new treaty will bring valuable improvements, most notably a cut in the dividend withholding rate from 10% to 5%. The new treaty has been welcomed by UK companies and business organisations.
I turn now to the protocol with India, which we signed in October last year. This short protocol, which amends the 1993 DTA, resolves the problem which UK partnerships have had in getting India to apply the DTA. From now on, where the partners are tax resident in the UK, India will apply the DTA to the partner’s share of the partnership income arising in India. The protocol will also insert the OECD articles on exchange of information and assistance in collection of taxes. In addition, it cuts the maximum permitted withholding rate of tax and dividends from 15% to 10%, while for the first time giving the UK the right to tax Indian recipients of dividends from UK real estate investment trusts. The protocol also inserts an article on tax examinations abroad, which confirms that officials may visit each other’s countries with the host country’s agreement. The protocol also strengthens the DTA’s anti-treaty shopping provisions.
I can be brief on the tax information exchange agreement with the Marshall Islands which was signed at the end of last year, as it is a standard agreement that sticks closely to the model developed by the OECD and adopted by the UK. The agreement is the UK’s first with the Marshall Islands. In a useful departure from the OECD model, it provides for the exchange of information relating not only to income and capital taxes but to all taxes.
The new DTA with Spain, which was signed in March this year, replaces the 1975 treaty. I am pleased to say that withholding tax rates have been lowered and brought into line with the recent treaties of both countries. Cross-border investment by pension schemes will be facilitated, and the treatment will be fully transparent—
Mr John Redwood (Wokingham) (Con): Before the Minister moves on from Spain, could he explain to the Committee how the arrangements work on income from immovable property and dividends? I noticed that they facilitate being able to tax in both places. It is by no means clear how double taxation is avoided, and whether it means that British holders of Spanish property, for example, could find themselves liable to quite heavy levies from Spain, which does not seem to like us very much at the moment.
Mr Gauke: I am grateful to my right hon. Friend for his question. He is not going to tempt me into wider discussions about our relationship with Spain, but let me focus on his particular concerns. Article 13.4 of the treaty allows Spain to tax gains on the sale of shares in a UK company, which I think may be a driver of his concern. Article 13 preserves the right of a state to tax gains from the sale of immovable property situated in that state. Article 13.4 counteracts arrangements to avoid this taxation by placing the property in a corporate envelope.
Spain can tax again on the sale of the shares of a UK company where those shares derive their value principally from property situated in Spain, but the measure is consistent with the OECD model convention. The existing treaty predates the OECD model article. The new treaty brings the tax treatment of such gains into line with the OECD model, so there is nothing exceptional about the arrangements here.
Mr Redwood: I was referring to article 6 in the order before us, which is not limited to shares in property companies but also applies to direct property. I was also concerned about article 10, on dividends. It allows, as I understand it, an additional 10% dividend tax, which is levied by the host country rather than the country of origin of the shareholder.
Mr Gauke: Again, I am grateful to my right hon. Friend for clarifying his concerns. As I said in the context of article 13, the order brings us into line with the OECD model, and the relationship is similar to that with other jurisdictions.
My right hon. Friend also raised concerns about articles 6 and 10. On article 6, let me reassure him that we will ensure that the order eliminates any kind of double taxation between the UK and Spain. Again, with article 10 there is no double taxation. We do
not tax companies on their dividends, so I can assure him that his concern, which we would all have if there were double taxation in certain circumstances, will not apply.Regarding Spain, the dispute resolution process will be improved by the introduction of an arbitration provision. The new agreement also updates the exchange of information article and introduces anti-avoidance provisions. Those are important measures, aimed at preventing fiscal evasion.
I hope that my remarks and explanations are helpful to the Committee. I am happy to take any further questions that Members may have. I commend the orders to the Committee.
2.41 pm
Shabana Mahmood (Birmingham, Ladywood) (Lab): It is a pleasure to serve under your chairmanship, Mrs Osborne. I thank the Minister not only for his introductory remarks, but for the invitation to a briefing by his team, which occurred yesterday. I was interested to be informed about the process by which the orders came about.
The agreements follow a series of similar agreements considered by Delegated Legislation Committees last November and the previous year. Those agreements received cross-party support, and the Opposition will support the orders before us today. Double taxation agreements were part of the previous Government’s international taxation strategy, and four of the orders—those for China, Brunei Darussalam, Spain and India—make amendments to agreements that have been in force for some time. The orders for the Marshall Islands and Albania are, as the Minister said, both new, and they are to be welcomed.
The orders for the Marshall Islands and Albania bring into effect for the first time agreements on the exchange of information for tax purposes between the Governments of the United Kingdom and the Marshall Islands and Albania respectively. The Albania order also brings into effect arrangements for the avoidance of double taxation. Information exchange is an important tool to prevent tax avoidance, and measures to improve information exchange that follow the OECD guidance on tax co-operation and transparency continue to have the Opposition’s support.
The China order amends the agreement originally made in 2011. The amendment relates to dividends so that the agreement applies only if the beneficial owner is a company that holds directly at least 25% of the capital of the company paying the dividends. That represents a change from the previous agreement, under which the beneficial owners were a company that held, directly or indirectly, at least 25% of the capital. Will the Minister tell us what was the specific problem involving indirect ownership? How many beneficial owners of companies will now not be caught, but would have been caught under the original agreement? Will he tell us the anticipated overall impact of the change?
The Brunei Darussalam order brings the 1950 arrangement up to date with regard to territorial scope and the definitions of competent authorities. The Minister suggested that the order is simply an updating measure. Will he confirm that we should not expect any additional impact from the changes?
The Spain order amends the agreement made in 1975 to bring into effect arrangements between the Governments of the UK and Spain for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital. Will the Minister tell the Committee what impact he expects the order to have on overall tax revenue?
The India order contains a protocol that amends the convention that allows UK businesses operating as partnerships in India to benefit from the treaty. I understand that it is believed that the amendment will be especially important to law and accountancy firms. It would be helpful if the Minister set out what benefit he expects the amendment will give to such firms. We expect changes to the treatment of partnerships for the purposes of tax law to be brought forward in the next Finance Bill, so can he anticipate whether those changes will have any impact on how such partnerships behave abroad?
Will the Minister tell us when he expects all the agreements to come into force? I would also welcome his outlining the overall expectation of their impact on tax revenue.
2.46 pm
Mr Gauke: I thank the hon. Lady for her questions. I suspect that this will be the first of a number of such debates in which we will both be involved.
The hon. Lady asked a question that has been asked by Opposition spokespersons for many years—it was certainly being asked in the previous Parliament—about the economic impact of the treaties. If I may, I shall answer that question in a general way with the answer that has been provided by Ministers for many years, including when I was an Opposition spokesman. It is not possible to identify specifically the economic and revenue effects of the agreements. DTAs remove barriers to cross-border trade and investment, so the effects of a specific agreement will depend on the extent to which activities change as a result of that agreement. Concluding a DTA is not a zero-sum game, as possible negative short-term revenue effects are offset in the longer term by increased activities, which is clearly beneficial.
There are long time scales, complex and shifting interactions with domestic law and large and unpredictable behavioural effects, as well as a lack of a sensible comparator, so it is not really possible to produce a meaningful estimate of the revenue effects of double taxation agreements. Successive Governments have never attempted to produce such an estimate, but I am pleased that there is a consensus in support of a strong DTA network, and the UK has one of the best such networks of any country.
On the China order, the hon. Lady made a point about indirect investment and asked how many companies would lose out. The change is largely technical. We asked several prominent UK companies whether they thought that the protocol would be damaging to them, but they were content for us to go along with the changes requested by the Chinese Government. I can confirm to her that there will be no further impact as a consequence of the Brunei order.
The hon. Lady talked about partnership changes in the context of India. She asked whether there will be any interaction with the forthcoming legislative changes, but I am not quite confident enough to give an answer in Committee on that point. The matter is somewhat complex so, if I may, I shall write to her on that point, rather than hazarding a guess.
Perhaps I can provide the Committee with a little more information on the ratification of the agreements. The treaty with Albania has been sent to the Albanian Parliament for ratification, and we understand that it will complete its proceedings before the end of the year. Brunei has yet to notify us that it has completed its proceedings. As I said earlier, China has ratified both the protocol and the 2011 DTA. India has completed its proceedings and is ready to exchange diplomatic notes, once the UK completes its procedures. The Marshall Islands automatically ratified the tax information exchange agreement on signature, and we await their diplomatic note. The treaty with Spain was approved by the Spanish Council of Ministers on 20 September and is now going through the Spanish parliamentary process. However, it appears that that process will not be completed this year. On that basis, the new treaty will not take effect until January 2015.
I hope that that is useful clarification for the Committee. I am grateful for the support for the orders and hope that the Committee will proceed to endorse them.
DRAFT DOUBLE TAXATION RELIEF (CHINA) ORDER 2013
That the Committee has considered the draft Double Taxation Relief (China) Order 2013.—(Mr Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (BRUNEI DARUSSALAM) ORDER 2013
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Brunei Darussalam) Order 2013.—(Mr Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (SPAIN) ORDER 2013
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Spain) Order 2013.— (Mr Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (INDIA) ORDER 2013
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (India) Order 2013.— (Mr Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (ALBANIA) ORDER 2013
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Albania) Order 2013.—(Mr Gauke.)