Draft Double Taxation Relief and International Tax Enforcement (Zambia) Order 2014
Draft Double Taxation Relief (Federal Republic of Germany) Order 2014
Draft Double Taxation Relief and International Tax Enforcement (Iceland) Order 2014
Draft Double Taxation Relief and International Tax Enforcement (Belgium) Order 2014
Draft Double Taxation Relief and International Tax Enforcement (Japan) Order 2014.
The Committee consisted of the following Members:
Blears, Hazel (Salford and Eccles) (Lab)
Blunt, Crispin (Reigate) (Con)
† Bottomley, Sir Peter (Worthing West) (Con)
Champion, Sarah (Rotherham) (Lab)
† Dakin, Nic (Scunthorpe) (Lab)
† Duddridge, James (Rochford and Southend East) (Con)
† Ellis, Michael (Northampton North) (Con)
† Gauke, Mr David (Exchequer Secretary to the Treasury)
Godsiff, Mr Roger (Birmingham, Hall Green) (Lab)
† Hames, Duncan (Chippenham) (LD)
Horwood, Martin (Cheltenham) (LD)
† Mahmood, Shabana (Birmingham, Ladywood) (Lab)
† Rudd, Amber (Hastings and Rye) (Con)
† Ruddock, Dame Joan (Lewisham, Deptford) (Lab)
† Sandys, Laura (South Thanet) (Con)
† Walker, Mr Robin (Worcester) (Con)
Wilson, Sammy (East Antrim) (DUP)
Wood, Mike (Batley and Spen) (Lab)
John-Paul Flaherty, Committee Clerk
† attended the Committee
First Delegated Legislation Committee
Monday 30 June 2014
[Mark Pritchard in the Chair]
Draft Double Taxation Relief and International Tax Enforcement (Zambia) Order 2014
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 (Zambia) Order 2014.
The Chair: With this it will be convenient to consider the draft Double Taxation Relief (Federal Republic of Germany) Order 2014, the draft Double Taxation Relief and International Tax Enforcement (Iceland) Order 2014, the draft Double Taxation Relief and International Tax Enforcement (Belgium) Order 2014 and the draft Double Taxation Relief and International Tax Enforcement (Japan) Order 2014.
Mr Gauke: It is a great pleasure to serve under your chairmanship again, Mr Pritchard. The five draft orders before the Committee deal with a revised comprehensive double taxation agreement and protocol with Zambia; a convention and protocol with Iceland; a protocol with exchange of letters with Japan; and protocols amending our existing agreements with Belgium and Germany.
Let me begin with Zambia. The agreement replaces the existing 1972 agreement with Zambia, which had become out-of-date. The new convention will, in particular, improve the exchange of information provisions between the two countries to the latest OECD standards. It will also reduce the level of withholding tax on dividends and royalties to match the level that Zambia has agreed with China. At Zambia’s request, and as is appropriate with a developing country, we have agreed source state taxation of services based on a days of presence test. We have also agreed an assistance-in-recovery provision, which will allow each country to seek assistance from the other to recover taxes owed by their residents.
If I may, I now turn to Iceland. The UK has had a comprehensive double taxation convention with Iceland since 1991, and that has now been fully revised. The new convention updates several important provisions and incorporates the latest OECD standards on business profits, exchange of information and assistance in collection of taxes. It was both countries’ preference to agree a new convention rather than to make substantial amendments by way of a protocol.
As well as updating those provisions, the new convention retains low withholding tax rates for dividends, interest and royalties, in line with the UK’s preferences. The new convention has a zero rate for dividends paid to pension schemes and zero for interest and royalties. The new dividend article also removes the former entitlement of Icelandic residents to claim a UK tax credit on dividends
received. Although the new dividend article shows a 5% withholding tax rate, in practice, UK companies can reclaim that tax in Iceland.As with other Nordic countries, the convention allocates taxing rights over pensions to the source state, but we have inserted a provision in the entry into force article to preserve residence state taxation for existing pensioners. The convention now includes a mandatory and binding arbitration provision to improve the dispute resolution process and give greater certainty to business. The anti-abuse rules in the convention have been amended in line with UK preferences to make the deterrents and defences more effective. The new convention should serve us well for many years to come.
Let me turn to Japan. The existing UK-Japan double taxation convention dates from 2006 and is an important treaty for both countries. The 2006 convention lowered withholding tax rates and capital gains taxation for UK and Japanese enterprises operating cross-border. The protocol before us today continues that trend. It extends the circumstances where a 0% rate of withholding tax will apply to dividends. The rate of withholding tax on interest is reduced from 10% to 0% and the zero rate will apply to almost all interest payments.
For capital gains arising to UK residents, the application of Japanese tax to gains from the sale of shares in Japanese companies is substantially reduced. The business profits article of the convention is amended to reflect the modern approach of the OECD model. While the existing treaty works well and disputes are rare, the protocol also introduces an arbitration procedure that will enhance the resolution of difficult disputes, should they occur. The changes described have been welcomed by UK businesses.
The protocol also updates the exchange of information article and the elimination of double taxation article. A new article committing the assistance in collection of taxes is introduced, allowing enhanced co-operation between HMRC and the Japanese tax authority. The protocol also extends the application of the convention to two new Japanese taxes introduced to fund recovery programmes related to the 2011 tsunami. The existing convention has assisted in the development of strong trade and investment links between the UK and Japan, and this protocol will further enhance those links.
On Belgium, the UK had completed its parliamentary procedures on the extensive protocol signed in 2009. However, the Belgian State Council subsequently ruled that all new conventions had to apply to not only federal taxes, but taxes charged by Belgium’s regions and communities. Consequently, Belgium could not ratify the 2009 protocol until the UK had given an assurance that we would amend the convention to permit it to apply to taxes imposed by the regions and the communities and that the regional and communal Finance Ministers were recognised as “competent authorities”. This protocol makes the necessary changes to implement that undertaking.
At Germany’s request we agreed a protocol to the 2010 convention to insert the new OECD business profits article, which both countries are now keen to include in all new treaties, although Germany had not been ready to do so when the convention was being negotiated. We also took the opportunity to amend the Government service article, which was inadvertently causing difficulties in both countries in relation to the
taxation of staff who are locally engaged by our diplomatic missions. The revised article returns the taxation of such staff to the treatment that existed under the 1964 convention.I hope those explanations are helpful. I commend the orders to the Committee, and I am happy to answer any questions right hon. and hon. Members may have about the provisions.
4.36 pm
Shabana Mahmood (Birmingham, Ladywood) (Lab): It is a pleasure to serve again under your chairmanship, Mr Pritchard.
The orders continue the process of updating our network of double taxation agreements through the signing of completely updated treaties and the agreement of protocols that amend clauses in existing agreements. The Opposition support the orders, but as I briefly go through them, I would like to ask the Minister to comment on a couple of points.
First, on the two completely updated agreements, the Minister said there is a new double taxation agreement between the UK and Iceland, which will replace the agreement signed in 1991. Major changes include that the dividends article removes the rules that used to give residents of Iceland tax credits on dividends and reduces to zero the withholding tax on dividends paid to pension schemes. Further, the application of a zero rate of withholding tax on interest payments is simplified. The treaty also includes provision for binding arbitration and contains the latest articles on exchange of information and assistance in collection.
We also have a new double taxation agreement between the UK and the Republic of Zambia, which will replace the agreement signed in 1972. The agreement generally follows the OECD model double taxation convention. The two important features of the new agreement are the inclusion of the latest OECD exchange of information article and the inclusion of a standard OECD capital gains article.
The Opposition welcome the continued progress on updating and improving our network of agreements. We would like the Minister to explain the process for deciding priorities for treaty negotiation. For example, we do not yet have a comprehensive double taxation agreement with Brazil, which appears to be an anomaly, given the size of that country’s economy. I would be grateful if he could help the Committee to understand the approach taken to securing such agreements.
Let me turn now to the protocols. On Japan, the measure before us is a protocol to the existing double taxation agreement. The main features are that dividends paid to parent companies holding between 10% and 50% of the subsidiary paying the dividend will now be free of withholding tax, which is currently 5%. A zero rate of withholding tax will apply to a wider range of interest payments. The business profits article—article 7 —reflects the latest OECD text. The taxation of capital gains on share sales is brought closer to the OECD approach. The protocol also contains the latest exchange of information article and provides for assistance in collection. Finally, the mutual agreement procedure article provides for mandatory binding arbitration.
With Belgium, the protocol makes it clear that the amendments made to the 1987 double taxation convention by the 2010 protocol apply not only to federal taxes, but
to those applied by the Brussels capital region and the Flemish and Walloon regions and by the communities, whether Flemish, French or German-speaking. It also confirms that the regional and communal Finance Ministers are recognised as competent authorities.On Germany, the protocol brings in the application and interpretation of the new article 7 of the OECD model double taxation convention adopted on 22 July 2010 by the OECD Council. It also harmonises the taxation rights under the government service and diplomatic missions articles with article 14 of the consular convention of 30 July 1956 between Germany and the UK.
As the Minister and I have agreed in previous debates, information exchange is an important tool to increase tax transparency and to prevent tax avoidance. It continues to have the support of the Opposition. We also support the measures that will provide for mutual assistance in the collection of taxes on behalf of the other contracting states within the agreement. I will be grateful, however, if the Minister will tell us whether an assessment has been made of how much revenue might be raised by the measures. Will he report on any successes to date in relation to other agreements of this kind? Has an assessment been made about the volume of requests that might be received from other treaty partners where requests for assistance with the collection of taxes are made? How much additional resource within HMRC might be required to fulfil such requests? Will he comment on how the Government will keep the draft order and similar orders under review to ensure that the policy objectives are being met and so as to provide data and information to determine the direction of future treaty negotiations?
4.41 pm
Sir Peter Bottomley (Worthing West) (Con): I admire the way in which the spokesman for the Opposition and my hon. Friend the Minister have managed to cover the agreements so clearly and so briefly. I do not want to add much to the length of the proceedings, but for one question, about which perhaps the Minister will write to me.
We have to have some sympathy for government in Belgium. That draft order refers to three communities, three regions and a national Government, which makes our coalition arrangements in this country seem rather easy.
In article 7, on page 7, of the draft order on Zambia, there is a reference to taxation that could be useful in dealing with the profits of some high-tech advertising businesses. I do not ask the Minister to comment on that now, but the document seems to say in plain language that some of the profits that do not appear to be taxed anywhere could be taxed somewhere. It would be a good idea if they were, in larger amount.
Reference is made to the agreement with Japan. I was glad to see the exchange of letters with His Excellency, Mr Hayashi, the ambassador. I was in Japan two weeks ago and saw the reconstruction from both the tsunami and the Kobe earthquake. The taxation raised for that has been spent with remarkable skill in restoring to people the life that was destroyed by natural disasters. I also listened to people at the European Business Council in Tokyo, who talked about some of the non-tax areas in which difficulties could be overcome, and I would commend the Minister and his colleagues in the Department for Business, Innovation and Skills to do so with the Japanese ambassador and the Japanese Government.
The question I was going to ask was about paragraph 3 of article 17 of the treaty with Zambia—on page 14 of the draft order, but perhaps the provision is in other treaties as well—where it states that, in effect, state pensions will only be taxed in the country in which they are paid. Is that right? If it means what it says, perhaps the Minister will write to me and explain in detail why that is the case. Were I a UK worker who retired to Australia or the United States, is it right that those countries would not take into account my UK pension income when dealing with my overall taxation in those countries?
4.43 pm
Mr Gauke: I am grateful to right hon. and hon. Members for their contributions to the debate. I thank the hon. Member for Birmingham, Ladywood for her continued support for us having in place a strong network of double taxation agreements that facilitate additional free trade, which benefits the United Kingdom. I am grateful that we have consensus.
The hon. Lady asked how we set out our negotiating programmes. The UK has comprehensive double taxation agreements with about 120 countries. Each year we seek views on that treaty network from interested parties, including business representatives, civil society and other Departments. We then make a judgment about which countries to seek to engage with, taking into account, for example, economic factors, the need to counter avoidance and evasion, and the role of treaties in promoting development. We also receive requests from countries that wish to negotiate with us, which we try to accommodate as time and negotiating resources permit. Given the number of treaties we already have, most of the programme will involve renegotiating existing agreements. HMRC makes periodic announcements about progress and prospects.
I agree that, on the face of it, it is surprising that we lack a treaty with such an important country as Brazil, with which the UK has considerable engagement—although one recent example of engagement by a part of the UK in Brazil did not last as long as some of us had hoped. Entering into a treaty means that both sides agree to give up some of the tax they charge on income arising in their state. At the moment, at least, Brazil is not prepared to do so to the extent that would make a tax treaty worth while. I hope that will change, because there is no doubt in my mind that a tax treaty along the lines recommended by the OECD would bring great benefits to both sides. In the meantime, my officials remain in regular contact with their opposite numbers in Brazil and monitor the situation closely.
On the issue of HMRC’s resources for dealing with the additional requests that are likely to be generated under the new agreements, the exchange of information is an essential and growing part of international tax co-operation, and HMRC has a dedicated unit in place to deal with requests. In addition to requests received from treaty partners, the trend towards automatic exchange of information provides HMRC with an increasing amount of information about UK taxpayers, which is distributed through another specialist unit, increasingly in electronic form. The resource required to handle the exchange of information is, of course, kept under review
to ensure it remains adequate. It is an important area, in which we are making rapid progress, and it is important that the UK is able to continue to exploit it to the full. I cannot put numbers on it at the moment—the hon. Lady has asked about that previously. We continue to monitor the situation closely to ensure we get everything we should. I hope that we will be able to publish more information—I think information is available about the volume of requests—and I will write to her with any information I have.On my right hon. Friend’s question—
Sir Peter Bottomley: Hon. Friend.
Mr Gauke: Hon. Friend—it is only a matter of time. He asked about the taxation of state pensions, and he highlighted the article in the Zambia treaty. It is not uncommon that the state pension is taxable in the paying state; that is the standard OECD framework. I trust that we are talking about state pensions, which are based on social security contributions, and so on. My hon. Friend’s interpretation of the Zambia agreement is correct; that is how it works. As long as it is consistently applied around the world, which is what the OECD tries to do, that seems a reasonable position. These matters are more complicated for private pensions, but we are talking about state pensions. I hope that clarity helps my hon. Friend and the Committee as a whole.
With those remarks, I hope the Committee is satisfied that all the agreements and protocols before us should go forward.
DRAFT DOUBLE TAXATION RELIEF (FEDERAL REPUBLIC OF GERMANY) ORDER 2014
That the Committee has considered the draft Double Taxation Relief (Federal Republic of Germany) Order 2014.—(David Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (ICELAND) ORDER 2014
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Iceland) Order 2014.—(David Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (BELGIUM) ORDER 2014
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Belgium) Order 2014.—(David Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (JAPAN) ORDER 2014
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Japan) Order 2014.—(David Gauke.)