Double Taxation Treaties (Developing Countries) Bill

(Limited Text - Ministerial Extracts only)

2nd reading: House of Commons
Friday 16th December 2016 Commons Chamber

[The Financial Secretary to the Treasury (Jane Ellison)]

I am grateful to colleagues on both sides of the House for giving me an opportunity to respond to this debate, because both this Bill and this subject are important. I want to respond in the constructive way in which the hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin) advanced his argument.

Let me make it clear from the start that I very much share the aims of the hon. Gentleman’s Bill. I share his belief in the importance of the UK’s efforts to tackle poverty in developing countries—we have achieved a great deal of cross-party consensus on that in recent years—and I think we would all very much agree with the thrust of his argument that it is absolutely vital to help countries to build capacity and to move beyond the need for aid.

[Patrick Grady]

Will the Minister give way?

[Jane Ellison]

I have only just started, so if the hon. Gentleman does not mind I will get a little further into my speech before I give way.

I reassure the hon. Member for Kirkcaldy and Cowdenbeath that tax treaties enable countries to achieve that objective by helping to encourage the stable environment that can pave the way for sustainable economic growth and facilitate revenue collection, which is another important point that he drew out in his remarks. Although we are in full agreement about the important principles of the Bill, the lack of feasibility in its practical requirements means that the Government are unable to support it. I will come on to outline those requirements, but I first want to say a few words about our commitment to aid in general.

[Patrick Grady]

That was the question that I wanted to ask. It would be very helpful for the House if the hon. Lady put it on the record that the Government remain committed to the 0.7% aid target, because there has been speculation in the press, including reported comments from the Chancellor, that their commitment might be wavering.

[Jane Ellison]

It was only this week that the Prime Minister responded directly on that subject, so the hon. Gentleman does not need my assurance because he has had it from much higher up the governmental food chain.

As the hon. Gentleman intervened earlier on the subject of Malawi, I want to get this point on the record. I have done a lot digging into this issue. It is true that we are negotiating an updated treaty with Malawi, which we hope to conclude soon, but the Malawian Government have stated that there is no evidence of any UK companies using the UK-Malawi treaty to deprive them of their revenues. An official statement from the Malawian Government said that

“both the Malawi Government and the British Government, as well as the nationals of the two countries, have evidently acted in good faith to ensure that neither party is exploited on the basis of the current agreement.”

I wanted to give the hon. Gentleman and the House that assurance on the Malawi treaty.

[Mark Pawsey (Rugby) (Con)]

Does my hon. Friend agree that the hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin) has some laudable aims, but that he is pushing at an open door because the Government have already taken substantial action and agreed to implement two of the base erosion and profit sharing outputs? They are therefore travelling in the direction he is asking for.

[Jane Ellison]

My hon. Friend is right. The OECD’s BEPS project is really important in addressing some of the issues the hon. Member for Kirkcaldy and Cowdenbeath talked about. The UK has played a leading role in that project and will continue to do so. A large number of countries have come on board with those principles and we will continue to move forward on them.

It is worth restating that the UK became the first G7 country to meet the UN target of spending 0.7% of gross national income on international development. The way in which we tackle the challenges in developing countries is very much in the spirit of what has been discussed in this debate. We understand the idea of helping people to develop capacity and independence so that they are not dependent on aid. At the heart of what DFID and the Government are doing is the idea of strengthening people so that countries can move forward and develop.

We help people to strengthen their economies and reduce their reliance on aid in a range of ways. Last year—I am particularly proud of this because it involves HMRC working closely with DFID—we committed to doubling the funding for tax projects in developing countries through the Addis tax initiative. HMRC has set up a specialist tax capacity-building unit, which deploys staff to developing countries to provide technical tax expertise. It is working closely with DFID on that.

Bilateral tax treaties can play a part. Treaties are important in encouraging private sector activity in a partner country. We know how powerful a force that can be in driving up employment, providing quality goods and services, and raising crucial tax revenues, which finance public services in those countries. We have about 130 treaties with countries across the globe, including several with developing countries, to support and sustain cross-border trade and investment by tackling double taxation and clamping down on cross-border avoidance and evasion.

The treaties are reached through negotiation by experienced officials from HMRC and are highly technical documents. Let me provide assurance on the specific points the hon. Member for Kirkcaldy and Cowdenbeath made about who is involved and the process that goes into those documents. They follow consultation exercises that help to establish appropriate priorities. That process includes the consideration of representations made by UK businesses, NGOs, other Departments including DFID and the UK’s missions based in developing countries. The approach to these treaties is very collaborative and open so that we reach the right priorities that work for both parties. Decisions on the negotiation or renegotiation of a tax treaty are taken on the basis of a range of factors, including the results of HMRC’s periodic review of the tax treaty network and the role of treaties in promoting development. The Government already strive to take wider issues, including development, into account and align our tax treaties with our wider development policies.

I know there are some concerns about the treaties, and some have been alluded to today. Let me be very clear that the UK never ties our wider assistance or investment to such treaties. We cannot impose tax treaties on other states, including developing countries, and we never try to do so. Every tax treaty we negotiate is necessarily a reflection of the interests and priorities of both states as equal partners. That of course will mean some trade-offs. Sometimes developing countries face a trade-off between reducing their tax rates and rights to encourage investment and maintaining those rates and rights and so risking losing investment. That is their judgment to make. Before engaging in a treaty negotiation any country would think about what its priorities are.

[Mark Durkan]

I have noted all that the Minister has said, but she must recognise that there is a concern that some of these treaties work more as double evasion treaties than as double taxation treaties. Beyond the treaties, in the last Parliament, against the grain of what the Government say they are about in the BEPS process, the controlled foreign companies rules were changed unilaterally and at the expense of developing countries’ exchequers.

[Jane Ellison]

There are two things I would say. First, our work on double taxation treaties cannot be seen in isolation from the wider work we have led through the OECD on the BEPS project and a lot of the legislation we have passed. Since just 2015, there have been more than 30 different measures that will come into effect on avoidance and evasion.

My second point, to reiterate what I was saying before I took the hon. Gentleman’s intervention, is that these are mutually agreed treaties. If a country is not comfortable with anything being proposed—not that the UK would propose anything close to what he suggested—the treaty is mutually agreed and it is right that we respect the balance developing countries wish to strike in negotiations as much as we would respect any country’s position. Our network of treaties with developing countries demonstrates that. We have no power to force a developing country to sign a treaty that is against its interests, and would never try to do so. If the UK and a potential treaty partner cannot come to an agreement that satisfies us both, the treaty simply will not go ahead.

I turn to some of the specific issues that the Bill would entail for any Government negotiating such treaties, because while we respect and agree with the thrust of the Bill’s intent, we do not think we could, from a technical point of view, carry out some of the analysis that the Bill suggests.

Let us take, for example, the idea of assessing the impact. Given the long timescales, the complex and shifting interactions with domestic law and the lack of a reliable comparator, we believe it is simply not possible to produce meaningful estimates of the revenue effects of a tax treaty in the sort of timeframe that the hon. Member for Kirkcaldy and Cowdenbeath is suggesting. These are long-term projects with partner countries. Successive Governments have never attempted to produce assessments of the effect on the UK, let alone for a partner country. To attempt to do the latter—to assess the impact for the partner country—would very likely not be welcomed by that country, as it would essentially represent the UK’s uninvited judgment of its tax policies. I entirely endorse his comments about mutual respect. However well intentioned, the idea of our passing judgment on another country’s tax policy runs counter to the key principle of mutual respect.

[Roger Mullin]

I am afraid that I do not accept the Minister’s point about evaluation for the following reasons. She says we have very good treaties, which are well respected and work well. How do we know that they work well if there is no evaluation of them? No one was suggesting that any evaluation would be one-sided. It is perfectly possible to have bilateral or multilateral evaluations.

[Jane Ellison]

I understand the hon. Gentleman’s point, but I still cannot agree with him. He asks how we can show benefits. I repeat that countries enter into these agreements willingly. We have over 130 of them, and there are more in the process of renegotiation, particularly those that are outdated. Countries would not be seeking to renegotiate or enter into that bilateral discussion if they did not feel there was mutual benefit in their doing so.

I have recently signed several such treaties—we have recently exchanged treaties with Colombia and Lesotho—and had the opportunity to talk to countries about why they do it, and it is clear they believe it is to our mutual advantage. Over time, these bilateral relationships must be to our mutual advantage. It is also worth noting that countries can rescind treaties. If countries did not think it to their advantage, they could rescind the treaties. We have not locked countries into these arrangements; they are entered into by mutual agreement, and countries can exit from them.

The Bill also asks us to assess the benefits of foreign direct investment, but again that would be very difficult, if not impossible, on the basis that FDI depends on such a wide range of factors. Investors will consider all sorts of things, including: existing and planned infrastructure; changes to the country’s legal system; political stability—often critical in the developing world; the education level of the workforce; and access to markets. The idea that we could assess in isolation the direct contribution of a tax treaty is impracticable. It would be part of a mix that moves a developing country from poverty to greater wealth; during that journey, all those things, and more, begin to fall into place to produce an environment in which wealth can be created to the benefit of the country because people want to invest there. To analyse one of those things in isolation, however, would be an extremely difficult proposition.

[Mark Durkan]

On the Minister’s point about mutuality and the nature of any treaty discussions, would she agree that when bilateral trade deals are negotiated post-Brexit they should be accompanied by new tax treaties, negotiated at the same time, in the spirit of mutuality she has talked about?

--- Later in debate ---

[Jane Ellison]

Brexit is a bit of a red herring in this regard. These agreements are bilateral, and the vast majority are outside the EU, although we have them with EU member countries too. I am happy to respond to the hon. Gentleman with further details, but his point is not directly relevant in the way he suggests.

[Mark Durkan]

rose—

[Jane Ellison]

No, I will not give way again. To be fair to the hon. Member for Kirkcaldy and Cowdenbeath, the promoter of the Bill, I want to deal with a couple of his other points.

Parliamentary scrutiny was mentioned. We have a system whereby tax treaties are subject to parliamentary scrutiny and debate before they can enter into force. That means scrutiny through a Delegated Legislation Committee. There is a gap of several months between signature and debate, which gives hon. Members ample time to acquaint themselves with the contents of a treaty and to inform robust debate. There is also both the power and the precedent for referring treaties to the Floor of the House. That has not been done since 1984, but I would be delighted to discuss any of these on the Floor of the House if Members were moved to bring them forward.

I thank the hon. Gentleman for championing this issue and for the constructive approach he has taken. It has given us the chance to put on the record what I believe is an admirable track record in this country.

I will mention one more thing that might be of interest to the House. The Department for International Development is supporting the OECD’s new “tax inspectors without borders” initiative, which has raised more than $260 million of additional revenue in developing countries to be spent on public services. Again, this is a record we can be proud of across parties.

While we fully support the principles of the Bill, many of its provisions are already in place, and where they are not that is due either to the technical difficulties involved or to the unintended and undesirable consequences that such measures would involve.

The debate has served to highlight a number of things, particularly the role that tax treaties can play in providing certainty and stability for increased investment in developing countries; the importance of our tax treaties being tailored to meet the individual tax policies of our partner countries; and the considerable impact that the success of these treaties can have on sustainable economic development.

Although we do not support the Bill, I would like to thank the hon. Member for Kirkcaldy and Cowdenbeath for securing the space to consider these issues—