Draft Double Taxation Relief (Mauritius) Order 2018
Draft Doubt Taxation Relief and International Tax Enforcement (Cyprus) Order 2018
(Limited Text - Ministerial Extracts only)
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The Financial Secretary to the Treasury (Mel Stride)
I beg to move,
That the Committee has considered the draft Double Taxation Relief (Mauritius) Order 2018.
The Chair
With this it will be convenient to consider the draft Double Taxation Relief and International Tax Enforcement (Cyprus) Order 2018.
Mel Stride
It is a particular pleasure to serve under your chairmanship, Mr Robertson. The orders before the Committee give effect to a new replacement double taxation agreement, or DTA, with Cyprus and a protocol amending our existing agreement with Mauritius. DTAs remove barriers to international trade and investment and provide a clear and fair framework for taxing businesses that trade across borders. By doing that, they benefit both business and the economies of the countries signed up to them.
I will say a few words about each agreement. Our current DTA with Cyprus was signed in 1974 and last amended in 1980. This new treaty therefore provides a comprehensive update that reflects the current OECD standards, including the BEPS—base erosion and profit shifting—minimum standards on treaty abuse and improving dispute resolution. The new treaty protects the UK’s taxing rights over gains from the disposal of land and buildings in the United Kingdom. That is particularly important, because it prevents non-residents from developing and disposing of UK land without paying tax in the United Kingdom.
Bob Stewart (Beckenham) (Con)
I am only here today to represent the concerns of servicemen, civil servants, policemen and firemen who have retired to Cyprus. They went there on the understanding that the tax rate would be 5%. That way, they eke out their pension pretty well. This change will hit them extremely hard. I very much want the House to realise that suddenly they will go from paying 5% up to paying at least 20%, and that is a big jump.
Mel Stride
I thank my hon. Friend for his intervention. The fact that he has chosen to attend this Committee, despite having not been selected to serve on it, is testimony to how strongly he feels about the issue. What I would say to him is this. First, the actual impact of the changes—the move from 5% up to 20%, as he termed it—on individual public service pension recipients will depend largely on their own personal tax affairs. As my hon. Friend may well know, there is a different personal allowance level in operation in the United Kingdom from that pertaining to Cyprus, so there is an interplay between those two reliefs as well. It is therefore not immediately obvious that all of those affected by this measure, or indeed the majority, will be adversely affected. The other point to make is the importance of a level playing field. In the case of all the other countries where we have a similar situation and with which we have agreements in place—countries such as Germany and Belgium—it is the UK tax authorities that actually levy the tax on those who are in receipt of UK public service pensions, albeit that they reside in those territories.
This treaty provides for exemptions for source state taxation, including eliminating withholding taxes on dividends, interest and royalties arising in Cyprus, but we have ensured that we retain the right to apply a withholding tax of 15% on distributions from real estate investment trusts, or REITs. The agreement also contains the most up-to-date provisions to guard against treaty abuse, the latest OECD exchange of information article, and a provision for mutual assistance in the collection of tax debts. Those features strengthen both countries’ defences against tax avoidance and evasion.
The protocol with Mauritius amends our existing 1981 DTA to update the dividend article in order to close a loophole in the original agreement. That was being abused to avoid tax on dividends from REITs. Dividends from UK REITs are usually subject to a withholding tax when paid to investors, because the profits themselves are not taxed in the hands of the REIT. However, the Mauritius DTA predates the creation of REITs and prevents application of that withholding tax. We recently became aware that third-country investors had established a company in Mauritius to use that feature of the DTA to avoid UK tax on dividends from a REIT.
We approached the Mauritian Government proposing a change to the dividend article to prevent the avoidance, and they were happy to co-operate. The amended article allows the UK to withhold tax at 15% on dividends from REITs to residents of Mauritius, bringing it into line with many of the UK’s other DTAs. The changes made by the protocol will, once it is ratified, be effective from the date of signature—28 February 2018—so there will be no delay in shutting down the avoidance and protecting the UK Exchequer with immediate effect.
The UK, and Cyprus and Mauritius, can be happy with the agreements. They protect UK revenue and provide a stable framework in which trade and investment between the UK and Cyprus and Mauritius can continue to flourish. I therefore commend the orders to the Committee.
Mel Stride
I thank everybody who has participated in this debate. To pick up on some of the questions that the hon. Member for Oxford East raised, we are constantly reviewing existing treaties. HMRC is considering the best way to approach looking at the different treaties and perhaps bring forward rationales for why we might approach them in a particular way. The hon. Lady will know that the OECD model is the starting point for our negotiations in this respect; it is available in the public domain and we can all view it. She asked what information could be provided in advance to Committees, particularly about shifts away from previous positions in existing agreements where they are being renegotiated. I would be happy to have a further discussion with her outside the Committee about the detail of that.
The hon. Lady also asked why certain choices were made. We have an explanatory memorandum and it is the case with most treaties that there is some time between the treaty being signed and it coming before this House. For example, the signed DTA that we are looking at was published on the Government website, and a ministerial statement was made to that effect, on 27 March 2018. MPs and their constituents have been able to make representations to me since then. The Government do not consult more generally on the contents of DTAs because they are the product of bilateral negotiations with other states, which deal with a vast range of complex issues that are not suitable for open negotiation.
The hon. Lady asked whether there were formal assessments of whether these arrangements are coherent with our development goals and approaches in developing countries. I assure her, as we have discussed in previous Committees, that the Department for International Development is well aware of and comfortable with our approach. Where it has concerns that it wishes to raise, my colleagues and I at the Treasury will be very happy to hear them. As with any agreement of this nature, it is only by mutual agreement between ourselves and those whom we negotiate with that we come to an agreement at all. Nobody is forcing any particular country into an agreement with us.
The hon. Member for Glenrothes asked me for an assurance that the instruments would not provide further opportunities for tax avoidance. I give him that assurance; I have no crystal ball, but I believe they are intended solely to make the tax system internationally fairer and operate better. As we have discussed in the case of the REITs and Mauritius, they tighten up the tax treatment there to make sure that we are able to levy appropriate tax on those particular structures.
The hon. Gentleman asked me how much money was involved in this kind of clampdown; in the specific case of Mauritius, there was one particular case of treaty shopping where a company was set up in Mauritius with a REIT in the UK, but the transaction was really coming back to another country. I believe the amount involved in that particular case was about half a million pounds. They are not sums up in the hundreds of millions, but they are significant sums none the less. There is an important principle at stake as well.
The hon. Gentleman also raised the issue of our personnel based in Cyprus who are in receipt of public service pensions. He asked how many people might be affected. There are about 65,000 UK residents residing in Cyprus, of whom something in the low thousands—I do not have a precise figure—might be on Government service pensions. A subset of that group would be on armed forces pensions—I shall come on to the contribution of my right hon. Friend the Member for Rayleigh and Wickford in a moment. The hon. Member for Glenrothes sought an assurance that under the new arrangements, those individuals would not be disadvantaged in any way relative to those receiving UK pensions who reside within the United Kingdom. The answer to that is they would not be; they are all basically on the same basis.
The hon. Gentleman also made an interesting point about the language in the explanatory memorandum, asking about the statement that the draft instrument complies generally with the OECD model. He is right. Almost invariably in such treaties, there are variations from that model, and one in the case of Mauritius is the principal purpose test, which does not feature in this particular agreement. That is an important tax avoidance measure, but we have assurances from Mauritius that that is something that will be included in the multilateral instrument. When the Mauritian Government ratify that, they will not have it as a reserved matter.
Coming to the very important points made by my right hon. Friend the Member for Rayleigh and Wickford, and indeed my hon. Friend the Member for Beckenham, as I said earlier, the critical thing in the Cyprus order is that we seek to place the arrangements that pertain to the UK public service pensions of those who happen to be resident in Cyprus on the same basic footing as those that we have with just about every other country with which we have such arrangements. The impact will be determined by a complicated interaction of different allowances—of course the personal allowance in the UK is different from that in Cyprus—and the 5% lower rate tax is a lower rate tax, but an individual who is being taxed in Cyprus can elect to pay the higher rate tax, so it is tricky to work out the exact impact in individual circumstances. We believe, however, that for the less well-off in particular, the likelihood—on average, on balance—is that the impact will be lower rather than greater.
My right hon. Friend asked in which tax year the measures would kick in, and the answer is in 2019-20 at the earliest. I may not meet his invitation to impress him and come up with something out of my pocket, or a rabbit out of a hat perhaps, but I shall go as far as to say that I will, of course, be pleased to meet him to discuss this matter or, indeed, any other tax measure that he may wish to raise with me. However, if we were to look at any form of transitional arrangements, that would require an agreement with Cyprus, and the likelihood of that—or of us pursuing that path, I have to say, as he rather suggested in his contribution—is very low.
On that note, I hope that we can agree the draft orders before the Committee.
Question put and agreed to.
Draft Double Taxation Relief and International Tax Enforcement (Cyprus) Order 2018
Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Cyprus) Order 2018.—(Mel Stride.)