Draft Double Taxation Relief and International Tax Enforcement (Luxembourg) Order 2022
(Limited Text - Ministerial Extracts only)
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The Financial Secretary to the Treasury (Lucy Frazer)
I beg to move,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Luxembourg) Order 2022.
It is a pleasure to serve under your chairmanship, Ms McVey.
The draft order gives effect to a new replacement double taxation agreement with Luxembourg. The statutory instrument has five main objectives: in a nutshell, it updates an existing agreement so as to make it easier for businesses to understand; it supports cross-border trade and investment; it reduces the tax burden on UK businesses with subsidiaries in Luxembourg; it improves available dispute resolution mechanisms; and it bolsters provisions to tackle tax avoidance and evasion.
I will now turn to the detail of the draft order and the new agreement. As I am sure the Committee understands well, agreements such as this one remove barriers to international trade and investment; they also provide a clear and fair framework for taxing businesses that trade across international borders. Both those things benefit businesses and the economies of signatory countries—in this case, the UK and Luxembourg.
The reality is that our previous agreement with Luxembourg dates back to 1967. As such, it needs updating, for example to reflect changes to the OECD model tax convention and to the domestic tax laws and treaty preferences of both countries. The new agreement also introduces a number of improvements for businesses, individuals and Her Majesty’s Revenue and Customs itself. Updating arrangements to follow many of the latest provisions in the OECD model convention will make it easier for businesses to understand their responsibilities and obligations.
One significant issue for larger companies is continuity in the payment of dividends. Dividends between group companies operating across borders in the European Union were previously exempted from so-called source state taxation under the parent subsidiary directive. The new agreement replicates that exemption for the majority of dividends, ensuring that UK businesses with subsidiaries in Luxembourg will not pay tax in Luxembourg on dividends paid to UK companies. The new agreement exempts the majority of dividends from tax, but it preserves our right to tax distribution from UK real estate investment trusts at a rate of 15%, thereby ensuring that the UK will not lose taxing rights where the profits from those REITs are otherwise exempt.
Disputes are another important issue. The draft order gives effect to the minimum standard on improving dispute resolution set out in the final recommendations of the OECD and G20 base erosion and profit shifting—BEPS—project. It does so by changing how disputes involving the application of the agreements are resolved. The changes mean that where taxpayers consider that the agreement has not been applied correctly, they may present their case to either tax authority, rather than just the authority where they are resident. At the same time, any resolution of a dispute will need to be implemented even if the time limits in the domestic law of either territory would otherwise prevent that.
There are also implications for tackling tax avoidance and evasion. Importantly, the new agreement contains all the minimum standards introduced by the BEPS multilateral instrument to ensure that double taxation agreements are not used to avoid or evade tax. The provisions include the statement in the preamble that it is not a purpose of a double taxation agreement to create
“opportunities for…tax evasion or avoidance”,
as well as a principal purpose test that denies treaty benefits in the case of abuse.
Other anti-avoidance rules in the new treaty include a tie-breaker provision for determining corporate residence based on a competent authority agreement. There is also a provision in the capital gains article that preserves UK taxing rights on gains from shares that derive their value from property in the UK. Finally, the new agreement provides for mutual assistance in the collection of tax debts.
In conclusion, all these features together strengthen both countries’ defences against tax avoidance and evasion, so this agreement is one that the UK and Luxembourg can both be very happy with. The mutual benefits that I have outlined are many. The agreement makes it easier for businesses to understand their obligations and responsibilities, it reduces the tax burden for UK businesses with subsidiaries in Luxembourg, it improves available dispute resolution mechanisms, and it bolsters provisions to tackle tax avoidance and evasion. Above all, it protects UK revenue and provides a stable framework within which trade and investment between the UK and Luxembourg can continue to flourish. For those reasons, I commend the draft order to the Committee.
James Murray (Ealing North) (Lab/Co-op)
It is a pleasure to serve on this Committee with you as Chair, Ms McVey, and I thank the Minister for her opening remarks. I am pleased to respond briefly on behalf of the Opposition.
As we heard from the Minister, the statutory instrument gives relief from double taxation in relation to capital gains tax, corporation tax, income tax and taxes of a similar character imposed by the laws of Luxembourg, as well as relating to international tax enforcement. As we can see, the schedule introduced by the order is largely technical in nature. It follows an approach that is consistent with similar bilateral agreements with other states and territories, and we will not oppose the order. It is important that bilateral agreements concerning taxation are clear.
We also welcome the objective of this double taxation treaty, which the explanatory memorandum makes clear is to
“protect the Exchequer by including provisions to combat tax avoidance and evasion.”
These provisions include
“measures providing for the exchange of information between revenue authorities”,
in order to
“make it more difficult for residents of both territories to evade taxation by concealing assets offshore.”
As the Minister knows from her time in office, the Opposition have been pushing her and her colleagues at every turn to do more to tackle evasion and avoidance. We have pushed them to implement the global minimum corporation tax rate that the OECD and G20 recently agreed, which the Minister mentioned in her speech. Therefore, I will use this opportunity to ask the Minister briefly about the implementation of the OECD agreement.
On 20 July this year, the Treasury published draft legislation that would introduce the new so-called multinational top-up tax. Can the Minister simply confirm whether the new Prime Minister tomorrow will support this legislation? If she cannot confirm that, will she join me in urging the new Prime Minister to continue with this legislation?
Lucy Frazer
I am happy to respond to the hon. Gentleman and I am very pleased to see him after the break. Of course he will realise that as the Prime Minister has just been appointed as the leader of the Conservative party and is yet to go to see the Queen, it would be a little bit premature to set out her plans.
Lucy Frazer
I thank the hon. Member for Glenrothes for his detailed and interesting questions. I hope to be able to respond to at least some of them. The hon. Member asked how the principal purpose test applies in practice. The answer is that HMRC has a long history of dealing with avoidance provisions of this type, and the same principles will be applied here, supported by existing guidance and OECD commentary.
The hon. Member asked about anti-fragmentation and the complicated wording; I assure him that it is standard OECD wording, which has been adopted by all countries. He also asked about any potential new capital articles. I would reassure him that the provision would cover any new UK tax on capital. On how arbitration works, the costs will be paid by the states and details of the operation are set out by a competent authority agreement. On whether article 26 complies with GDPR, the answer is yes, it is fully compliant with GDPR provisions.
The hon. Member pointed out the issues of beneficial ownership. He will know that the UK was the first country to introduce a public register of ultimate beneficial owners of companies—the people with significant control register. Recently, we have also introduced a largely public register of beneficial owners of overseas entities that own UK property, and we expect that new register will be useful in tackling tax non-compliance as well as economic crimes.
Peter Grant
On the question of the register of beneficial ownership, how effective—if indeed they exist at all—are the penalties for knowingly providing false information, or for knowingly withholding information? I regularly look at companies’ records at Companies House where it is clear from looking at the shareholdings that someone has very substantial control, yet the official register says that no one has significant control. When will the requirement to report that actually be given teeth, so that it becomes mandatory, instead of effectively voluntary as it is now?
Lucy Frazer
It is of course important that we have penalties appropriate to the provisions in any legislation. The hon. Gentleman will know that we are looking very carefully at the issue of beneficial ownership. He also asked about a wealth tax; there is no current intention to bring in any wealth tax. For all those reasons, I commend the draft order to the Committee.
Question put and agreed to.