Draft Double Taxation Relief and International Tax Enforcement (Ecuador) Order 2024
(3 days, 20 hours ago)
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The Exchequer Secretary to the Treasury (James Murray)
I beg to move,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Ecuador) Order 2024.
It is a pleasure to serve on this Committee with you as Chair, Mrs Harris.
The order before the Committee gives effect to a first-time double taxation convention with Ecuador. It will provide a clear and fair framework for the taxation and administration of cross-border transactions between the United Kingdom and Ecuador, benefiting businesses and the economies of both countries by removing barriers to cross-border trade and investment. The DTC is based mainly on the OECD model tax convention, which contains a set of internationally agreed principles that make DTCs easier for businesses to understand and for tax administrations to apply.
I turn now to some of the main features of the DTC. It provides limits on the withholding taxes that can be charged on dividends, royalties and interest, which in many circumstances are less than the tax rates applied under Ecuador’s domestic law. There are specific exemptions for dividends and interest paid to pension funds and for interest paid to financial institutions, which will be of benefit to UK pension funds and to banks with interests in Ecuador.
The DTC limits the circumstances in which the trading profits of an enterprise based in one country may be taxed in the other country. That will be welcomed, for instance, by United Kingdom businesses looking to provide services to customers in Ecuador, such as in the life sciences, infrastructure and financial services sectors, as it will ensure that businesses will not face Ecuadorian withholding taxes on some payments for those services.
The agreement contains all the minimum standards introduced by the joint OECD and G20 project on base erosion and profit shifting. Those standards ensure that DTCs are not used to avoid or evade tax, and include a statement in the preamble that it is not a purpose of a DTC to create opportunities for tax evasion and avoidance, and a principal purpose test that denies treaty benefits in cases of abuse.
Another anti-avoidance rule included in the new treaty is a tie-breaker provision for determining corporate residence based on agreement by the competent authorities of each country. The DTC also allows for the exchange of information between the two countries to facilitate tax transparency and provides for mutual assistance in the collection of tax debts.
Together, these features strengthen both countries’ defences against tax avoidance and evasion. The order includes dispute resolution provisions that go beyond the minimum standard set out in the final recommendations of the BEPS project by providing that, where a taxpayer considers that the DTC has not been applied correctly, they can present their case to either tax authority, and not just where they are resident.
In summary, this agreement is one that the UK can welcome, fulfilling a long-held ambition to conclude a DTC with Ecuador and filling another gap in the UK’s network of DTCs in Latin America. It will provide a stable, long-term framework within which trade and investment between the United Kingdom and Ecuador can flourish. I commend the order to the Committee.
Richard Fuller (North Bedfordshire) (Con)
I echo the Minister in saying it is a pleasure to serve on the Committee under your chairmanship, Mrs Harris.
The Minister will be pleased to know that it is not the intention of the official Opposition to divide the Committee on this tax treaty. However, I have a number of questions —he may be able to answer them today, but I am perfectly happy if he wants to reply in writing subsequently.
This treaty follows on from the agreement signed in Quito on 6 August this year. Can the Minister provide us with an update on the status of Ecuador’s ratification of this treaty? As I understand it, that will be subject to its National Assembly, but there are elections to the National Assembly coming up in March next year and the President only holds a majority through a coalition. I would be grateful for any update on the status and expected date of ratification.
I echo the Minister’s comments about the importance of stimulating exports and trade with Ecuador. We have very limited trade at the moment, and hopefully this agreement will help from the point of view of both imports and exports, and of direct investment.
The Minister mentioned that this agreement was based on the OECD model tax convention. That model, as hon. Members probably know, has been in place for 30 or 40 years—maybe even longer—and many tax treaties around the world are signed around these conventions. However, there is a slight deviation in part of this agreement. In paragraph 5.16 of the explanatory memorandum, relating to article 5 on permanent establishment, it says that the agreement
“has a wider scope than the OECD Model, reflecting Ecuador’s preference. In particular, it has a lower threshold of 183 days for a building site to give a PE. It also deems there to be a PE where services are provided by an enterprise in the other territory for more than 183 days in total in a 12-month period.”
As there is very little for the Committee to note that is different from the OECD model, I hope the Minister does not mind me asking about that one point I have highlighted.
Furthermore, Ecuador is, as best I know, not a member of the OECD, or certainly has not signed up to pillar 2, the agreement on global minimum taxation for multinational enterprises. Any implication in this tax treaty relating to Ecuador’s status on that question would be of interest, but again that is not a matter for us to divide the Committee on today.
James Murray
I welcome the comments from the shadow Minister and his party’s support for this double taxation treaty.
First, on Ecuador’s ratification of the DTC, Ecuador has indicated that it will complete the process by the end of this year, which I think gives the shadow Minister the timetable he was seeking. If this Committee supports the DTC today, it will take effect from 1 January 2025, as long as the necessary diplomatic exchanges are all completed in time. Taxpayers and businesses in the UK will be able to benefit from the DTC provisions from that date.
The other questions the shadow Minister asked related to the explanatory memorandum and the relationship with pillar 2. There are provisions taken from the United Nations model tax convention, which many developing countries prefer, and which are present in many of the UK’s treaties. They reflect the support for developing countries as they want to engage in the process. Ecuador’s approach to pillar 2 more broadly is probably a question more for the Government of Ecuador than for me but, as the shadow Minister will know, we are committed to the effective delivery of pillar 2 in the UK and to ensuring that the necessary legislation is put in place. Indeed, there is legislation on that in the current Finance Bill, so I look forward potentially to his support for that Bill when it comes to the Chamber.
To conclude, this statutory instrument to approve the double taxation treaty will ensure that we have a modern DTC in place in both countries, providing a stable foundation for investment and growth, while at the same time, crucially, making it harder for people to avoid their taxes in the UK if that is something they are trying to do. I am grateful to the shadow Minister for his contribution and I hope the Committee will see fit to support the order.
Question put and agreed to.