Draft Double Taxation Relief and International Tax Enforcement (Algeria) Order 2015
Draft Double Taxation Relief and International Tax Enforcement (Sweden) Order 2015
Draft Double Taxation Relief and International Tax Enforcement (Senegal) Order 2015
Draft Double Taxation Relief and International Tax Enforcement (Croatia) Order 2015
draft Double Taxation Relief and International Tax Enforcement (Bulgaria) Order 2015
Draft International Tax Enforcement (Brazil) Order 2015
(Limited Text - Ministerial Extracts only)
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Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to serve under you, Mr Bailey—the first time that I have had the pleasure, I believe. I would prefer, with your permission and that of the Committee, if we dealt with the draft orders on Algeria, Bulgaria, Croatia and Sweden together—I appreciate that that will still lead to four votes—and then, in separate debates, the draft orders on Senegal and on Brazil. Of course, the Minister might have different views on what is appropriate.
The Financial Secretary to the Treasury (Mr David Gauke)
I have no objection to that.
The Chair
I should make it clear that debate on the collective group of statutory instruments will continue for up to an hour and a half, although they will be voted on separately. There is then up to an hour and a half on the other two instruments afterwards.
The Chair
With this it will be convenient to consider the draft Double Taxation Relief and International Tax Enforcement (Sweden) Order 2015, the draft Double Taxation Relief and International Tax Enforcement (Croatia) Order 2015 and the draft Double Taxation Relief and International Tax Enforcement (Bulgaria) Order 2015.
Mr Gauke
Thank you for your guidance, Mr Bailey. I am immediately beginning to regret my assent to that slight rearrangement, but I am sure that all parties will work in a constructive way. Who knows, we might not be here for the full four and a half hours.
Let me start with Algeria. We have a first-time agreement that conforms closely to our expectations and to what Algeria has agreed with parallel countries. It will deliver substantial benefits for UK companies and individuals. The rates of withholding taxes for dividends, following the OECD model, are 5% for direct investors and 15% for portfolio investors. The maximum rates for interest and royalty payments are 7% and 10%, respectively. As is common with a developing country, we have agreed a provision that allows the taxation of services in the country in which they are performed, provided that they last for more than 183 days.
The treaty contains our usual anti-treaty shopping provisions, the latest OECD exchange of information article and an arbitration provision to assist the mutual agreement process, which will be an important comfort for UK companies investing in Algeria. There is also an article providing for mutual assistance in the collection of taxes.
Bulgaria’s treaty policy favours a higher level of source state taxation than is our preference. We have accommodated that to a certain extent and have obtained a similar agreement to those that Bulgaria has signed with other countries in the past five years.
On interest, there are exemptions from taxation at source on interest paid to financial institutions, pension schemes and fellow group companies. On royalties, the European Union interest and royalties directive, which took effect in Bulgaria in January 2015, will eliminate tax on intra-group payments. Dividends paid to UK companies will get the zero rate introduced by the EU parent and subsidiary directive, which took effect in Bulgaria in January 2015, and there is an important carve-out giving the zero rate to pension schemes. In most other respects, the treaty follows our preferences, especially in the adoption of anti-avoidance rules that prevent the treaty from being exploited by residents of third countries.
Let me now turn to the double taxation agreement with Croatia. This is a first-time, comprehensive DTA with Croatia. It will replace the existing 1981 treaty with Yugoslavia. Croatia’s treaty policy favours a higher level of taxation at source than is our preference. We were able to agree to that, however, as it has become a consistent feature of Croatia’s recent approach and, as is the case with Bulgaria, the combination of EU directives and the features that Croatia conceded to us will give us a result with which we are pleased. The treaty notably contains a withholding tax exemption for dividend payments to pension schemes.
We also achieved all our special provisions, such as our anti-treaty shopping measures, which prevent the UK from being used as a conduit, and a measure protecting our taxing right over real estate investment trust dividends.
Turning to Sweden, our existing treaty with Sweden dates from 1983 and although it is working reasonably well it is out of date by modern standards. In particular, the dividends article is defective and anti-treaty shopping provisions are also missing which, combined with Sweden’s general lack of withholding taxes, opens up the possibility of abuse.
The new treaty preserves the positive features of the existing one and includes most of the improvements that we were seeking. In particular, the 5% rate for portfolio dividends is maintained and we will now be able to tax real estate investment trust distributions at our preferred rate of 15%. On pensions, we accommodated Sweden’s wish for more extensive taxation at source, as we have done with Norway and Iceland. We now have a modern treaty, improvements to the dividends article and protection against abuse.
I hope those explanations are helpful to the Committee. I commend the draft orders and am happy to answer any questions that hon. Members might have on the provisions.
Mr Gauke
I thank the hon. Member for Wolverhampton South West for his first contribution and my right hon. Friend the Member for Cities of London and Westminster for his first and perhaps last contribution of the afternoon.
First, I will address the point about format. I understand why the hon. Gentleman raised the point but let me reassure him that all UK treaties follow to a large extent the OECD model, as is the case for most treaties throughout the world, which means that all the treaties appear very similar to each other. The hon. Gentleman would find that treaties that did not involve the UK would also look similar, so it is not so much the UK asserting a particular UK model. This is very much the international rule.
Rob Marris
Would that be the case with Algeria, which of course is not a member of the European Union and I believe is not a member of the OECD? Would it still, as far as he knows, tend to follow that common OECD format as a template?
Mr Gauke
Yes, that is very much my understanding. I confess I have not studied Algerian double taxation treaties not involving the UK perhaps as much as I might have done, but my understanding is that this model is used very broadly. Clearly there are advantages in terms of standardisation of the model for these treaties. It comes back to the point made by my right hon. Friend the Member for Cities of London and Westminster that double taxation agreements of this sort—tax treaties—help provide greater certainty to businesses. That greater certainty does help encourage foreign direct investment into countries that have treaties. The UK certainly benefits from a very extensive network of tax treaties, but developing countries also benefit from the certainty provided—the signal that a country is open for business. That is mutually beneficial.
I am aware that some critics of DTAs focus on the potential for abuse that they create, either through the creation of opportunities for non-taxation or the flow of benefits to unintended recipients, but such criticisms ignore the fact that measures can be agreed that protect against abuse, and the UK routinely agrees such measures with developed and developing countries alike. I would speak in defence of these tax treaties, from the point of view of both the UK and developing countries.
I suspect we will return to the role of the UK and the extent to which these matters are something of a compromise. I would just make the point that with any of these treaties, it is not realistic to expect any one party to a treaty necessarily to get their way on everything. These are matters on which there is likely to be some compromise.
I touched upon the fact that a lot of countries would place greater reliance on source income as opposed to residence as a test of where the taxable rights should fall. There tends to be a compromise reached, where an acceptable one can be. After all, each of the treaties before us this afternoon is the result of two sovereign Governments agreeing that it is in their mutual interest to sign it. We believe that a tax treaty can be a powerful tool for development because of the certainty it gives to international investors.
I hope those points are helpful to the Committee, Mr Bailey. I suspect I may refer to them again later this afternoon. I hope that, on those points of clarification, the Committee will support the four draft orders.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Algeria) Order 2015.
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (SWEDEN) ORDER 2015
Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Sweden) Order 2015.—(Mr Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (CROATIA) ORDER 2015
Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Croatia) Order 2015.— (Mr Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (BULGARIA) ORDER 2015
Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Bulgaria) Order 2015.—(Mr Gauke.)
Draft Double Taxation Relief and International Tax Enforcement (Senegal) Order 2015
Mr Gauke
I beg to move,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Senegal) Order 2015.
This is the first time that we have had a double taxation agreement with Senegal. Senegal has only 10 other DTAs, so it was pleasing that it agreed to negotiate one with the United Kingdom. As a developing country, Senegal, not surprisingly, wished to retain a substantial level of source state taxation. The DTA therefore permits the taxation of services when performed in the country for more than 183 days. However, Senegal agreed reductions in withholding taxes on passive income, in particular restricting withholding tax on dividends payable to direct investors to 5% and that on leasing payments to 6%. The DTA also includes the latest OECD exchange of information and assistance in the collection of taxes articles. I hope the Committee will support this order.
Mr Gauke
I thank the hon. Gentleman for his questions. I very much appreciate that he is probing the Government, as indeed is his role, and I am grateful that he indicated to me in advance that he would probe along those lines.
We do have to bear in mind that such treaties are not a zero-sum game. The hon. Gentleman did not claim that it is, but we have to bear in mind that a concession by one party to the other may well be to their mutual benefit. That is the nature of a double taxation agreement: it helps to provide greater certainty, for example, for businesses investing in a particular country. It prevents double taxation, which would act as an impediment to foreign direct investment. As we touched on in our earlier debate, that is why these treaties help to smooth the flow of investment funds and help countries to trade more closely together, which is an important source of increased prosperity. I make that general point.
More specifically, regarding the Senegal treaty that we are considering today, I hope that the hon. Gentleman will be reassured by the fact that discussions on this DTA commenced after an approach from Senegalese officials and not after lobbying by UK multinationals—not that such lobbying would necessarily be wrong. Nevertheless, the process was initiated by the Senegalese. The treaty will provide benefits for UK companies investing in Senegal, and Senegal will also benefit from such investment as its economy develops. Indeed, it is important for a country to be clearly open for business and to provide a tax regime that attracts investment rather than deterring it.
I will touch on some of the specific points that have been made. The hon. Gentleman made a point about the difference in withholding tax. The treaty reflects a compromise after extensive discussions. The balance of source state taxation versus residence state taxation reflects that compromise while providing certainty to businesses, which will encourage investment in Senegal. Cross-border trade will be enhanced, increasing taxable income in both states.
The hon. Gentleman raised a concern about UK multinationals exploiting the treaty to the disbenefit of Senegal. Of course, the Government are well aware that treaties can be exploited by some multinationals, but this treaty contains measures that will allow aggressive exploitation to be challenged by both states. Senegal has subjected this treaty to its legislative procedure, just as we are doing here now, and more widely, non-governmental organisations have acknowledged that the transparent nature of treaties is a positive factor for developing countries. I make the point again that the Senegalese Government initiated the discussions about this treaty and have agreed to the treaty.
On the economic and revenue effects of DTAs, they remove barriers to cross-border trade and investment. The effects of a specific agreement depend on the extent to which activities change as a result of it. Given the long timescales involved, the complex and shifting interactions with domestic law, the unpredictable behavioural effects and the lack of a sensible comparator, it is not possible to provide meaningful estimates of the revenue effects of DTAs, and successive Governments have never attempted to do so. I remember asking questions about the effects of a DTA when I performed the role that the hon. Gentleman is performing now, and I never received an answer. In truth, it is difficult to come up with a sensible number. Overall, however, DTAs are beneficial to the world economy and to participants in them.
A couple of other specific points were made about the Senegal treaty. The hon. Gentleman asked why it does not permit Senegal to tax supervisory activities connected with building sites, but it does allow that. The threshold for the taxation of profits arising from building sites is that the activity be carried on in the country for six months. While supervisory activities are not mentioned specifically in the treaty, the OECD commentary on the relevant provision makes it clear that supervisory activities associated with the erection of a building are included in the taxable activity of the building site.
As for why the treaty does not permit the taxation of royalties paid for radio and television programmes broadcast in Senegal, it provides that generally, royalties arising in Senegal can be taxed in Senegal at a rate not exceeding 10%. The definition of royalties includes payments for the use of, or the right to use, any copyrighted literary, artistic or scientific work, including cinematographic films. The OECD commentary on the provision makes clear that cinematographic films include material for TV broadcast. If the material to which the payment relates is subject to copyright and the payment is for the use of the copyright, Senegal may tax the payment. I hope that provides some reassurance.
Rob Marris
I congratulate the Minister on the width of his expertise on taxation in Senegal on cinematographic matters. It is most impressive.
Mr Gauke
I am grateful. It is recently acquired expertise—[Laughter]. As is my expertise on technical services paid to the UK from Senegal.
Fees for technical services fall within the business profits article of the treaty and can be taxed in Senegal if the fees are attributable to a permanent establishment in Senegal through which the work relating to the fees is performed. That reflects the view of the UK and many other states that business profits should be taxed in the country where the business is carried out. Senegal’s approach to the taxation of services differs from that of the UK. The treaty represents a compromise after extensive discussions, and the provisions governing the taxation of services follow the approach of Senegal in important respects—for example, the taxation of mobile services and insurance.
The shadow Minister asked about DFID. The UK seeks the views of UK businesses and Government Departments on agreements and treaty negotiations on an annual basis. I hope he is reassured that when it comes to overseas development, and in particular capacity building, there is a close working relationship between HMRC and DFID to improve the capability of developing countries when dealing with their tax systems. I am talking not specifically about treaty negotiations but more generally about the capacity to, for example, enforce transfer pricing legislation. A considerable amount of work is done by HMRC and DFID together to provide technical support to developing countries. I strongly support that, and I know that my right hon. Friend the Secretary of State for International Development—a former Treasury Minister—takes great interest in it as well.
There has traditionally been consensus in this country on extending double taxation agreements. The shadow Minister raises perfectly reasonable points, but I hope he is now reassured.
Mr Gauke
I beg to move,
That the Committee has considered the draft International Tax Enforcement (Brazil) Order 2015.
This is a standard agreement that sticks closely to the model developed by the OECD and adopted by the UK. It will facilitate exchanges of information on request between the Brazilian and United Kingdom tax authorities and assist HMRC in its tax compliance activities to counter tax avoidance and evasion. I hope the order will have the support of the Committee.
Rob Marris
Will the Minister briefly explain why the order is so different from the other ones?
Mr Gauke
This is a different type of agreement. It is about tax information being exchanged, as opposed to a double taxation agreement, so it seeks to do different things. This order is about assisting tax authorities to enforce the law. On why this is not a double taxation agreement with Brazil, that would require both sides to reach an agreement. At the moment, at least, Brazil is not prepared to enter into an agreement that we believe would make a tax treaty worth while. I hope that will change in future, because it would clearly be beneficial to the UK and to Brazil. In the meantime, my officials remain in regular contact with their opposite numbers in Brazil and monitor the situation closely.
Question put and agreed to.