Draft Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018
Draft Double Taxation Relief (Switzerland) Order 2018
Draft Double Taxation Relief and International Tax Enforcement (Uzbekistan) Order 2018
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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 (Base Erosion and Profit Shifting) Order 2018.
The Chair
With this it will be convenient to consider the draft Double Taxation Relief (Switzerland) Order 2018 and the draft Double Taxation Relief and International Tax Enforcement (Uzbekistan) Order 2018.
Mel Stride
It is a pleasure to serve under your chairmanship again, Mr Hosie. The base erosion and profit shifting—BEPS—order brings into effect the multilateral convention to implement tax treaty-related measures to prevent base erosion and profit shifting, which is commonly and thankfully referred to simply as the multilateral instrument. The orders in respect to Switzerland and Uzbekistan amend our existing double taxation agreements with those countries. All the instruments bolster the UK’s network of international tax arrangements and deepen our commitment to avoiding double taxation while preventing tax evasion and avoidance.
Double taxation agreements—DTAs—are bilateral agreements between the UK and other countries that aim to ensure that profits, income and gains are taxed only once. They develop the UK’s economic relationship with other countries and vice versa. DTAs provide critical certainty for cross-border firms and enhance co-operation in tax matters to stimulate economic growth and prevent tax avoidance.
The OECD/G20 base erosion and profit shifting project recommends a number of changes to DTAs, including the introduction of minimum standards to prevent tax avoidance by those who abuse tax treaties, and measures to improve the resolution of tax disputes. In addition, it recommends action to prevent so-called hybrid mismatches and the avoidance of permanent establishment status.
To enable those enhancements to DTAs to be made as soon as possible, more than 100 countries in a group chaired by the UK drew up the multilateral instrument. The group adopted the text of the MLI in November 2016 and it has now been signed by 78 jurisdictions, including the UK. It is in the process of being ratified by those jurisdictions. Individual DTAs will be modified by the MLI only if both jurisdictions have signed it and have given notice that they wish the DTA to be covered by it. The UK intends the MLI to cover all our DTAs that are agreements under international law and that do not already include provisions that we want from the MLI.
Except in relation to certain minimum standards, parties implementing the MLI are also permitted to reserve against provisions. If either party to the DTA has reserved against an MLI provision, that provision cannot modify the DTA. Following consultation, the UK proposes to adopt those provisions that are a proportionate and effective defence against the abuse of tax treaties, in addition to the minimum standard provisions. We intend to reserve against provisions that have a disproportionate effect on commercial transactions or that are unnecessary in the light of other measures taken to address the misuse of the international tax framework.
At the time of signing the MLI, the UK submitted its list of reservations to the OECD, which was published on the OECD’s website. Some minor amendments to that list have also been published on gov.uk. Those amendments relate to bilateral arrangements that have been agreed since the submission of our original list of reservations.
To ensure complete clarity for taxpayers, HMRC will prepare consolidated versions of treaties showing how they have been modified by the MLI and will publish those in good time before the modifications take effect. Where possible, it is our intention to agree those texts with our treaty partners. The order ensures that the UK can use the MLI to implement our commitments under the BEPS project and that our DTAs contain robust and proportionate defences against tax avoidance to the benefit of the UK and our treaty partners.
Let me now turn to the other two orders, in respect of Switzerland and Uzbekistan. The Switzerland order amends our existing 1977 DTA. To give effect to DTAs, the Swiss Government transpose them directly into domestic law, so it is much more straightforward for them to amend their law by amending the existing DTA, rather than by adopting the MLI separately. As a result, we agreed with Switzerland to implement modifications that would have been made by the MLI through this order.
For Uzbekistan, the order implements many of the provisions available under the MLI, including minimum standards on preventing treaty abuse and improving dispute resolution. In addition, the order provides for a general update to the existing text to reflect changes to the OECD model tax treaty and the domestic laws of the UK and Uzbekistan. Importantly, the changes remove a barrier to UK companies claiming benefits in respect of dividends from Uzbekistan created by the introduction of a dividend exemption regime in the United Kingdom. That will enhance the investment climate for UK businesses in Uzbekistan, to the benefit of both countries.
The orders enhance our commitment to tackling international tax avoidance and evasion. They also strengthen the integrity of our network of DTAs and remove barriers to investment by UK businesses. I commend the orders to the Committee.
Mel Stride
I thank the hon. Member for Oxford East. It is not long since we jousted and debated, and it is good to be back doing exactly that. I welcome the overarching support for the MLI in her early remarks, particularly in respect of tax avoidance and the double taxation avoidance measures, although I understand that she has some issues around arbitration, which I will come to in a moment. I too have fond memories of clause 32 of the Finance Bill last year, which provided the powers under which the MLI is being brought forward for consideration.
The hon. Lady posed a large number of questions and I will attempt to answer as many as I can—I was busy thinking about the answers to some when the next two or three arrived in train, so if I do not cover everything, I would of course be very happy to take a representation from the hon. Lady after the Committee and look at them in more detail.
On advertising and the reservations that we might be seeking from the MLI, we have provided information on the OECD website and subsequent changes appeared on the gov.uk website, so the information is in the public domain. We will be required to provide that information to the OECD some four months before this measure comes into effect and it in turn will advertise the reserved elements that we decide on at that time.
The hon. Lady asked why we do not include all the DTAs. She is absolutely right that the UK has a large number—from memory, I think it is around 130—and about 121 will be potentially covered by this measure. The answer is that, in some cases, the DTAs largely conform to the changes that would be introduced were they to be subject to the MLI. In some cases, it is not necessary, as our treaty contains substantial provisions. Our first-time DTA with Colombia would be one example.
The hon. Lady asked whether Switzerland taking these tax changes directly into domestic law, rather than less efficiently through the MLI, was a unique circumstance. I believe that it is relatively unique—my officials have just nodded. It is something of an unusual situation. That is the reason that both countries have decided to approach the matter in this way.
The hon. Lady mentioned permanent establishments and various related issues, asking why we were reserving against those particular matters. The general response to that and like matters is that the Government do not believe that they would have any major material impact on what happens with the taxation of revenues from one country coming back into the United Kingdom. Of course, those measures would bring with them various administrative burdens on business, which the Government always seek to minimise where possible.
The hon. Lady raised the issue of consultation on digital taxation, slightly at a tangent to the matter at hand. I would welcome her intervention if I have misunderstood her, but I think she was referring to our consultation on the taxation of businesses making profits via digital platforms.
Anneliese Dodds
I am grateful to the Minister for seeking clarification. The reason I mentioned it was that, with the adoption of the MLI, we have what many would view as quite a lax approach to defining permanent establishments, compared with article 12, if we had adopted that. However, in that consultation, the Government seemed to suggest a stricter approach. There seems to be a contradiction, which in itself is contradicted by what the Chancellor said at the informal ECOFIN—he seemed to say that we need to have US agreement before we can have stricter rules.
Mel Stride
I thank the hon. Lady for that clarification. I take this in two parts. These are different situations. When it comes to taxation of profits derived from digital platforms, be they social media, search engines or online marketplaces, the critical thing is to ensure that we tax the value that accrues to the interaction of consumers with those marketplaces. We are working with the OECD and the European Union, as the hon. Lady pointed out, to come up with an appropriate way to address that particular challenge of the current international taxation regime. As to the Chancellor’s remarks about whether we might go it alone or have to wait for America, I am not entirely sure that he said what was reported. That is the information I received, although I did notice those comments in the press, as did the hon. Lady.
We have debated mandatory arbitration before. The essential point is that, in order to enter into a DTA, both sides have to agree that it is an appropriate treaty to enter. Both sides have to be comfortable in the round with it. There is no circumstance in which the United Kingdom could therefore force a country against its will to enter into agreement with mandatory binding arbitration.
Anneliese Dodds
Surely it would be helpful, given the differences in resource that could none the less be provided between developing and developed nations, for the Government to carry out that analysis into the use of mandatory binding arbitration, and whether it exemplifies policy clearance for development. It would be wonderful to hear a Treasury Minister say that the Government might consider adopting this and doing so explicitly.
Mel Stride
The Government’s view is that mandatory binding arbitration is a very useful element of these agreements. In the absence of that, the process undertaken might be ultimately inconclusive. In order to ensure that these agreements work efficiently, we believe there is great merit to that approach.
I lastly turn to parliamentary scrutiny. Matters reserved against will be for the Government to determine in time although, as I have indicated, we have already put out preliminary suggestions of what we will do. As time goes forward, this or any other Government may decide to remove some of those reserved powers. It is down to this Committee and this moment to take a decision on whether in the round all those possible changes are agreed to or not. On that basis, I urge that we move forward with the recommendations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018.
DRAFT DOUBLE TAXATION RELIEF (SWITZERLAND) ORDER 2018
Resolved,
That the Committee has considered the draft Double Taxation (Switzerland) Order 2018.—(Mel Stride.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (UZBEKISTAN) ORDER 2018
Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Uzbekistan) Order 2018.—(Mel Stride.)