Draft Double Taxation Relief and International Tax Enforcement (Colombia) Order 2017 Draft Double Taxation Relief and International Tax Enforcement (Lesotho) Order 2017

Anneliese Dodds Excerpts

Wednesday 10th January 2018 General Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure, Mr Bailey, to serve with you in the Chair. It is also a pleasure to sit across from the Minister for the third time this week, with more to come tomorrow during the consideration of the Finance Bill.

I do not want to repeat much of what has already been said, but I share the concerns that have been articulated by my hon. Friend the Member for Birmingham, Selly Oak and the hon. Member for Glasgow East. We need to be clear, particularly when we talk about the treaty with Lesotho, that there is an extreme power imbalance between the UK and that country.

Many of us have heard of Lesotho because it is the only country—at least, the only one that I know of—whose people seek not to have some form of self-determination. Indeed, many people in Lesotho want it to join with South Africa, because of the enormous pressures on its public services and the small amount of finance that it has to deal with its terrible AIDS epidemic; I am sure that colleagues know that around a quarter of people in Lesotho of working age are infected with HIV/AIDS. Life expectancy in Lesotho is just 54, which means there are more pressures on public services and public service financing in Lesotho than in many other countries.

In that regard, it is important that we take our responsibilities as parliamentarians very seriously when we scrutinise such deals. In particular, it is important that we assure ourselves that this treaty is in line with the policy coherence for development principles, which state that in every area we must ensure we do not legislate in such a way as to deviate from our international development commitments.

That is significant for the UK, because we are Lesotho’s largest single source of foreign direct investment. The total amount of FDI in Lesotho is $51 million and the British contribution is $17 million. That might seem like small beer to some of us, given the kinds of figures that we normally look at in British Budgets; for example, it is about a sixth of the cost of the building of the new hospital in Northumbria. However, the UK FDI is more than half of the total Lesotho Government spending commitment for 2018. So, what we, as parliamentarians, do in relation to the tax that our citizens and our companies make it possible to collect in Lesotho is enormously important for that country’s economy.

There are a number of questions that we really need answers to, and I am not willing to wait for those answers. We need them now, and if we do not receive them, I do not think that we can accept the treaty. First, have the Government assured themselves, or otherwise, that this treaty coheres with our development policies? In particular, are we enabling lower-income countries to become more self-sustaining?

I understand that in 2016, when Jane Ellison was an MP and the Financial Secretary to the Treasury, she reiterated the Government’s commitment to align our tax treaties with our wider developmental policies. May we please hear today which assessments of this treaty the Government have undertaken to consider its potential impact on governmental revenues, particularly those allocated to poverty alleviation, as well as those allocated to HIV/AIDS and tuberculosis reduction programmes? Also, have the Government already published, or will they publish, an analysis of the projected impact of the new treaty on investment levels and tax revenues in the UK and Lesotho?

May I ask what contact the Treasury and the negotiators of this treaty have had with DFID about the relationship between the measures we are considering today and any programmes in Lesotho that DFID might previously have conducted, might be conducting or might conduct in the future? It would also be interesting to hear about any discussions the Treasury has had with DFID generally about our international development policies and how they cohere with this treaty, rather than just about specific projects that might be happening in Lesotho or that might happen there in the future.

We also need to know the extent to which the treaty coheres with the principles set out in the Addis Ababa accord. Most of us would want to promote that accord very much, and particularly this principle:

“Domestic resource mobilisation and effective use is the crux of our common pursuit of sustainable development and achieving the SDGs”—

that is, the sustainable development goals. Also, will we agree to co-operate with others to combat tax evasion as well as tax avoidance? That is the first set of questions that we need answers to.

I come to the second set of questions. Like other colleagues, I regret the fact that parliamentarians have only been able to see the final version of this treaty. There is only a one-page explanation at the back of it, and there is no commentary on why particular approaches have been adopted rather than others. I hope that we will receive a commitment to a more open process for future double taxation agreements. In fact, we have the chance to begin that process next week, as my hon. Friend the Member for Birmingham, Selly Oak has just mentioned.

Thirdly—this is where we need some specific answers—I hope the Minister will explain why certain decisions in this tax treaty were taken. My hon. Friend the Member for Birmingham, Selly Oak mentioned the eye-watering reductions in the withholding tax for Lesotho, compared with what will apply to citizens and companies for other countries. There is a reduction of 80% for dividends, 60% for interest payments and 70% for royalties. Last night, I was looking at the rates in the previous treaty from 1997—I know how to live. I am particularly interested in finding out why the withholding tax on dividends has been pushed down from 10% in 1997 to 5%, and why there is a new lower rate for the beneficial owner of a company that directly holds at least 10% of the capital of the company that pays the dividends. Why is that new requirement in the treaty, given that it was not in the 1997 one? Why is the withholding tax on royalties down from 10% in the previous treaty to 7.5% in this one? The Minister said that these measures are in place to benefit the economies of the UK and Lesotho, but how will those changes do that?

Finally, as my hon. Friend mentioned, it would be helpful to know why the British Government decided to promote mandatory binding arbitration in this agreement through the mechanism of specialist—and, by the way, secret—international courts. That is a new measure in this treaty. It was not in the 1997 version, and, as was mentioned, it appears to be a new measure generally in our double taxation treaties for low-income countries. I am keen to learn whether the UK Government considered the potential barriers that would prevent a low-income country such as Lesotho from representing itself properly in such a court. Will the UK Government provide any help to Lesotho in that regard? I was pleased to hear from the Minister that there will be other forms of help—potentially with tax collection—but will there be help with the specialist court?

Was it the UK that requested the inclusion of mandatory arbitration, or was it Lesotho? We need an answer to that question, which the hon. Member for Glasgow East asked. What has the UK’s experience been so far with mandatory binding arbitration, and did that affect the UK’s decision to put the model in the treaty or to acquiesce to it, if the impetus came from the Lesotho side? Will the Minister indicate whether Her Majesty’s Revenue and Customs has any findings on the developmental impact of that form of mandatory binding arbitration? Were such findings taken into account when the decision to promote mandatory binding arbitration in this treaty was made?

I realise that that is a large set of questions, but this is a significant treaty for a country that has experienced enormous challenges in recent years. As parliamentarians, we are all committed to international development, particularly for the poorest countries. Especially given Lesotho’s public service challenges—a quarter of its population suffer from AIDS and HIV—we need to ensure our tax treaties are in line with our international commitments.

--- Later in debate ---

[Mel Stride]

As the hon. Gentleman will appreciate, that is a highly specific question, which I cannot be expected to be in a position to answer at present. I am certainly happy to get back to him. Typically with treaties of this nature, a number of discussions are held with stakeholders, the overseas Governments concerned and so on. That is one reason why such arrangements take a considerable time to come to a conclusion.

The agreement with Colombia—our first with that country—brings a significant improvement to our coverage of the region and will improve the trading conditions for businesses in both countries and aid the fight against tax avoidance and evasion. We have brought forward a mutually beneficial treaty in the case of Lesotho.

[Anneliese Dodds]

I am grateful to the Minister for his efforts to respond to the questions raised. I have some brief points to make on a number of the matters he referred to.

The Minister referred to the UK’s commitment to promote development in lower income countries. One of our main concerns about the Lesotho treaty is that it might not be coherent with the general direction of our aid efforts. I would be interested to know whether DFID was asked to comment specifically on this treaty. It would be helpful to know that.

Secondly, to be absolutely clear, I do not think that any Member has argued against the principle of having double taxation treaties in the first place. Rather, the comment is on the specific issues raised by treaties such as this one. For Opposition Members, the particular issue is the reduction in withholding tax rates and the introduction of mandatory binding arbitration, rather than the principle of having a treaty in the first place.

Thirdly, on the issue of negotiations, aspects of the treaty are surely a step forward. I do not believe the Minister mentioned permanent establishments, but the new rules on those seem to be fairer. A rather peculiar reference in the previous treaty to the tax treatment of loans through the UK Export Credits Guarantee Department is gone. I can understand that Lesotho might have wanted to get rid of strange elements from before, but I am interested to know what its comment was on the changes to withholding rates in particular, because those would seem to pose quite a large risk to its revenue.

On the negotiation, let us be completely frank: we are talking about a country of 2 million people, where the average person is 33 times poorer than a Briton. Are we honestly saying that we can have an equal negotiation? Pointing that out does no disservice whatever to the Lesotho Government—quite the opposite, because it means that we as parliamentarians have a much greater responsibility to scrutinise such agreements more fully. We need that.

On binding arbitration, yes, there is the OECD model, which is being promoted, but there is also the UN model. It would be interesting to know whether that came up in the negotiations at any stage, because most people view it as more favourable to developing nations than the OECD approach.

Finally, on the issue of information and impact assessments, I note that a tax information and impact note is provided for other tax requirements. Surely many tax issues within Britain are incredibly complicated—the Minister has ably discussed such matters in proceedings on the Finance Bill—so I do not see a huge difference there, in particular when UK investment in Lesotho seems to be concentrated in some quite large firms, especially, I understand, two very large mining concerns: Letšeng Diamonds, which is partly owned by the Lesotho state but mostly by a UK-based company, and Firestone Diamonds. We are not talking about a terribly complicated taxation arrangement, so surely it should be possible to have the information we require.

Again, I am grateful to the Minister for his responses and clarifications.

[Mel Stride]

I will endeavour to do my best to answer the additional questions posed by the hon. Lady, some of which were very specific ones about what may or may not have happened during the negotiations. Unfortunately, I was not there. If I had been there and knew the answers, I would share them with her. However, I can perhaps be a little more helpful on some of the other questions.

The hon. Lady asked whether DFID was aware of the discussions. Naturally, it would have been. I say that based on the fact that it has been very publicly out there that the negotiations have been taking place for some considerable time. DFID has not, to my knowledge, specifically requested meetings or interactions at an official level with the Treasury, but had such an interaction been requested I have no hesitation in reassuring her that we would of course have facilitated it promptly and effectively.

On binding arbitration, the situation is as I outlined earlier. It is now based on the OECD model. The hon. Member for Birmingham, Selly Oak asked earlier whether, during the process of consultation around the treaty negotiations, any company had requested that that form of arbitration be brought in. The answer to that is no. To the best of my and my officials’ knowledge, no business came forward and specifically requested that. Of course, it was then entered into jointly as a consequence of the agreement between the two Governments.

The hon. Member for Oxford East asked about tax information and impact notes. That is a fair point, but TIINs typically relate to where taxes, charges and duties are being imposed, and to the effect they have on individuals, companies, families and others. In this case, we are looking at reliefs in the context of a double taxation treaty.

I totally echo the hon. Lady’s powerful comments about the relative wealth of those who have the very good fortune to live in our country, for all its imperfections, compared with those who are less fortunate elsewhere. The Government are very aware of that. I will not re-rehearse the comments I made earlier about our commitment to international development and HMRC’s involvement over and above treaties in trying to alleviate such situations as much as we can. The hon. Lady made a powerful point, which I will certainly take away with me. I commend the orders to the Committee.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Colombia) Order 2017.

DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (LESOTHO) ORDER 2017

Motion made, and Question put,

That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Lesotho) Order 2017.—(Mel Stride.)