Draft Double Taxation Relief (Mauritius) Order 2018 Draft Doubt Taxation Relief and International Tax Enforcement (Cyprus) Order 2018

Bob Stewart Excerpts

Monday 18th June 2018 General Committees

[Mel Stride]

It is a particular pleasure to serve under your chairmanship, Mr Robertson. The orders before the Committee give effect to a new replacement double taxation agreement, or DTA, with Cyprus and a protocol amending our existing agreement with Mauritius. DTAs remove barriers to international trade and investment and provide a clear and fair framework for taxing businesses that trade across borders. By doing that, they benefit both business and the economies of the countries signed up to them.

I will say a few words about each agreement. Our current DTA with Cyprus was signed in 1974 and last amended in 1980. This new treaty therefore provides a comprehensive update that reflects the current OECD standards, including the BEPS—base erosion and profit shifting—minimum standards on treaty abuse and improving dispute resolution. The new treaty protects the UK’s taxing rights over gains from the disposal of land and buildings in the United Kingdom. That is particularly important, because it prevents non-residents from developing and disposing of UK land without paying tax in the United Kingdom.

[Bob Stewart (Beckenham) (Con)]

I am only here today to represent the concerns of servicemen, civil servants, policemen and firemen who have retired to Cyprus. They went there on the understanding that the tax rate would be 5%. That way, they eke out their pension pretty well. This change will hit them extremely hard. I very much want the House to realise that suddenly they will go from paying 5% up to paying at least 20%, and that is a big jump.

[Mel Stride]

I thank my hon. Friend for his intervention. The fact that he has chosen to attend this Committee, despite having not been selected to serve on it, is testimony to how strongly he feels about the issue. What I would say to him is this. First, the actual impact of the changes—the move from 5% up to 20%, as he termed it—on individual public service pension recipients will depend largely on their own personal tax affairs. As my hon. Friend may well know, there is a different personal allowance level in operation in the United Kingdom from that pertaining to Cyprus, so there is an interplay between those two reliefs as well. It is therefore not immediately obvious that all of those affected by this measure, or indeed the majority, will be adversely affected. The other point to make is the importance of a level playing field. In the case of all the other countries where we have a similar situation and with which we have agreements in place—countries such as Germany and Belgium—it is the UK tax authorities that actually levy the tax on those who are in receipt of UK public service pensions, albeit that they reside in those territories.

This treaty provides for exemptions for source state taxation, including eliminating withholding taxes on dividends, interest and royalties arising in Cyprus, but we have ensured that we retain the right to apply a withholding tax of 15% on distributions from real estate investment trusts, or REITs. The agreement also contains the most up-to-date provisions to guard against treaty abuse, the latest OECD exchange of information article, and a provision for mutual assistance in the collection of tax debts. Those features strengthen both countries’ defences against tax avoidance and evasion.

The protocol with Mauritius amends our existing 1981 DTA to update the dividend article in order to close a loophole in the original agreement. That was being abused to avoid tax on dividends from REITs. Dividends from UK REITs are usually subject to a withholding tax when paid to investors, because the profits themselves are not taxed in the hands of the REIT. However, the Mauritius DTA predates the creation of REITs and prevents application of that withholding tax. We recently became aware that third-country investors had established a company in Mauritius to use that feature of the DTA to avoid UK tax on dividends from a REIT.

We approached the Mauritian Government proposing a change to the dividend article to prevent the avoidance, and they were happy to co-operate. The amended article allows the UK to withhold tax at 15% on dividends from REITs to residents of Mauritius, bringing it into line with many of the UK’s other DTAs. The changes made by the protocol will, once it is ratified, be effective from the date of signature—28 February 2018—so there will be no delay in shutting down the avoidance and protecting the UK Exchequer with immediate effect.

The UK, and Cyprus and Mauritius, can be happy with the agreements. They protect UK revenue and provide a stable framework in which trade and investment between the UK and Cyprus and Mauritius can continue to flourish. I therefore commend the orders to the Committee.

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[Mr Mark Francois (Rayleigh and Wickford) (Con)]

May I, too, say what a pleasure it is to serve under your chairmanship this afternoon, Mr Robertson?

Like my hon. Friend the Member for Beckenham, I am making a special guest appearance here today in order to raise the issue of service veterans. I managed to give at least brief private notice to the Financial Secretary of my intention to do so.

It is a fact that many veterans and, indeed, other former public sector workers living in Cyprus have been taxed for many years at a rate of 5%. It is important to bear in mind that these people have served their country, and many of them subsequently married local girls and settled down in Cyprus, in some cases to raise a family. Not unreasonably, they have made their financial plans on the basis that they would continue to pay the local tax rate of 5%, to which they have become fully accustomed. For those people suddenly to have to adjust to a tax rate of 20% or perhaps in some cases a marginal rate at 40%—so, eight times higher—will be quite a considerable adjustment.

[Bob Stewart]

You will forgive me, Mr Robertson, for intervening on my right hon. Friend, but the fact of the matter is that I have an interest and I declare it. A very good friend of mine was at the Joint Service Defence College with me. He was a Royal Navy officer and he has contacted me to say that because of this change, he has no option but to return to my constituency. I welcome him back, but the fact is that that is a very big change in his life as a consequence of this change in the tax regime, if it comes about.

[Mr Francois]

I am sure that my hon. Friend is always trying to look after his constituents, both old and new. Nevertheless, that is a valuable example of the change that this measure could mean. If someone has been living in Cyprus for some period of time and has to return to the United Kingdom for tax reasons because of this change, that shows that it is not a merely immaterial alteration.

We should bear in mind the very practical point that recent movements in the exchange rate between the pound and the euro have only compounded the challenge for people who are paid their pensions originally at the sterling rate and have to convert that into euros.

I will ask the Minister some specific questions and then ask for a favour. My first specific question is, assuming that the tax treaty comes into force fairly shortly, in what tax year would the new arrangements arise? In other words, would these veterans be charged at the new rate of 20% or more in the current tax year—2018-19—or would it only cut in, as it were, in a full tax year, in 2019-20? For anybody who is looking to plan, that is an important piece of information that, understandably, they want to know.

Secondly, given the scale of this change, has the Department considered any transitional arrangements, perhaps phasing it in, in some way, over several years to give people time to adjust? As I am sure the Minister can appreciate, what some of these veterans would like is for the Government to reconsider this whole decision, and I can well understand why they would make that case. I can make that plea on their behalf but, knowing a bit about how government works, I suspect that the Minister is not going to give them great joy on that point. What I am seeking to do, therefore, as I am sure the Minister, who is a reasonable man, can understand, is to say that if the Government are determined to go ahead with this change, which I suspect they are, could they at least try to ameliorate it in some way, to give people who have planned for a number of years on one basis—perfectly reasonably—a little more time to adjust to having to plan for themselves and their families on an alternative basis?

Bearing in mind that these are people who have served their country loyally, will the Government in return, as my hon. Friend the Member for Beckenham and I very much wish—as, I suspect, do other members of the Committee—give a little bit of acknowledgment of the good service of those people in the past? I look forward enthusiastically to the Minister coming up with at least something out of his back pocket.