Draft Double Taxation Relief and International Tax Enforcement (United Arab Emirates) Order 2016 Draft Double Taxation Relief (Isle of Man) Order 2016 Draft Double Taxation Relief (Jersey) Order 2016 Draft Double Taxation Relief and International Tax Enforcement (Uruguay) Order 2016 Draft Double Taxation Relief (Guernsey) Order 2016

David Gauke Excerpts

Wednesday 15th June 2016 General Committees

[The Chair]

If the Committee agrees to debate the orders together, the debate will be an hour and a half long, and if the Minister agrees, they can be debated in two sections within the hour and a half.

[The Financial Secretary to the Treasury (Mr David Gauke)]

indicated assent.

[The Chair]

If the Committee is happy with that, I call the Minister to move the motion.

[Mr Gauke]

I beg to move,

That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (United Arab Emirates) Order 2016.

[The Chair]

With this it will be convenient to consider the draft Double Taxation Relief (Isle of Man) Order 2016, the draft Double Taxation Relief (Jersey) Order 2016, the draft Double Taxation Relief and International Tax Enforcement (Uruguay) Order 2016 and the draft Double Taxation Relief (Guernsey) Order 2016.

[Mr Gauke]

It is a great pleasure to serve under your chairmanship again, Mr Hanson. When you moved on from the shadow Treasury team, I feared that we would never spend time together debating double taxation treaties as we had once done, so I am thrilled that we are reunited on this topic, as I can see you are.

Given the comments of the hon. Member for Wolverhampton South West, let me make some remarks about the identical protocols with Guernsey, the Isle of Man and Jersey, which I believe he wishes to discuss first, and then deal with the remaining orders in a second contribution. We have agreed three identical protocols with Guernsey, the Isle of Man and Jersey, amending the existing double taxation agreements to include modern OECD provisions allocating the primary taxing right over income, profits and gains from land to the jurisdiction in which that land is situated. These changes are connected with the offshore property developers measures announced in Budget 2016, to be legislated for in the Finance Bill—we look forward to that. They remove a potential loophole that may have allowed property development companies located in the Crown dependencies to argue that the DTAs prevent the UK from taxing them on the full amount of their profits from developing UK land. The Crown dependencies have agreed to the changes being effective from Budget day, 16 March 2016, which aids the effectiveness of targeted anti-avoidance rules that protect the new tax charge in the period between its announcement on 16 March 2016 and the introduction of the legislation. That demonstrates the continued co-operation between the UK and the Crown dependencies to tackle tax avoidance and evasion.

I hope that that explanation is helpful to the Committee. I look forward to returning to the double taxation agreements with the United Arab Emirates and Uruguay. I will cease my comments now and allow hon. Members to ask any questions that they have in respect of the protocols that I have described.

[The Chair]

Order. Although I appreciate why the Minister has spoken to the Jersey order, the motion before the Committee is that it has considered the draft Double Taxation Relief and International Tax Enforcement (United Arab Emirates) Order 2016. I will call Mr Marris to speak, and he can obviously at that stage refer to the Jersey order as part of the discussion.

--- Later in debate ---

[Mr Gauke]

I thank the hon. Member for Wolverhampton South West for his questions. To answer his first question about why these treaties have not been amended before, we have taken action in this Budget to prevent a form of avoidance that HMRC became aware of relatively recently. This ensures that a loophole that would have prevented the implementation of measures to protect the UK tax base can be addressed. The challenge was first, a recognition that profits relating to land in the UK were being booked in these Crown dependencies—the view being that these profits properly belong in the United Kingdom—and therefore, we announced the Budget measure. The concern was that the measures that we took in the Budget could not be implemented without these changes.

Perhaps if I can address the second point—

[Rob Marris]

On that point—

[Mr Gauke]

If I can just address the second point, I think it may be helpful to the hon. Gentleman. The new legislation announced in the Budget will include targeted anti-avoidance rules that will stop property developers structuring around the new charging provisions during the period from the announcement on Budget day, which is the date that the new legislation comes into force. Making the protocol changes effective from Budget day aids the effectiveness of these targeted anti-avoidance rules. This is not backdating all retrospection, as such. The double taxation agreements are changed only from the date that the protocols were signed. The targeted anti-avoidance rules will apply prospectively only from Budget day. I hope that provides a bit of clarification to the hon. Gentleman.

[Rob Marris]

I am grateful to the Minister for that explanation. Is it then the case that the, and I mean this positively, wonderfully innovative accountancy industry in the United Kingdom did not realise that they could advise their clients, quite legitimately, to offshore land profits—this is my shortening of the situation—to the Crown dependencies? They did not realise for 50 years, and then they suddenly realised and it started to happen. The Government then said, “That was never anybody’s intention, so the measures announced in the Budget”—in the statutory instruments today—“will stop that.” Or is it something else?

[Mr Gauke]

I understand the hon. Gentleman’s point. I want to be perhaps a little a cautious, if not tentative, about the wording. That is not to say that nobody was making use of these provisions—I think that people were making use of them. However, it was relatively recently that Her Majesty’s Revenue and Customs became aware that this loophole—I think it would be fair to describe it as that—was being used. That was not really the intention of Parliament. One could make an argument—if Parliament addressed its mind to this matter—that it would certainly not be the way that we want the system to work. In recent months, in the run-up to the March Budget, it was concluded that action needed to be taken. These changes to the protocols are all part of ensuring that this is effective.

If I can deal with the third question, I will then make my comments about the double taxation agreements. I was asked why there is no TIIN—tax information and impact note. We have not produced impact assessments because double taxation agreements are not of a regulatory nature. They impose no obligations on taxpayers. Rather, they give UK residents relief from foreign tax in prescribed circumstances. They also provide relief from UK tax for non-residents in a comparable situation. Given that the hon. Gentleman has raised that specific point, perhaps we will look again at the wording of the explanatory memorandum to see whether we can provide a clearer explanation next time. He has made a constructive point.

If I may, Mr Hanson, I will turn to the two other orders, on the United Arab Emirates and Uruguay. This first-time double taxation agreement with the UAE completes our DTAs with the Gulf states and follows the same principles that we have adopted with the other countries in the region. Although the UAE does not currently impose tax on individuals or companies, it has the potential to do so. Legislation was in place, but the UAE chooses for the moment not to apply it. Concluding the DTA now ensures that should the UAE start to apply its tax laws, UK companies will have greater certainty over the liabilities, as the taxing rights are constrained by the treaty.

The DTA generally follows the OECD model. Dividends are exempt from withholding tax, other than where the payer is a real estate investment trust, in which case 15% tax may be charged. Interest and royalties are also exempt, but with a provision to ensure that the benefits of the interest article can flow only to UAE residents and companies owned by UAE residents. The exchange of information article is the latest OECD version, which permits information to be used for non-tax purposes with the permission of the other state.

The Government signed a first-time DTA with Uruguay earlier this year. This is an important treaty for the UK as it expands our treaty network in an increasingly important region. The treaty gives valuable benefits to UK businesses and individuals with interests in Uruguay and will strengthen the economic ties between the two countries.

Withholding taxes can hamper cross-border investment, as they represent an extra and often excessive layer of taxation. I am therefore pleased that withholding tax on dividends is restricted to 5% on direct investment and interest is taxable at source at a maximum of 10%, with some important exemptions—for example, for certain bank loans. As we sometimes do with a country whose economy is in transition, we have agreed a provision that allows the taxation of services in the country where they are performed where they last for more than 183 days. The treaty also contains anti-treaty shopping provisions based on the BEPS—base erosion and profit shifting, as you know, Mr Hanson—recommendations on treaty abuse, the latest OECD exchange of information article and an arbitration provision to assist the mutual agreement procedure, which will be welcome to UK companies investing in Uruguay.

I hope those explanations are helpful. I commend the orders to the Committee and I am happy to answer any remaining questions that hon. Members may have.

--- Later in debate ---

[Mr Gauke]

I thank the hon. Members for Wolverhampton South West and for Glenrothes for their questions and, indeed, their support. Let me try to address as concisely, but as thoroughly as I can the points made.

First, on the differences between the two double taxation agreements, I am certainly happy to write to the hon. Member for Wolverhampton South West and to set out some details. The two main points that I would bring out, without going into a clause-by-clause analysis—tempting though that is—is that the hon. Gentleman is absolutely right to say that there is a difference of timing in when the draft orders were agreed, so the principal purpose test contained in the Uruguay agreement reflects the fact that that is a new direction for the UK. It comes out of the “Action 15” work of BEPS, and will appear in the next edition of the OECD model. That is the explanation for that, and we expect to see it more often in future. Another distinction worth pointing out is that we have no capital tax, but Uruguay has a wealth tax, so an article in the double taxation agreement properly reflects that.

The hon. Gentleman drew a distinction between artistes and entertainers. That perhaps should be best left to the letter. I will not dwell on that here or draw any general conclusions about the UAE or Uruguay and which is most appropriate, but he raises a fair point on “sportsman”. I am pleased to say that it has been changed to “sportsperson” in the latest OECD model. I fear that we are not going to be able to give him credit for that change in double taxation agreements, but he has certainly spotted something that needs rectifying, and I am pleased to say that it is being rectified.

Turning to the questions raised by the hon. Member for Glenrothes, let me reassure him that we have a tax information exchange agreement with all the Crown dependencies. It is not included here because these are specific protocols dealing with a specific issue, but we have well established treaties with those Crown dependencies. It is worth stressing that they meet the international standards in this area. We were early signatories to what became the common reporting standard.

I am entirely in agreement with the hon. Gentleman on the importance of tax authorities having an ability to share information much more widely than they have in the past and on its not being possible for the information to be held secret, as was once the case. Much progress has been made on the move to automatic exchange of information, which has long been an aspiration of all parties, and that is coming into effect. We have moved a long way in recent years on exchanging information with law enforcement authorities and so on, and on co-operation between tax authorities across the board.

I am not aware of any particular issues or controversy with differing definitions between one jurisdiction and another of the operation of immovable property, but if I may, I will write to the hon. Gentleman to confirm the position and to what extent it has proved difficult, whether in the jurisdictions we are talking about today or more widely. I add my support to his comment that we should have a tax system in which tax is properly aligned to economic activity. That is very much the direction of the OECD’s work on BEPS, and it is very much the direction that the UK has argued for. We believe that the international tax system has to properly reflect that alignment. It is the only sustainable way in which an international tax system can properly work, and we continue to make that argument.

I hope that those points of clarification are helpful to the Committee. With that, I hope that the orders before us will have the support of the whole Committee.

Question put and agreed to.

[The Chair]

With the leave of the Committee, I will put the remaining motions in a single question.

Draft Double Taxation Relief (Isle of Man) Order 2016

Resolved,

That the Committee has considered the draft Double Taxation Relief (Isle of Man) Order 2016.—(Mr Gauke.)

Draft Double Taxation Relief (Jersey) Order 2016

Resolved,

That the Committee has considered the draft Double Taxation Relief (Jersey) Order 2016.—(Mr Gauke.)

Draft Double Taxation Relief and International Tax Enforcement (Uruguay) Order 2016

Resolved,

That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Uruguay) Order 2016.—(Mr Gauke.)

Draft Double Taxation Relief (Guernsey) Order 2016

Resolved,

That the Committee has considered the draft Double Taxation Relief (Guernsey) Order 2016.—(Mr Gauke.)