Draft Double Taxation Relief and INternational Tax Enforcement (Turkmenistan) Order 2016

Jane Ellison Excerpts

Thursday 17th November 2016 General Committees

[The Financial Secretary to the Treasury (Jane Ellison)]

I beg to move,

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

Good morning, Mrs Gillan, and colleagues. The draft order deals with a first-time double taxation agreement with Turkmenistan. Currently, Turkmenistan is honouring the treaty between the UK and the Soviet Union. Following an approach from Turkmenistan, we agreed to enter into negotiations for a replacement treaty.

Turkmenistan recognises that a modern treaty would benefit its growing economy, which also offers important opportunities for UK business. We recognise that ex-Soviet states will want to renegotiate treaties to reflect their own circumstances and opening economies. The Turkmen approach followed the OECD model approach in most respects. This, together with a fairly conventional tax system, enabled us to reach an agreement in two short rounds in 2011 and 2012. We have ended up with an agreement that we can be pleased with. It contains none of the provisions favoured by some capital-importing countries such as source state taxation of services and gains on shares, which do not form part of our preferred approach. We have agreed our anti-treaty-shopping measures and confirmation of the availability of benefits for UK pension schemes and charities. The treaty also contains the latest OECD exchange of information article.

Withholding rates are higher than our preference and show an increase over the rates provided for in the Soviet Union treaty. However, they do provide for a reduction on the domestic rates levied by Turkmenistan and reflect a reasonable compromise for a treaty with a developing nation. Turkmenistan has already completed its ratification procedures, and approval of the order today would permit the provisions of the agreement to take effect from 1 January next year. I hope my explanation has been helpful and I commend the order to the Committee. I am happy to try to answer any questions that hon. and right hon. Members might have on its provisions.

--- Later in debate ---

[Jane Ellison]

I will try to answer as many questions as I can; there was quite an array. We are straying into more general concerns on the relationship between the UK and developing countries and double taxation agreements. I am familiar with the private Member’s Bill that is being proposed. Let me say a few general words; I will try to cover some of the specifics, but I may have to take up the shadow Minister’s invitation to write to him if I cannot cover all the questions.

The UK enters into double taxation agreements because they are mutual agreements. Countries are not pressured to sign them; they are signed because they are in the interests of both countries and are increasingly recognised to be so. I understand there is NGO concern and we will no doubt come to debate that a bit further in due course, but I do take the issue seriously. I have signed a couple of double taxation agreements myself in the past few months and I take the opportunity to talk to the people I am signing them with about what they see as the advantages for their country.

Although I welcome the scrutiny of NGOs, I sometimes think that their concerns are perhaps a little misplaced. These are mutually negotiated agreements entered into freely by both countries and the negotiating capacity of many of the countries we are dealing with, even developing ones, is very considerable. Occasionally, I worry that that is a little understated or underestimated by those with such concerns. I reassure the hon. Member for East Lothian that we take the issue very seriously.

The Government are engaging with Turkmenistan to promote and protect British interests and values. It is a Foreign and Commonwealth Office human rights priority country and it is a key objective to encourage the Turkmen Government towards democratic reforms and to implement their international human rights commitments and obligations, as well as to improve the investment climate for UK businesses. Those things go very much hand in hand. A country that respects human rights, the rule of law and all those things is a good place in which to do business. Doing business in a country often drives development and drives the opportunities to advance British values—those two things are very closely linked. We are supporting and encouraging Turkmenistan’s contribution to regional prosperity, stability and security, including in respect of UK objectives in Afghanistan and the wider region.

A number of questions touched on the scope for further commercial engagement. There is plenty of scope for further UK commercial engagement in Turkmenistan, particularly in the oil and gas sector, and this agreement will help our efforts to promote those increased commercial opportunities in a more transparent investment climate. Transparency of investment climates is often at the heart of the benefits of such agreements.

On the economic and revenue effects, my right hon. Friend the Chief Secretary has previously informed the House that it is difficult to provide sensible estimates of the revenue effects of DTAs. It might be that in a particular case there is a short-term revenue gain or loss, but even then it would be hard to quantify. Such agreements are essentially strategic and are not meant to achieve a particular short-term outcome, so concluding one is not a zero-sum game.

It is possible that short-term revenue effects will be augmented or balanced by longer-term increases in activity as companies and others respond to a more favourable business climate and the greater certainty that a DTA can provide but, because of such movement over time, the effects are hard to quantify. The complex and shifting interaction of the laws in our country and the laws of the country in question also makes it difficult to give meaningful estimates. Successive Governments have not tried to give such estimates, so we are not unique in not trying to estimate the impact other than to say that by signing the agreement both countries believe it is in their mutual long-term interest—we would not be doing it otherwise.

That brings us to impact assessments. We have not produced an impact assessment because DTAs impose no obligations on taxpayers, rather they give UK residents relief from foreign tax in prescribed circumstances and provide relief from UK tax for non-residents in comparable situations. That is not new. There was a written ministerial statement in March 2011, after impact assessments were introduced, in which my predecessor gave details on exceptions from the requirement to publish an impact assessment, and secondary legislation enacting double taxation treaties was listed among those exceptions. We have taken a consistent position because of the nature of where the impact is felt.

By governing the taxation of cross-border income flows and eliminating double taxation, tax treaties promote international trade and investment. That long-term picture leads to sustainable tax revenues. One reason such treaties are important in financing development is the certainty they give.

NGOs often bring up the difference between the OECD and the UN models, and we cleave more closely to the latter. This treaty follows the OECD model, not the UN model, however the models are similar in nature. The treaty does not include an arbitration article, as Turkmenistan does not include such articles in its treaties—that is one variation.

I have mentioned the opportunities that the treaty offers for businesses operating overseas. I can give the assurance that the treaty with Turkmenistan prevents UK businesses from being disadvantaged in comparison with competitors from countries that have treaties in place. Of course, we are not the only country with which Turkmenistan, and indeed other countries, is looking to update its agreements, particularly given the different circumstances in which it finds itself today compared with its time as part of the USSR.

A question was asked about the Double Taxation Treaties (Developing Countries) Bill, which is due to have its Second Reading on 16 December. I look forward to debating that private Member’s Bill further, and I hope to give further assurances because I am aware of the interest of ActionAid. In the case of one country on which that NGO is particularly focusing, I have had useful discussions with the chairman of the all-party group for the country in question and I am further investigating to try to assure myself that the concerns are misplaced.

I think I have dealt with many of the questions, but we will go back to see whether I have missed any specific ones. A question was asked about our capacity to collect tax. The UK is a leading nation in supporting capacity building in other tax systems. I am proud of the work we do in supporting capacity building in tax administration. We have the wherewithal to offer good support, where that is needed. HMRC undertakes a major piece of work as part of the Department for International Development’s wider programme of capacity building in partner countries.

I think I will leave it there. I know that a question was asked about the number of people from the UK and the number of businesses in Turkmenistan. I do not have that detail to hand, but I am very happy to write with as much as we know about that. Clearly part of the DTA’s purpose is to encourage that very exchange from business to business. I will write to Members whom I have not been able to satisfy with my answers.

Question put and agreed to.