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

Steve McCabe Excerpts

Wednesday 10th January 2018 General Committees

[Steve McCabe (Birmingham, Selly Oak) (Lab)]

I am conscious that it is not common for Members to queue up to take part in Delegated Legislation Committees. I am genuinely pleased to be able to make a contribution to the Committee, because I believe that the significance of the UK’s network of bilateral tax treaties is far greater than the level of transparency and scrutiny afforded to it under the system of negotiation, renegotiation and ratification.

There are two major issues surrounding bilateral tax treaties. First, there is the question of tax treaties that enable companies to route money through tax havens such as Crown dependencies. That can come at a particularly high cost to the revenue raising capacity of Governments in poorer countries. Only a few years ago, ActionAid revealed how Deloitte was advising prospective clients in western and Chinese companies with an interest in Africa on how they could route their investment through Mauritius, a known tax haven. Perhaps not surprisingly, Mauritius has tax treaties with both the UK and Lesotho, so it is possible—if not highly likely—that UK companies investing in Lesotho are avoiding tax through such a route.

Secondly, many of these treaties are restrictive and cost lower-income countries billions of pounds each year that could be used to improve public services and alleviate poverty. For the purpose of the Committee, I want to concentrate on the treaty with Lesotho, one of the world’s poorest countries. It is regularly argued that such treaties boost economic development, but the World Bank has argued that there is very little conclusive evidence that tax treaties between OECD countries and low-income countries actually do so. My right hon. Friend the Member for Barking (Dame Margaret Hodge) writes in her excellent book “Called to Account”, that Angel Gurría, the secretary-general of the OECD, said in 2008:

“Developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid.”

He also said:

“poor countries could eliminate hunger in just one decade with less than a third of the money they lose to tax avoidance by big corporations”.

In 2014, the International Monetary Fund reported:

“the use of tax treaty networks to reduce…payments…is a major issue for many developing countries, which would be well-advised to sign treaties only with considerable caution.”

Britain has a large network of bilateral tax treaties both with low-income countries and tax havens. Analysis by Martin Hearson, a leading authority on the subject, found that the UK has the joint highest number of highly restrictive treaties with lower-income Asian and sub-Saharan African countries across the world. Ironically, we send a substantial amount of aid to those countries. Last year, DFID was responsible for delivering nearly £6 million of British taxpayers’ money in aid to Lesotho, yet we are signing a treaty that will actually deprive that country of corporation tax to which it is entitled.

I said that I was grateful for the opportunity to contribute, because this is one of the few opportunities for any kind of parliamentary scrutiny of a treaty of this nature—a treaty that the Government have already concluded. I am aware that there is a power for referring such treaties to the Floor of the House, but I understand that that has not been done since 1984. For most of us, this Committee is what passes for scrutiny. There is scant information on the reasons for this treaty in the explanatory notes or in the presentation we have just heard from the Minister. The Government do not publish their reasons for negotiating or renegotiating treaties. We do not appear to have any analysis of the expected impact of the treaty on investment or tax revenue. Perhaps the Minister will enlighten us.

The House of Commons Library conducted a comparative analysis of the approaches of a number of countries to such treaties. Many countries establish specialist committees to scrutinise them. In other countries, treaties are scrutinised by both Houses or Assemblies. Here, it is done by a Delegated Legislation Committee. In Canada, parliamentarians have a formal opportunity to review such treaties before they become binding. In Australia, there is a national interest analysis and formal hearings to approve treaties. In the United States, the Department of the Treasury produces a technical explanation of the agreement. We should compare that with the information before us today as we consider these treaties.

Is the Minister willing to consider that the Government should at least publish the specific objectives they are seeking to achieve before future tax treaties come before a Delegated Legislation Committee? Will he tell us the rationale for opening negotiations on these treaties? Is it not the case that if the Lesotho treaty did not exist, Lesotho would be free to charge the diamond companies and others a 25% withholding tax, rather than one of 5%? Why are the rates of the withholding tax in this treaty so low? It seems like Robin Hood in reverse.

Will the Minister say something about the binding arbitration clause in the treaty? I recall that kind of thing being a source of some concern to people in this country during the Transatlantic Trade and Investment Partnership negotiations. Am I right in thinking that this is the first UK tax treaty with a low or middle-income country to include a binding arbitration clause? What safeguards exist to ensure that large corporations do not use it to threaten Lesotho so that it does not try to challenge blatant tax avoidance? Have any British companies made representations to the Government for a binding arbitration clause to be included in the treaty?

Why is it so difficult to obtain information about the likely effect of the treaty? The EU produced detailed sustainability impact assessments that analyse the potential economic, social, human rights and environmental impacts of all trade deals. Why can a similar framework not be adopted for treaties such as these? As well as the treaties before us today, two more will be considered next week. I understand that there are treaties pending for Malawi, Nepal, Trinidad and Tobago and Uzbekistan. Will the Minister confirm whether all the existing tax treaties with EU countries will have to be renegotiated as part of the Brexit process? Surely we need a much better parliamentary process that involves full and proper scrutiny and provides evidence that such treaties are fair and in keeping with the values and traditions of our country.

I hope that my hon. Friend the Member for Oxford East shares my view about the inadequacy of the process and that she might consider testing the will of the Committee on the Lesotho treaty so that, at the very least, we can make our concerns crystal clear.

--- Later in debate ---

[Mel Stride]

May I, at the outset, make one thing extremely clear to the Committee? The Government are entirely committed to supporting lesser developed countries. We are one of the few countries in the EU and among the advanced industrialised countries that meets the 0.7% aid requirement. The hon. Member for Oxford East will know that the Taxation (Cross-border Trade) Bill, which is going through Parliament, will ensure that we take into UK law the unilateral preferences that pertain under the European acquis to ensure we provide zero-duty arrangements on a selfless, unilateral basis with a number of countries that need our support. It is important to understand where we are coming from in our overall negotiations and in the arrangements we enter into with the countries that are the subject of this debate.

I will go through some, at least, of the most prominent questions that were asked. There was a rather eye-watering number of them, delivered at rattle-gun speed, and some were quite technical. Although I enjoy the mental gymnastics of these debates—I always enjoy debating with the hon. Lady—I hope she bears with me as I do my best to pick them up. I was barely thinking about some of them when I had two or three more thrust in my direction. I will do my best to cover as much as I can.

The hon. Member for Glasgow East asked who opened the discussions between ourselves and Colombia. It was us, because Colombia is a significant Latin American economy. It is currently going through its accession process with the OECD, and it is expanding its network of double taxation agreements, including with our competitors—other nations around the world. We have always had close and friendly ties with that country, so we approached it. It was willing, and we have now concluded an agreement.

Like the hon. Members for Birmingham, Selly Oak and for Oxford East, the hon. Member for Glasgow East raised the important issue of transparency in the negotiation process. Tax treaties are international agreements that are given effect through law. They are therefore subject to parliamentary scrutiny and debate. Only when both sides are satisfied with the content of a new treaty will it be signed and published. Parliament will then scrutinise the agreement. If Parliament is not satisfied, the treaty will not enter into force. Where these treaties come about, we are in a position to scrutinise them, as we clearly have in some detail in this Committee. Such treaties have generally enjoyed cross-party support to date. It is recognised that they generally have a positive role in creating and enhancing cross-border trade, investment and employment.

The hon. Member for Birmingham, Selly Oak raised an example of the potential use of this arrangement or treaty in the context of tax avoidance. He mentioned Mauritius specifically. Mauritius has now become a signatory to the OECD base erosion and profit shifting project. It is therefore bound by the rules and regulations in that regard. If we look at offshore so-called tax havens—I think that was the expression he used—they are most typically brought into play where double taxation arrangements are not necessarily in place and there is a fear that double taxation may occur. In that sense, so-called tax havens or overseas tax trusts are being used to create a neutral tax space. The overarching point is that the proliferation of double taxation agreements is to be welcomed in that context.

The hon. Members for Birmingham, Selly Oak and for Oxford East raised the important issue of whether we were in some way exploiting Lesotho as a consequence of the agreement. The hon. Lady went into some detail on her bedtime reading. She went back to the 1997 treaty to look at the various rates of withholding tax and so on. The point I would make is that it is not possible for us to impose a treaty on another country, even if we wanted to. It is for the other country to decide when it is ready to enter into negotiations and to weigh up the trade-off between retaining all its taxing rights and possibly limiting those rights to attract foreign investment.

To answer a question that the hon. Member for Glasgow East posed about Colombia, it was Lesotho that approached us to seek a further double taxation arrangement. There were certainly elements within that negotiation where it sought to achieve certain outcomes to which we acquiesced.

The hon. Member for Birmingham, Selly Oak also raised the issue of how the tax treaty will support Lesotho’s development. UK tax treaties are negotiated by Her Majesty’s Revenue and Customs, reporting to Treasury Ministers. DFID is fully supportive of HMRC’s approach. It works with the Treasury on various aspects at various times in these various arrangements. DFID supports the tax authorities in developing countries to increase their capacity to raise revenues, and it works with the Treasury to develop the Government’s tax and development policy. The Government have also set up a specialist tax capacity building unit in HMRC that deploys HMRC staff in support of DFID country offices to provide technical expertise. The point is that, even outside the context of the treaties, the Treasury and HMRC are there alongside DFID in ensuring that we provide support to those countries and recognise the importance that they rightly place on the sustainability and durability of their tax base.

Other Governments have approached the negotiation of treaty arrangements and the process by which they go through Parliament in exactly the same way as we are looking at this today. It is certainly the case that treaties of this nature under the last Labour Government —in the dim and distant past—went through a similar process to that which we are following today.

The hon. Member for Birmingham, Selly Oak raised the important issue of binding arbitration and asked whether it is typical of these kinds of arrangements. In some cases it is; in some cases it has not been. That is because of historical changes that have occurred in this area. The new model agreed under the auspices of the OECD will now make it more normal. The decision taken by Lesotho and ourselves was that it would be appropriate to operate the model set out by the OECD for binding arbitration.

A question was raised about the renegotiation of our existing trade treaties with other nations—those treaties being between the European Union and other countries. It is my understanding that we will not need to do that in the case of those particular treaties.

The hon. Member for Oxford East asked for reports on the effects on the investment and the tax take and so on. Those are immensely complicated questions to answer; it is very complicated to try to assess and determine exactly what the impacts of a double taxation agreement with another country—an agreement with two countries interacting, with all the various externalities that impinge on those circumstances—will be. It is, of course, the British Government’s responsibility to continue to closely monitor those impacts as far as we can. All legal measures, treaties and agreements with other countries are always constantly under review, as the hon. Lady would expect.

[Steve McCabe]

I want to clarify one point on binding arbitration. As I understand it, consultations take place between the Government and various stakeholders and interested parties in preparation for the treaty. I am curious to know whether any British companies made representations that they wanted the binding arbitration clause included. If so, would the Minister tell us who they are?

[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.