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John Healey: The hon. Member for Eddisbury has recognised why I believe that the safeguards are adequate across the piece. On the particular point that he raised on behalf of the ICA, the legislation is designed to ensure that in cases in which the taxpayer deliberately misleads Customs and Excise investigators while purporting to assist them following an inducement offer and the deception is subsequently discovered, any evidence collected may be used in a subsequent prosecution. The rule is not designed to promote admissibility; it is a provision to remove a possible bar.
There is a major safeguard for the taxpayer: the decision whether such evidence is admissible will rest with the trial judge, who will be guided by the provisions of section 78 of the Police and Criminal Evidence Act 1984.
Question put and agreed to.
Clause 38 ordered to stand part of the Bill.
Clauses 39 and 40 ordered to stand part of the Bill.
Clause 41
Regulations and orders
Question proposed, That the clause stand part of the Bill.
John Healey: The final clause in part 3 sets out the scope of the power and the nature of the procedure to make regulations by statutory instrument. Affirmative resolutions of the House will be required for regulations to amend either the maximum permitted penalty or references to Community law. Other regulations, including the schedule identifying the contraventions that can attract civil penalties, are subject to the negative resolution procedure. I can confirm that Customs and Excise will consult business sectors affected by the scope of the schedule through the trade consultation group. I will issue a draft of the schedule during the summer and expect to lay the statutory instrument before the House in the autumn.
Question put and agreed to.
Clause 41 ordered to stand part of the Bill.
Clause 147
Meaning of ''permanent establishment''
Mr. O'Brien: I beg to move amendment No. 99, in
clause 147, page 85, line 29, leave out 'business of the company' and insert 'company's trade'.
The Chairman: With this it will be convenient to discuss the following:
Amendment No. 100, in
clause 147, page 85, line 32, leave out 'do business' and insert 'engage in trading activities'.
Amendment No. 101, in
Amendment No. 3, in
Mr. O'Brien: We move on to my final part of the Bill before the Whitsun recess. Many members of the Committee will breathe a massive sigh of relief because I am on my last lap. My hon. Friends are encouraging me to stay, but I am keen for them to have an opportunity to speak.
Clauses 147 to 155 deal with the definition of the term ''permanent establishment''. Clause 147 is intended to set out the definition in line with the various internationally recognised characteristics commonly used in the UK's double taxation agreements. It will be effective for accounting periods beginning on or after 1 January 2003.
Without doing more than referring all members of the Committee to it, I commend the debate introduced by my hon. Friend the Member for Arundel and South Downs (Mr. Flight) on clause 148 in the Committee of the whole House last week. It would be helpful for members of the Committee to have in mind the arguments presented by him on that occasion and some of the responses given—I should say, issued and received.
I am now facing the Paymaster General instead of the Economic Secretary, and I welcome her to her place. The problem, as I understand it, is that the definition here departs in some respects from that contained in the Organisation for Economic Co-operation and Development model convention, although the relevant parts of that convention are generally contained in United Kingdom tax treaties.
I shall focus on clause 147(2)(h), to which I shall rapidly turn, as we have jumped 100 clauses. That might be false encouragement to some members of the Committee; no doubt we shall return to those that we have just skipped. Subsection (2)(h) treats
''a building site or construction or installation project''
as a ''fixed place of business'', although paragraph 3 of article 5 of the OECD model convention states:
''A building site or construction or installation project constitutes a permanent establishment only if it lasts more than 12 months.''
The clear and obvious solution would be to say that a building site or construction or installation project should not constitute a fixed place of business unless it lasts for more than 12 months.
We are concerned about the discrepancy between the meaning of permanent establishment in Untied Kingdom domestic legislation and the definition of permanent establishment in the bulk of the UK's double tax treaties. That could result, for no good reason, in different tax treatment for non-resident countries based in treaty jurisdictions and those based in non-treaty jurisdictions.
Amendment No. 3 replicates paragraph 3 of article 5 of the OECD model convention. Obviously, an alternative approach would have been to redraft subsection (2)(h) to read,
''a building site or construction or installation project that lasts for more than 12 months'',
which would compare to paragraph 2(g) of article 4 of the treaty with France. However, that would be less favourable than amendment No. 3, because a building site or construction or installation project that lasted for less than 12 months might still amount to a fixed place of business in certain circumstances. It is worth noting that the opening of subsection (2) states that the list in paragraphs (a) to (h) is
''without prejudice to the generality of''
the expression ''fixed place of business''. That series of arguments has been widely supported by the Chartered Institute of Taxation, the Institute of Chartered Accountants in England and Wales and the Law Society.
Turning to the other amendments, the Chartered Institute of Taxation, having already commented adversely on the new definition of ''permanent establishment'', thinks that the words ''authority to do business'' in subsection 1(b)
''are vague, and do not specify the essential criterion that the agent must be in a position to bring the principal into a binding agreement with the customer. The Inland Revenue have indicated in consultation that a person will only be treated as an 'agent' in circumstances where that person can bind the principal.''
The Inland Revenue has confirmed that the references in subsection (1)(a) and (b) to the carrying on of business and the exercise of ''authority to do business'' are limited to business activity of a trading nature by virtue of the provisions in section 18(1)(a)(iii) of the Taxes Act 1988. Therefore, looking at amendments Nos. 99 and 100, I support the Chartered Institute of Taxation's submission that in clause 147(1)(a) the reference to the ''business of the company'' should be replaced by a reference to the ''company's trade'', and that in subsection 1(b), the words ''do business'' should be replaced with the words ''engage in trading activities''.
The Inland Revenue said in consultation that the permanent establishment provisions will not apply unless the non-resident is exercising a trade in the UK; in other words, the carrying on of a non-trading business activity is outside the scope of the legislation. It went on to recommend that the legislation should clarify those points to avoid any misunderstanding over whether a person acting as a representative without authority contractually to bind their principal is an agent. It also recommends that it is confirmed that references to the carrying on or exercising of authority to do business are limited to activity of a trading nature, and that investment business activity is outside the scope of the legislation.
Turning to what the Institute of Chartered Accountants in England and Wales has to say, as already explained, the OECD published a consultative document in March 2001 on the issues surrounding permanent establishment. The ICAEW has identified that the problem arises in relation to ''dependent agents'', a point that was made earlier. It says:
''The authority of the agents should only apply to authorities to carry on the trade in question and not to authority to do business. This in particular will give rise to widespread compliance issues for potential agents who constitute permanent establishments even where there was no trade. These provisions should be amended accordingly.''
It also notes that in subsection (1)(b),
''an agent who 'habitually exercises authority to do business on behalf of the company' will constitute a Permanent Establishment of that company in the country where the agent operates. The OECD Model Treaty still only treats an agent as a Permanent Establishment when the agent '(has) and habitually (exercises) the right to conclude contracts' in that country''—
as opposed to its having authority in that country. It continues:
''We believe that the UK law should follow closely the relevant OECD model until such time as the OECD model is amended.''
I turn to the Law Society. It is very interesting that the submissions of these societies all support one another, and that they have all expressed concerns about the various difficulties reflected in the different amendments. The Law Society, after agreeing with what I have just said on amendments Nos. 3, 99 and 100, says on the matter addressed by amendment No. 101:
''The Inland Revenue have also confirmed that the reference in clause 147(1)(b) to an agent is restricted to those persons who contractually can and do bind their principals and not to persons acting in some other representative capacity falling short of having such authority.''
The Law Society suggests, and I agree:
''In order to clarify this point we recommend that that term 'agent' is defined to mean 'a person who has authority to and regularly does enter into arrangements on behalf of his principal which are contractually binding on that principal'.''
For the convenience of the Committee, you have been encouraging us to raise any stand part issues at the same time as the amendments, Sir Nicholas. Recognising that, I raise some small points that the Paymaster General may wish to contemplate addressing on Report, as well as directly addressing the amendments. They pick up on some further points suggested by the ICAEW. It notes that
''subsection (5) does not include a category (e) along the lines of the existing OECD Model Treaty. This subsection states that any combination of the activities listed under the equivalent of (5)(a) to (d) would also not constitute a Permanent Establishment. We recommend that an additional subsection along these lines be included for the avoidance of doubt and to ensure that the UK rules are consistent with the OECD rules.
This provision applies to accounting periods beginning on or after 1 January 2003. It is not acceptable for these provisions to apply before the relevant provisions are enacted. The start date should be amended so that it applies to accounting periods beginning on or after Royal Assent.''
I put those points on the record, and they will no doubt be considered when it is available.
I hope that the points that I have made were as succinct as they could have been on this quite complex matter, which is definitional because it constitutes a move forward. I have sought to make arguments that jointly and severally support amendments Nos. 3, 99, 100 and 101. I hope that the Paymaster General will find that they were made sufficiently cogently for her to accept the amendments. I look forward to her response.
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