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Mr. Burnett: Sir Nicholas, I have not had an opportunity to welcome you. I have served under your chairmanship on many occasions, not just in various Standing Committees—you are also the Chairman of the most illustrious Committee in the House: the Procedure Committee. Mr. O'Brien: What does the hon. Gentleman want?
3.30 pmMr. Burnett: I want an opportunity to speak about amendment No. 101 in particular, although there are good reasons for the other amendments about which the hon. Gentleman spoke. The Chartered Institute of Taxation and the Law Society have raised points, as the hon. Gentleman said. There are two simple points on amendment No. 101. First and foremost, is it right that, under British law, including British tax law, any representative can be referred to as an agent? Surely it is part and parcel of the law of agency that someone is an agent only if they can bind their principal. Any representative cannot and should not be called an agent. That is part of British law and international tax practice. The second point has been raised by the Law Society. As the hon. Gentleman said, the Revenue has confirmed, with reference to the definition of ''agent'', that it will treat only those persons who contractually can and do bind their principals as agents for the purposes of the clause. If that is the case, why can that not be in the Bill? That would be in the interests of the country's commercial activities. It is important that we trade overseas and welcome overseas investment. It is not in the interests of our economy to have vague laws and laws that do not stand on all fours in relation to international practice. It is in our interests for people to know exactly where they stand. I hope that the Paymaster General will accept amendment No. 101, in particular. It makes sense, is compelling and rights a wrong. Mr. Djanogly: My hon. Friend the Member for Eddisbury mentioned the OECD convention discrepancy. I fully agree with that point. More basically, the wording in the clause is vague, which is why I support amendment No. 99. We need to specify that the business of the company is the company's trade. I understand from what I read in the Chartered Institute of Taxation book that the Inland Revenue has indicated in consultation that the provisions in the clause will not apply unless a non-resident is exercising a trade in the United Kingdom. There is a need to make it clear that the continuation of a non-trading business activity is outside the competence of the legislation. May I draw the Paymaster General's attention to what appears to be a typo? In subsection (1)(b) ''there'' should presumably be ''their'', or more properly, ''the company's''. Either way, it is pretty shoddy drafting. On amendment No. 101, I essentially agree with my hon. Friend's analysis. I would just add that the word ''agent'' is a commonly used expression in business and is often used where there is, and is not, authority to bind the company that is using the agent. To that extent, it is necessary to clarify whether the provision will apply only when the agent can bind its principal, not only for technical purposes, but for those of the normal taxpayer when considering the legislation. Mr. Burnett: Does the hon. Gentleman agree that it will be extremely confusing for overseas taxpayers sending representatives to this country if they do not have the authority to bind, and they are suddenly caught by the provisions? Mr. Djanogly: The hon. Gentleman makes a good point and, considering the matter the other way round, I am concerned for the English taxpayer, who is the agent and might not know where he stands. Mr. O'Brien: My hon. Friend is making some very interesting and valuable points that support the arguments on the amendments, but to put his mind at rest on something that is not subject to the amendments, the spelling of ''there'' probably is correct in the context of the clause because it relates to territory. It happens to be rather inelegant word order, so I understand why he has found that difficult to pick up. Mr. Djanogly: I thank my hon. Friend for clarifying that for me. On amendment No. 3, I fully support what my hon. Friend said. We clearly do not want a situation in which temporary building works to build the most minor projects could be subject to the same treatment as factories and offices. A building site of less than a year is clearly not permanent. Mr. John Baron (Billericay): As we know, clause 152 replaces references in the Taxes Act 1988 to ''branch'' or ''agency'' with references to ''permanent establishments''. Clause 147 redefines the term ''permanent establishment'' in that context. The definition has been widened beyond the definition of ''branch'' and ''agency'' so that some non-resident companies, not previously subject to UK corporation tax, may become taxable under the new rules. I have one or two key concerns about that. First, as my hon. Friend the Member for Eddisbury has already highlighted, in certain respects the definition departs from that contained in the OECD model convention, although the relevant parts of that convention are generally contained in UK tax treaties. An example was given with regard to building sites. That is an area of concern because the discrepancy could lead for no good reason to different tax treatment for non-resident companies based on treaty jurisdictions as compared with non-treaty jurisdictions. I ask the Paymaster General to clarify that, because it would be helpful for all concerned. Mr. Howard Flight (Arundel and South Downs): I wonder whether my hon. Friend has focused his mind on whether the changes could result in hedge funds outside the UK, whose transactions are frequently handled in the City of London, falling within the definition of residence. That would be a disaster for the City, because business would go elsewhere if that were the effect. Mr. Baron: My hon. Friend makes an excellent point. That is a consideration. When it comes to the City, competitiveness is all-important, and if the new legislation ensnarls hedge funds, it could result in the City of London and other financial cities throughout the UK losing business. I ask the Paymaster General to bear that in mind, and address the issue when she sums up. I turn to another issue that concerns me, and ask the Paymaster to address it. The definition of permanent establishment in clause 147 will widen the tax liabilities of foreign companies doing business in Britain. Although none of us would condone tax avoidance, I would suggest that the relatively favourable tax regime in this country for overseas companies has been one of the factors that has contributed to our economic well-being, certainly when compared with our competitors. It is no accident that our structural unemployment rate is far less than it is on the continent and across the eurozone as a whole. Most independent observers would acknowledge that part of the reason for that is that we have had much more flexible practices than on the continent, thanks largely to previous Conservative Governments, part of the reason is that the United Kingdom has not signed up to the euro and part of the reason is that we have had a relatively favourable tax regime for overseas companies compared with other countries, particularly those in the eurozone and on the continent. I believe that the clause threatens that tax advantage. On its own it will not be a major factor in weakening our economic competitiveness, but taken with all the other regulations on taxes with which the Government have burdened our economy since they came to power, I suggest that it will have an effect, and is having an effect now. I therefore ask the Paymaster General three questions. To what extent do the Government believe that the definition of permanent establishment widens the UK tax liabilities of foreign companies? Have the Government estimated the likely impact of the definition of permanent establishment on foreign investment? Would she consider carrying out an impact assessment of those two issues to determine what effect the clause has on our economic competitiveness? The Paymaster General (Dawn Primarolo): I congratulate the hon. Member for Eddisbury on introducing his amendments so succinctly. He is right: this is a complicated area of international tax law, relating to the combination of UK domestic law, international agreements through the OECD guidelines and the OECD's commentary on its standard guidelines. Regular members of the Finance Committee or hon. Members who, like the right hon. Member for Fylde (Mr. Jack), have in a past life been members of double taxation committees scrutinising the introduction of double taxation treaties in the United Kingdom will understand that the question of permanent establishment is crucial for determining the respective taxation rights of the United Kingdom and the country with which it is entering into the treaty. The hon. Member for Eddisbury is right that the OECD model recommends a 12-month period, but we now have more than 100 tax treaties and the time period for permanent establishments varies. I want to deal first with the points raised in the amendments and then turn to the other issues that hon. Members have mentioned this afternoon. As I said on another clause in the Committee of the whole House, UK banks are at a tax disadvantage compared with foreign banks as regards their operation in the City of London, whether or not branches of foreign banks pay UK corporation tax. That is the point at which the clause starts. Mr. Baron: Will the Paymaster General give way? Dawn Primarolo: I am happy to give way, but this is a general point about the clause rather than the amendment. Mr. Baron: Absolutely—point taken. I am delighted that the Paymaster General is defending UK banks, but the UK banks and the banking structure generally recognise that the tax advantages offered to foreign banks add to the vibrancy of the City and to its attractiveness as a commercial centre. Very few UK banks complain about the tax treatment of UK branches of overseas banks.
3.45 pm
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