|
Dawn Primarolo: The amendments would introduce indemnities and protections for independent agents who are the tax representatives of non-resident companies. As the amendments replicate the existing provisions of schedule 23 to the Finance Act 1995, I assume that they are prompted by the fact that previously an independent agent could be a tax representative, so an indemnity was desirable and included in the legislation. However, the clause provides that tax representatives for non-resident companies are now their permanent establishments, so independent agents who are prevented from being the permanent establishments of non-resident companies by clause 147(3) cannot be the tax representatives of non-resident companies. Therefore, the amendments are unnecessary.
Independent agents may continue to be the tax representatives of persons other than non-resident companies. They will, however, continue to enjoy the equivalent protections proposed by the amendment, which can be found in schedule 23 to the Finance Act 1995.
I hope that the hon. Gentleman will accept that his probing amendment demonstrates that the coverage is there, the indemnity is not necessary and the permanent establishment requirement for the non-resident company is met. I ask him to seek to withdraw the amendment, but if he feels unable to do so and puts it to a vote, I shall ask my hon. Friends to oppose it.
Mr. O'Brien: I am grateful to the Paymaster General for that succinct and clear explanation. She rightly identified, as I believe I had done, the replication of existing law.
The essence of the clarification is the interaction between this clause and clause 147, which has just been agreed to. Therefore, because of the definitional change, the question whether an unbroken chain of indemnification is required is no longer relevant. I accept the Paymaster General's helpful explanation and am glad that it is on the record. I therefore beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 149 ordered to stand part of the Bill.
Clause 150
Non-resident companies: extent
of charge to income tax
Mr. O'Brien: I beg to move amendment No. 97, in
clause 150, page 90, leave out lines 5 to 7.
This is a probing amendment relating to non-resident companies and the extent of charge to income tax. The clause provides that a non-resident is subject to income tax by withholding only in the case of income falling within subsection (2), rather unhelpfully referred to as
''income to which this section applies''
and on other UK-source income in respect of which it is not liable to corporation tax.
I tabled an amendment to probe the position, because it is not clear to me why, on calculating the tax on income falling within paragraph (b)—other UK-source income in respect of which a non-resident is not liable to corporation tax—one has to disregard relief under double tax treaty as required by subsection (1)(a)(ii). There is probably a sound technical explanation, but it escapes me, so I look forward to hearing what the Paymaster General has to say.
Dawn Primarolo: I am grateful to the hon. Gentleman for tabling this probing amendment to tease out the precise interactions between the clauses that follow on from clause 147. The amendment would upset the existing basis of computing the limit of income tax on foreign companies from investments in the UK other than property and from any trading in the UK through a broker or investment manager. At present, the maximum such foreign companies can pay is the tax, if any, deducted at source.
The clause is a consequential adjustment to replicate exactly the effect of section 128 of the Finance Act 1995 on foreign companies. It is necessary following the change from ''branch or agency'' to ''permanent establishment'' that is introduced by clause 147.
The subsection that the amendment seeks to leave out does not prevent double taxation relief from being claimed. The position regarding such relief remains exactly as it was, and the clause limits the income tax chargeable before double taxation relief, as was previously the case. The double taxation relief would be given in any assessment, subject to the usual rules. That ensures that the UK income tax liability of a non-resident company is properly aligned to the amount due in accordance with any relevant tax treaty.
I hope that the hon. Gentleman will accept that explanation. He may feel that he wants to study the issues a little more, but I hope that he is reassured that the clause is, as I said, a consequential adjustment to replicate exactly the effect of section 128 of the Finance Act 1995 on foreign companies.
Mr. O'Brien: I am grateful to the Paymaster General for that clear explanation, which demonstrates an internal consistency in the light of clause 147. Therefore, as I indicated that this was a probing amendment, and as I am satisfied with the explanation, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 150 ordered to stand part of the Bill.
Clause 151
Non-resident companies: transactions
carried out through broker,
investment manager or Lloyd's agent
Question proposed, That the clause stand part of the Bill.
Mr. O'Brien: We have discussed several clauses for which the meat is found in a schedule. Therefore, I shall proceed on the basis of registering the fact that the Conservatives will not object to the clause stand part, but our agreement is subject to the way in which we discuss the amendments that we have proposed on schedule 26, which supports clause 151. The formal procedures do not allow us to reflect our concerns at this point.
The Chairman: The hon. Gentleman will be able to deal with the amendments that have been selected and, if necessary, I will be happy to grant a stand part on the schedule. However, based on the way in which the Committee has been proceeding, I suspect that most of the matters will be dealt with in detail during the discussion on the lead amendment and those that will be taken with it.
Question put and agreed to.
Clause 151 ordered to stand part of the Bill.
Schedule 26
Non-resident companies: transactions
carried out through broker,
investment manager or Lloyd's agent
Mr. O'Brien: I beg to move amendment No. 92A, in
schedule 26, page 344, leave out lines 36 to 38 and insert—
'(c) either—
(i) the remuneration he receives in respect of the transaction for the provision of the services of a broker to the non-resident company is not less than is customary for that class of business; or
(ii) he acts on behalf of the non-resident company in relation to the transaction in an independent capacity; and'.
The Chairman: With this it will be convenient to discuss the following:
Amendment No. 93, in
schedule 26, page 345, leave out lines 12 and 13 and insert—
'(c) either—
(i) the remuneration he receives in respect of the transaction for the provision to the non-resident company of investment management services is not less than is customary for that class of business; or
(ii) he acts on behalf of the non-resident company in relation to the transaction in an independent capacity; and'.
Amendment No. 94, in
schedule 26, page 345, leave out lines 15 to 17.
4.45 pm
Mr. O'Brien: We come to schedule 26; this is the first time that we have strayed into the second volume of the Bill. The amendments relate to a similar line of argument.
The schedule largely re-enacts the existing law in section 127 of the Finance Act 1995 and the Opposition find it broadly acceptable. However, paragraph 2(c)(ii) seems to be anti-competitive because, if a broker is prepared to carry on business for less than the usual level of fee or commission, he risks becoming a permanent establishment of a non-resident company and liable for any corporation tax chargeable on the non-resident company as a consequence of transactions carried out through it. Amendment No. 92A would provide that a lower-than-customary fee or commission could safely be charged provided that the broker acted in an ''independent'' capacity. That is covered by paragraph 7(2) of the schedule.
Mr. Burnett: I appreciate that the Opposition do not have armies of civil servants to help us. Does the hon. Gentleman mean by ''independent'' not connected within the meaning of the Taxes Act 1988 and not an associated or subsidiary company? Can he give a slightly more detailed description of what he means by ''independent''?
Mr. O'Brien: It is important that I do not seek to advance arguments for putting in legislation words and definitions that are not well established within the meaning of independence. The definition of a broker acting in an independent capacity is already contained in the Bill and earlier tax legislation. The issue at stake is not so much the question of how the action takes place in an independent capacity, which is established, but the way in which the provisions work. When a broker transacts business for a lower-than-customary fee or commission, he must act in an independent capacity; otherwise, there would be a link that would raise other presumptions.
Rob Marris: In paragraph 2(1) of the schedule, the words ''independent status'' are used. Under amendment No. 92A, paragraph 2(2)(c) would contain the word incapacity—that is a Freudian slip. I meant to say that the words ''independent capacity'' are used. It seems to me and, perhaps, the hon. Gentleman, that his amendment is suggesting a circular definition. Perhaps he can help the Committee by differentiating between independent status and independent capacity.
Mr. O'Brien: The hon. Gentleman will accept that paragraph 3(2)(c) refers to ''independent capacity'' and that is replicated in the amendment. We tried to be consistent with the schedule and I shall delineate the issue. The schedule must work and is largely a re-enactment. It is not trying to reinvent anything, but it is trying to provide a greater degree of consistency and clarification.
Amendment No. 92A would solve the difficulty in paragraph 2(2)(c) of schedule 26, replacing what is in line 36 with new wording. Paragraph 3(2)(e) suffers from the same defect, so we propose both to delete that paragraph and replace paragraph 3(2)(c) with the wording in amendment No. 93, which picks up on the exact wording that amendment No. 92A identifies. We would then have total internal consistency because the phrase ''independent capacity'' is already used in paragraph 3 but not found in paragraph 2 as it stands. Hence, although the hon. Gentleman thought that our proposal was circular, we are actually attempting to square the circle in the schedule, providing internal consistency and ensuring that the measure works fairly and properly. Paragraph 3(2) already contains the requirement for an investment manager to act in an independent capacity, so if we replaced paragraph 3(2)(c) with the wording in amendment No. 93, that would improve the drafting.
A further, general point is supported by the Chartered Institute of Taxation, which has said:
''Schedule 26 paragraph 3 deals with investment transactions carried out through investment managers. Subsection (3) defines investment transactions. The wording in paragraph 3(a) needs to include contracts for differences. We understand that the provisions of schedule 26 are exclusive and not complementary to the main provisions relating to Permanent Establishments. We trust that this will be reflected in Revenue published guidance.''
Another general point is that the OECD model treaty does not contain anything along the lines of schedule 26, but I shall not take up that point because I have listened carefully to what the Paymaster General has said on the matching of these provisions with the OECD model treaty. I recognise that there are some distinctions to be drawn, not least to reflect the variation in more than 100 double tax treaties. I have been able to study some of those, but there are clearly various differences. I realise that that requires recognition in the drafting that the model cannot be adopted verbatim in all respects.
I hope that that proves to be a helpful explanation. It has taken not a little effort to reach this point, and I hope that the amendments are considered to be serious and to have a helpful intent. I hope that they will be accepted.
| 
