|Draft Double Taxation Relief (Taxes on Income) (The United States of America) Order 2002 and Draft Double Taxation Relief (Taxes on Income) (Lithuania) Order 2002
Mr. John Horam (Orpington): My hon. Friend the Member for Eddisbury did remarkably well from a standing start. He was honest enough to admit that he had snuck into the Treasury for a briefing. That speaks volumes for his straightforwardness, and his knowledge was remarkable. Clearly, if he can speak about double taxation with such knowledge after such short experience, he will go far.
In contrast, I am mired in ignorance, knowing nothing about double taxation, so it was interesting to hear the Paymaster General's opening remarks. In the spirit of spreading a little enlightenment on my profound ignorance, I hope that she will respond to my simple queries. They spring from a layman, though hopefully not an unintelligent one. If the object of the double taxation treaties is to get rid of double taxation, which is clearly a disadvantage to international trade, how widespread is such double taxation? Is the treaty with the United States unique or is it common among advanced western countries such as France, Germany, Canada and so forth? Is double taxation a matter of course in widespread parts of the world?
At one stage of my career I was the director of an international business, although I picked up no knowledge whatever—I left it all to the accountants—of double taxation. However, when doing business with Greece I recall having to deal with an element of it. An amount had to be deposited against a taxation before business could be done. As a matter of general worldwide perception, is double taxation common? If it is widespread, is it—like the hole in the ozone layer—reducing, or is it still a real impediment to international trade?
Are treaties such as those with the United States and Lithuania always symmetrical, in that they give us certain advantages such as bringing down the tax on withholding from 5 per cent. to zero, and we straightforwardly reciprocate? Is there always a balance of negotiation, or do we gain something that the United States does not? Are such treaties like a balance sheet that is evenly balanced between what is given and taken, or are they uneven because we give away something—or, in this case, take something that is not being given back to the United States?
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The Minister mentioned that the United States had been unhappy with certain aspects of the treaty. I got the impression from her remarks—she will correct me if it is not accurate—that after the treaty had been signed there were different interpretations of some areas of it. It seems odd that a country should sign a treaty while not being clear about its meaning. I would have thought that the treaty would have been gone over with a toothcomb, and that both sides would have been perfectly clear about what any article meant, so that there would have been no need for any protocol or further documents explaining the intention of the treaty. If we were discussing a European Union treaty, the situation might be different, because EU treaties seem always to indulge in high-flown language that can be interpreted in different ways by 15 different nations. That might be a feature of EU treaties, but not of things that must be strictly defined, such as double taxation treaties between sovereign states.
I hope that, in a spirit of enlightenment, the Minister will respond to my three humble questions from the pit of ignorance.
Mr. Adrian Flook (Taunton): I also pay tribute to my hon. Friend the Member for Eddisbury for being able to gen up so quickly on the extremely complicated issues of withholding tax and double taxation relief. Having spent a number of years in the City, I have no doubt that withholding tax created a number of problems for its enhancement. I therefore welcome the Government's attempts to enhance financial business to the benefit of the nations and currencies concerned.
As a member of the Select Committee on Culture, Media and Sport, and as the vice-chairman of the all-party BBC group, I ask the Minister how the BBC fits into the treaty. Will she tell us whether the Treasury regards the BBC as a company or enterprise of a contracting state? That is important because, in advance of proceedings on the Communications Bill, the Department of Trade and Industry and the Select Committee on Culture, Media and Sport, which together will be bringing forward that Bill, have a view on whether the BBC fits into an office of communications. It would be interesting to know how the Treasury, and indeed Mr. Farish, the US ambassador, regard that matter.
I referred in my opening remarks to withholding tax and its impact on the City of London. The Minister will remember that, a few years ago, there was much talk about whether a Labour Government would agree to the request of the European Union to implement withholding tax. I am glad to say that the Chancellor of the Exchequer appears to have knocked that ridiculous idea on the head. Will the Minister clarify the extent to which the double taxation relief that we are considering today knocks that idea on the head for ever, and whether it is possible for the EU to overrule it?
Dawn Primarolo: I do not know where to start in responding to the huge number of questions. I will go
Column Number: 15through them, but if, when checking the record, it is found that I have not answered any of those asked by the hon. Member for Eddisbury, I undertake to write to him and to all members of the Committee, and to ensure that the replies are placed in the Library. I am sure that my hon. Friends hope that I will say that I will write to the hon. Gentleman on every question. I am sorry that I cannot do that, but I will deal with the points raised.
I apologise for the fact that the explanatory memorandum was not available in time. I do not know why, but the hon. Gentleman is right that they are extremely helpful and should always be available to the Committee.
The hon. Gentleman touched on my parliamentary answer of 14 March in which I mentioned a possible timetable for agreeing the treaty. I said then that I understood that we were negotiating with our US colleagues and discussing whether a protocol was necessary. It would not have been helpful to speculate during those negotiations, and doing so would have misled Parliament. We always believed that we should conclude the treaty as quickly as possible. He pointed out that the current treaty, which the treaty before us will replace when it comes into force, was negotiated in 1975 but was not agreed until 1980. We are therefore doing well, although it is a shame that we had to have a year's gap.
The hon. Gentleman and his colleagues, the hon. Members for Orpington (Mr. Horam) and for Taunton (Mr. Flook), asked whether other EU member states had raised any issues about the treaty and whether that would have any implications. The answer is categorically no. Furthermore, the Government have not entered into any correspondence or discussion with any member states or the Commission about the treaty. The treaty is bilateral and a matter for the United Kingdom and the United States of America alone: we are the ones who are negotiating it.
Before I answer the detailed questions asked by the hon. Member for Eddisbury, it may be helpful to deal with a couple of the points that the hon. Member for Orpington raised about double taxation. As the hon. Gentleman may know, the United Kingdom—and probably the United States too—has the largest number of double taxation treaties. That is a reflection of our global trading and the importance, as he rightly said, of facilitating business where possible in ensuring that there is no double taxation.
To use the example of the United States, it is unfortunately common that if a resident of the United Kingdom derives income from the United States, both states may be entitled to tax it. The United Kingdom is entitled to tax it because the taxpayer is resident here, and the United States is entitled to tax it because the income arose in the United States. Clearly, there would be potentially massive obstacles to overcome if that continued. Tax treaties are therefore the way forward.
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The OECD has developed the model double taxation convention, which states that its use around the world will help to build up a network of bilateral agreements. As I said, we have the largest number of those. Each year, we announce to Parliament by parliamentary answer the treaties that we are negotiating and those that we will negotiate the following year. We determine which countries we will negotiate with after consulting business and identifying where double taxation may occur. Some treaties are brand new. Others, such as the huge treaty with the United States, are updated. Much has changed since that treaty was negotiated in 1995.
Mr. Horam: The right hon. Lady is explaining the matter very clearly, but having to go through this process every year as a few more treaties come on stream sounds rather laborious. How many such treaties do we have? I do not ask for the exact number of countries, but do the treaties cover only a small part of the world, such as western Europe and north America—Asia is a closed book and has a lot of double taxation—or are we now beginning to cover most of the world?
Dawn Primarolo: We have 106 treaties. If the hon. Gentleman is interested, I will be more than happy to write to him telling him which countries they cover. We also have tax treaties with the EU, of course, but as he said, European directives may override them. It would be better for me to deal with the issues that he raised about withholding and the benefits of the treaty when I answer the hon. Member for Eddisbury.
The hon. Member for Orpington then asked about the protocol. I shall be perfectly frank with him and with the Committee. I am sure that it can be appreciated that the business and interactions between the UK and the USA—and those between other countries—are vast and complex. The tax authorities of any two countries will attempt, when drafting a treaty, to ensure that it responds to the world not only as it is, but as it appears to be developing. Sometimes, however, things just move on. If a tax treaty is to operate well and to provide certainty and security to businesses, it is crucial that the two tax authorities should agree on how to interpret that treaty.
After the signing of the treaty, interpretations of words and ideas on how some things would function varied slightly. We thought that the treaty was important—as did the US—so we sought to make sure that it included everything before it was finally ratified. One could criticise us for waiting for the protocol, and one could ask why we did not get things right the first time round, but such matters are very complicated. It is better to have the protocol and a treaty that operates correctly than to have no protocol and problems and uncertainty for businesses. I hope that I have dealt with the hon. Gentleman's point.
The first question asked by the hon. Member for Taunton was about the BBC. I am sorry to say that, as a Minister, I am not permitted to know companies' details or people's tax status, or to engage in discussions about such matters. Actually, I am not sorry about that, as that fact is vital to the tax system
Column Number: 17in the UK. Our tax treaties set out how we will interact.
The hon. Gentleman went on to ask about the draft directive on taxation of savings, and about having an automatic exchange of information—as is being discussed in the European Union—rather than a withholding tax. I shall later say more about the exchange of information, as the hon. Member for Eddisbury asked me about it. The exchange of information provided for in the treaty in no way cuts across the basic principle that the Chancellor has been pursuing, and which we will continue to pursue, of the automatic exchange of information between tax authorities about their residents or companies.
I shall deal as quickly as I can with the points that the hon. Member for Eddisbury made. He mentioned article 2 and his concerns about the possibility of a US state taxing a UK shipping or airline company when the US at federal level would not. If that happens, the US Government will seek to persuade the state concerned not to charge the tax. The US Government cannot go further than that and cannot cover state taxes in the treaty because the constitution limits their ability to interfere in a state's taxing rights.
I should be happy to discuss later with the hon. Gentleman a case from the 1980s, when his party was in government, in which there was a problem over some interaction with a state. The UK Government took direct action. They are able to do so through their normal anti-avoidance protection measures—whatever they may be called. We still have all those measures, and can use them.
The hon. Gentleman asked about the Channel Islands. I can confirm that they are not covered by the orders. They are outside the UK for the purposes of taxation. There is a constitutional relationship between the UK and the Isle of Man and the Channel Islands, including Jersey and Guernsey. The hon. Gentleman may have seen in the press recently that there have been some negotiations on exchange of information agreements between the US and at least one of the Crown dependencies; I cannot remember which. However, he is right that those states and countries are specifically excluded—as they are on the American side—because there is not an entitlement to negotiate on their behalf.
The hon. Gentleman then asked about the special rules in paragraph 6 of article 4 that relate to United States female nationals. Those rules provide domicile status, for United Kingdom tax purposes, for a female United States citizen who married a UK-domiciled male before 1 January 1974. Her situation is not determined by the domicile status of her husband, thereby providing for the equal treatment of male and female Unites States citizens in relation to the determination of their domicile status for tax purposes in the UK. A woman who married a UK-domiciled man before 1 January 1974 is generally treated as having the same domicile as the husband; it is as if the advent of independent taxation and the treaty follow the provisions.
On article 11(6), the hon. Gentleman asked about the possibilities of abuse and the problems on capping.
Column Number: 18That paragraph counters abuse that might arise in connection with United States real estate mortgage investment conduits. There is not a comparable UK investment vehicle. The provision is intended to prevent the avoidance of United States tax by converting US-source property income, which is fully taxable in the United States, into interest, which would not be. That explains that mechanism in the treaty.
The hon. Gentleman asked about article 12 about royalties. I was not convinced that I followed his point—and I apologise for that. I will have to look at the record before I answer it. I recognise the importance of royalties to business, but the most significant point is that there is no withholding tax on royalties. Royalties are taxed only in the country of residence of the recipient of the royalty. However, I am unsure whether that answers the hon. Gentleman's question, so I will look at the record and get back to him.
|©Parliamentary copyright 2002||Prepared 28 October 2002|