Double taxation arrangements specified by Order in Council

Finance (No. 2) Bill – in a Public Bill Committee am 9:25 am ar 16 Ionawr 2018.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury) 9:25, 16 Ionawr 2018

I beg to move amendment 54, in clause 32, page 23, line 37, at end insert—

“(2A) After section 6 of TIOPA 2010 (the effect given by section 2 to double taxation arrangements), insert—

“6A Review of changes made by section 32 of Finance Act 2018

(1) Within twelve months of the passing of the Finance Act 2018, the Chancellor of the Exchequer must review the effects of the changes made by section 32 of that Act on the operation of double taxation arrangements.

(2) The review under this section must consider in particular—

(a) the extent to which those changes facilitate UK law giving effect to the Multilateral Instrument in a way which coheres with the principles of Policy Coherence for Development;

(b) the extent to which those changes facilitate UK law giving effect to the Multilateral Instrument in a way which coheres with the UN Model Tax Treaty;

(c) the effect of those changes on the number of disputes decided by arbitration;

(d) the counterparties in each such case;

(e) the outcome in each such case; and

(f) the effects of those changes on the public revenue of the United Kingdom.

(3) The Chancellor of the Exchequer must lay before the House of Commons the report of the review under this section as soon as practicable after its completion.

(4) In this section—

“the Multilateral Instrument” means the Multilateral Treaty to Implement Tax Treaty related Measures to Prevent Base Erosion and Profit Shifting;

“the principles of Policy Coherence and Development” are to be interpreted in the light of relevant publications of the Organisation of Economic and Development Cooperation and of the 2011 Busan Partnership for Effective Development Cooperation, the UN Millennium Declaration and the 2010 UN Millennium Development Goals Summit; and

“the UN Model Tax Treaty” means the United Nations Model Double Taxation Convention between Developed and Developing Countries published in 2011.””

With this it will be convenient to discuss the following:

Amendment 55, in clause 32, page 24, line 3, leave out subsection (4).

This amendment removes the retrospective effect of the foregoing provisions of Clause 32.

Clause 32 stand part.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

This is about the arrangements for the incorporation of the multilateral instrument, if I am correct.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I am looking forward to more detailed explanations on this part of the Bill, because they are enormously important. Our amendment 54 requests a review of the operation of the provisions enabling the MLI’s implementation in the UK, and especially of the extent to which it promotes the principles of policy coherence for development, and the outcomes that would have been produced had the UN’s model tax treaty been used instead.

The MLI is, in many ways, a milestone for international tax law. Rather than being an amending protocol of the type we might have seen before in wholesale changes to international treaties, the MLI provides an instrument to swiftly and consistently implement a range of standards in taxation in existing treaties. It also provides the means, through the OECD, of monitoring its implementation—and, potentially, mechanisms for the future adaptations of treaties; it is important that we consider those, and I will come back to them.

Given that those bodies looking to engage in “treaty shopping” and their advisers are often highly sophisticated international actors that will readily search out new loopholes, the design of the MLI, which makes possible future alterations and provisions to deal with new tax challenges, is surely to be welcomed. I understand that the UK was one of the first 26 signatories to the MLI. There are now 69—more have probably signed since I looked that up. I understand that a UK Treasury official chaired the OECD working group that determined many of its provisions.

The MLI includes six articles to address treaty abuse. Many of them are already in accordance with the UK’s approach to international tax matters. One element of the MLI that seems particularly propitious is the principal purposes test,

“a subjective test based on an assessment of the intentions behind a transaction or arrangement”,

intended to rule out the obtaining of any benefits from a treaty if those benefits are not in accordance with the object and purpose of that treaty. That amounts to a general power, which could be useful for many countries encountering abuse.

In that connection, however, it is surely necessary for tax authorities to be sufficiently staffed, both overall and in terms of expertise, to make any accusation under these powers stick in court, not least if that court is a private international one, which the UK appears to have committed itself to by accepting multilateral binding arbitration. It would be helpful to hear from the Minister whether he feels that Her Majesty’s Revenue and Customs and the Treasury possess sufficient staff with sufficient knowledge of and expertise on international arbitration for our country to be able to defend its interests adequately, should the need arise. As well as measures concerning treaty abuse, the MLI also introduces uniform approaches —or rather, approaches that should be uniform in their outcomes, if not in specific details—to dispute resolution, permanent establishment and hybrid mismatches.

While in many respects there are very positive elements of the MLI, other elements might raise concerns. I will focus the rest of my remarks on those, and will be interested to hear the Minister’s response. First, the UK appears, in its adoption of the MLI, to have ruled in using mandatory binding arbitration where mutual agreement procedures have failed to produce an acceptable outcome within two to three years. Following the discussion last week of the use of mandatory binding arbitration in the UK’s new tax treaty with Lesotho, it was interesting to find, when I was reading the UK’s MLI position paper last night, that we already have mandatory binding arbitration in 18 of our tax treaties, including those concluded with Algeria, Armenia, Albania, Kosovo and Tajikistan, as well as a number concluded with higher-income countries. The UK appears to apply the principle already in relation to developing countries, but it strikes me that we have not had much discussion of that in the House.

Mandatory binding arbitration involves both parties to a dispute agreeing to have it dealt with not through normal judicial mechanisms, but through arbiters who possess some kind of expertise—in this case, expertise in international tax matters. There are considerable problems with that approach for developing countries. I think that that is one reason why developing countries in the UN have rejected the approach. Many of those countries lack the resources necessary for adequate representations to be made to an expert arbiter.

There are also, of course, significant issues in relation to transparency. Concerns about the use of investor-state dispute resolution—a form of binding arbitration—were raised repeatedly during discussions about the Transatlantic Trade and Investment Partnership, the EU-US trade treaty, much of the time because of worries that that would enable disputes to be resolved privately, without appropriate democratic oversight. Is another version of that potentially being hard-wired into our processes because of the incorporation of the MLI?

The second worry about the UK’s incorporation of the MLI relates to the fact that, overall, the OECD approach to tax treaties has traditionally been less favourable than the UN approach, most would argue, when it comes to developing countries. I would underline the points that I attempted to make in the discussion last week about the tax treaty with Lesotho. As a nation, we are, rightly, providing development aid to many countries. If we then facilitate a situation in which British businesses, which may or may not be very well run—this is independent of the character of those businesses—are able to accrue profits back to the UK without those profits being adequately taxed, surely we are just giving via Peter what we are taking away via Paul.

There are, therefore, concerns about whether, in our approach to tax treaties, we have been following the right trajectory when it comes to developing countries. In some respects, we have followed the UN model, but with the new incorporation of the MLI, we will be hard-wiring in the OECD approach, so I wanted to ask a few questions, just comparing the UN model with the OECD one. That is exactly what we ask for in our request for a review: we ask for the OECD approach to be contrasted with the UN one.

The UN model convention generally favours greater retention of so-called source country taxing rights under a tax treaty—the taxation rights of the host country of investment—as compared with those of the residence country of the investor. In that connection, we need to know whether, from the Government’s point of view, the OECD’s MLI incorporates or, on the contrary, avoids the problems that seem to beset the OECD model tax treaty when compared with the UN model treaty.

For example, when it comes to permanent establishment, the UN approach seems more favourable to those nations where an international actor has a temporary activity, which would of course tend to be the case for the developing country when it comes to treaties concluded between a developing and an industrialised country. We could talk about building sites, for example. The OECD model treaty requires building sites to have been present for more than a year, whereas the UN permits that for just over six months, so obviously the UN approach is more restrictive, in the interests of developing countries. The UN model also covers the provision of services and stocks of goods or merchandise and is less permissive when it comes to contracted agents—brokers and so on—who might be coming from a developed country and working in a developing country.

The UN model treaty is also much more restrictive against profit shifting, from what I can see. It states that the deduction of expenses is allowed for tax purposes, but continues:

“However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment.”

When it comes to mandatory binding arbitration—this is an issue that I will focus on—the UN model treaty offers alternatives based on different approaches to implementing the OECD approach to mandatory binding arbitration, or retaining just the mutual agreement procedure, which was of course first set out by the UN treaty itself.

A number of additional questions require answers, if possible. First, will the Minister inform the Committee about any discussions that the Treasury, or other Government bodies, have had with our Crown dependencies and overseas territories about signing up to the MLI? I note that Guernsey and the Isle of Man were signatories as of December 2017, but other CDs and OTs were not. I know that there is a regular dialogue about tax issues with those jurisdictions, so it would be helpful to know whether they are likely to sign up to the MLI.

I was a bit confused about why Saudi Arabia seems to be mentioned in the UK’s position paper for the MLI. The UK had to submit a position paper detailing the extent to which it is resisting tax treaties with MLI-signing countries, and the extent to which those would have to be changed. Saudi Arabia cropped up, but I do not know whether it is a signatory, so perhaps that could be clarified. That is obviously very significant, given the amount of two-way economic interaction between our countries.

I have some final questions about the relationship between the incorporation of the MLI, and our general debates and discussions on concluding double taxation treaties. As I said, the MLI could be amended in future to take into account new, potentially devious attempts to get around international tax loopholes, which is surely one of its strengths. This is my fault, but I have not been able to find out whether there was an appropriate parliamentary discussion when the UK first signed up to this agreement. However, if there are to be future changes to the MLI, I wonder whether a proper discussion on that will be held in the House. The almost automaticity of the instrument is one of its strengths, but that must be accompanied by appropriate parliamentary scrutiny. Can we have a commitment to ensure a proper discussion on that?

I am also interested in the interaction between this MLI and the tax treaty that we were due to discuss on relations between the UK and Kyrgyzstan. We did not have that debate on Monday as initially scheduled, but the treaty does not include the anti-abuse provisions that are promoted by the MLI if both parties list it as a covered agreement—I assume we will have done that because we seem to have listed all our double taxation treaties as covered agreements within the position paper submitted to the MLI process. We also seem to have differences on the use of mandatory binding arbitration, and it would be helpful to understand the Government’s view on that, particularly with developing countries. How does the incorporation of the MLI relate to those issues?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 9:45, 16 Ionawr 2018

Clause 32 makes changes to ensure that full effect can be given to the multilateral convention to implement tax treaty-related measures to prevent base erosion and profit shifting, and the UK signed the MLI on 7 June 2017. Double taxation agreements are bilateral agreements between the UK and other countries that aim to ensure that profits income and gains are taxed only once. They help to develop the UK’s economic relationships with other countries, and other countries’ economic relationship with the United Kingdom. DTAs provide certainty for businesses operating across borders, and enhance co-operation in tax matters, supporting the growth of a more global economy.

The OECD/G20 base erosion and profit shifting project—BEPS—recommended a number of changes to DTAs. Those included minimum standards on preventing tax avoidance through the abuse of tax treaties, and improving the resolution of tax disputes. To enable those important improvements to DTAs to be made as soon as possible, more than 100 jurisdictions, in a group chaired by the United Kingdom, drew up the multilateral instrument. The group adopted the text of the MLI in November 2016. It has now been signed—to update the hon. Member for Oxford East—by more than 70 countries, which is the latest information I have.

To implement improvements to the UK DTAs, the MLI must be given effect in our domestic law. This measure ensures that the existing powers for giving effect to DTAs in UK law, which have previously been used only to give effect to bilateral arrangements, can also be used to give full effect to the MLI.

The hon. Lady made a very sensible point about parliamentary scrutiny of the MLI. The measure simply ensures that we have the appropriate powers to bring the MLI into force in UK law. However, that would be by a draft affirmative statutory instrument. After the Bill has become an Act, Parliament will have time to scrutinise the MLI.

The existing powers give effect to arrangements made with foreign territories with a view to affording relief from double taxation. Concerns have been raised in some quarters that an agreement that operates primarily to restrict relief is not made with a view to affording relief from double taxation. Doubts have also been expressed about whether the existing power is sufficiently clear that agreements can delegate functions to the public authorities of the territories.

The Government are not persuaded by these concerns but wish to put the matter beyond doubt. The clause ensures that the improvements made by the MLI can, subject to the views of Parliament, be implemented quickly and with certainty. The changes made by clause 32 will clarify that the existing power for giving effect to international tax agreements covers any arrangements modifying the effect of existing arrangements. It also clarifies that the provisions of arrangements can delegate functions to public authorities and signatories—HMRC in the case of the United Kingdom.

Turning to the two Opposition amendments, I reiterate that the changes made by clause 32 merely clarify the existing power for giving effect to international tax agreements, thereby ensuring that Parliament can, if it chooses, give full effect to the MLI—an objective that I hope Opposition Members will join me in supporting. The Government’s intention is to lay the draft Order in Council to which the MLI will be scheduled as soon as possible, but clearly after the passage of the Bill, at which point Members will have the opportunity to debate the MLI in full, as I have said.

None the less, I will take this opportunity to respond to some of the specific points raised by the hon. Member for Oxford East. First, on the suggestion that the multilateral instrument should be given effect in a way that complies with the principles of policy coherence and the UN model treaty, the text of the MLI has already been negotiated and agreed with more than 100 countries, including a significant number of developing countries, which were able to input into its development. It is therefore not possible for the Government to make changes unilaterally—an approach that some might have been suggesting.

However, it is true that the text contains certain options and permits states to make reservations against certain provisions. Following consultation with business and NGOs, the Government propose to use this flexibility to adopt all the provisions contained in the MLI that were deemed by those negotiating the text to be particularly important for preventing base erosion and profit shifting—the minimum standards. This includes provisions combating the abuse of tax treaties. We believe that this approach of bearing down on international tax avoidance will help global economic development for both the United Kingdom and developing countries, in line with the principles of policy coherence.

Secondly, to respond to the hon. Lady’s concern about the Government’s proposal to adopt the mandatory binding arbitration provision for resolving double tax disputes contained in the MLI, the Government believe that arbitration is important for ensuring that double tax disputes are resolved. Mandatory arbitration benefits tax authorities and taxpayers alike by creating greater tax certainty and preventing double taxation. This is beneficial for all cross-border transactions. However, it should be noted that the MLI will amend the UK’s bilateral DTAs to include arbitration only where our treaty partners have also chosen to adopt the arbitration provision—an important point in the context of the hon. Lady’s remarks. There can be no suggestion that any country has been forced into its adoption.

Thirdly, in response to the request for a costing, given a process by which the multilateral instrument will come into effect at different times in different states, it would be very difficult to quantify the effects of changes in public revenue that arise from the implementation of the MLI more generally. It is very difficult to provide sensible estimates of the revenue effects of our tax treaties. Concluding a tax treaty is not a zero-sum game, and possible short-term revenue effects are augmented and balanced in the longer term by increased activities, as companies and others respond to the more favourable business climate that tax treaties provide. However, those effects are hard to quantify and successive Governments have never attempted that. Finally, retrospective effect is necessary to ensure that the provision does not create uncertainty in relation to pre-existing international agreements.

With regard to whether HMRC is sufficiently resourced and has appropriate staff to be on top of international arbitration issues, let me make two points. One is the exemplary record that HMRC generally has in this area. We often talk about the £160 billion that has been brought in or protected by clamping down on avoidance, evasion and non-compliance since 2010, and the additional resources provided to HMRC, including £170 million in the most recent Budget, to ensure that it is on top of such issues. My second point is on international arbitration. What we are looking at with the MLI is an extension of that approach rather than a fresh introduction. HMRC would not have to gear up for something completely new; it would be a matter of extending the occasions on which international arbitration was entered into.

The hon. Lady also asked whether HMRC or the Treasury had had discussions with the Crown dependencies and overseas territories. I will be happy to look into that and let her know what I discover. I imagine that such discussions would have been held. We have very close relationships with the Crown dependencies and overseas territories. The hon. Lady mentioned the case of Saudi Arabia, which had appeared in the position paper. She asked whether they had finally become a signatory to the MLI. I do not immediately know the answer but I will again revert to her, not only with an answer to her specific question but with some of the background, explaining, if they do not appear, why they have not done so.

I think most other points were covered in my earlier remarks. On that basis, I hope that we can agree to the clause standing part of the Bill.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury) 10:00, 16 Ionawr 2018

I am grateful to the Minister for those enormously helpful clarifications. I was particularly pleased to hear his commitment to ensuring that the draft affirmative statutory instrument will be tabled in the House and that we will have a proper chance to debate it. As part of that discussion, I would urge him to ensure that additional information is provided on the Government’s reasoning around adopting a number of the provisions that are within the OECD but not the UN approach.

I fully accept that the OECD approach is supported by a large number of countries; that is absolutely right. None the less, as the Minister himself stated, there are then choices to be made by signatories to the MLI about how to interpret different elements. Those choices can make that approach either more like the UN’s or more like traditionally the OECD’s.

As the Minister said, mandatory binding arbitration is an approach that countries can decide to adopt or otherwise. It was positive to hear that that will be adopted only when both countries, as signatories to a double tax treaty, wish to adopt it. I am interested to know, first, on what basis we have already chosen to adopt mandatory binding arbitration or otherwise. I would again point to the inconsistency between the tax treaty agreed last week on Lesotho, and that which was proposed, albeit not yet discussed, around Kyrgyzstan, which seem to have very different approaches to mandatory binding arbitration. Why is there that difference?

Secondly, it would be helpful for us to assess the claim that mandatory binding arbitration promotes certainty and the ability to tax appropriately for all countries if we saw what some of the outcomes from existing cases subject to mandatory binding arbitration have been, particularly for our country’s ability to retain the revenue that is its due. I have not yet seen that kind of consolidated examination of outcomes from mandatory binding arbitration, and it would be very useful for us to have that in relation to our country and the impacts on our ability to collect revenue, and for developing countries as well. We need that before we can assess whether we want to adopt this in a more wholesale manner. The Minister is absolutely correct to say that we already have it in operation—I mentioned that before—but we need to have more detail.

One final point—I am sorry, but I managed to miss this in my previous remarks—is that it would be helpful for us to understand what transatlantic discussions the UK has been having with the US around the adoption of the MLI. It has not yet adopted the MLI and, sadly, some elements within the US have resisted the OECD’s action in this area—a lot of the time for totally unnecessary, politicised reasons—but it would be useful to know whether the US is likely to adopt this approach. That is because when we talk about double taxation, much of the time we will be talking about multinational companies that have the US as their host country or source country, and when those companies then conduct operations in the UK we need to be able to know that we can protect revenue from them.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

On the hon. Lady’s point around the different models—the OECD and the UN models—a number of countries have signed up to the MLI, and implicit in those discussions will be the kinds of issues that she has touched on, but it might be of interest to her that the Government do expect the UN to update them on the treaty in the light of what has been agreed within the MLI, which clearly we will be keeping a close eye on.

I said earlier that I did not have an answer to the hon. Lady’s specific question, but I now do—through a form of divine inspiration known as the officials of Her Majesty’s Treasury. Saudi Arabia is indeed not a signatory to the MLI initiative, but we hope that it will be signing in future, at which point we would intend that our treaty be amended accordingly to accommodate that.

On the hon. Lady’s point about mandatory binding arbitration, one of the points that I should have made earlier is in the context of how fair or otherwise this is on the countries with which we enter into those particular arrangements. Once arbitration is entered into, two arbitrators are appointed—one by each country—so this is not a stacked jury in any sense, and it will be for them, impartially and properly, through the normal processes, to come to their conclusions.

The issue of transparency and the disclosure of the outcomes of arbitrations really falls within the area of tax confidentiality. Inevitably, within those arrangements where companies, and indeed eventually individuals, are involved, it is important that we maintain the rigorous tradition that we have in our country of complete impartiality when it comes to HMRC, our tax affairs, investigations, arbitrations and so on.

The hon. Lady asked specific questions about US policy, which is probably a stretch too far for me to reach on this occasion, but if she has specific questions that relate to UK Treasury interaction with the US as an overseas tax authority, I would be happy to consider any representations that she would like to make.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I am grateful to the Minister for those clarifications. He rightly said that it is very important that HMRC conducts its affairs in a manner that is impartial between taxpayers and that is fair. That is absolutely right. However, we are surely not talking about anything that would threaten that impartiality when we talk about more transparency; we are not talking about the decisions themselves being altered, but rather the transparency around decisions that are taken. That would not affect the process leading up to those decisions being taken.

If there were concerns about this somehow negatively affecting taxpayers, I am sure that there could be some way of anonymising the results from different arbitration situations. However, I genuinely think it would be helpful for us, whatever side of the House we are on, to see more information about the use of that mechanism, because it can make a significant difference for taxpayers and, indeed, for our revenue.

Finally, on the difference between OECD and UN processes, it is absolutely right that some developing countries were involved in the OECD’s development of its approach. However, they were only observers—as we know, the OECD is a club of generally rich countries. Those developing country members were consultees, not full members. I look forward to seeing exactly that development of the UN model in the light of the OECD’s approach. Developing countries have full status in UN discussions, which they lack within the OECD process.

Question put, That the amendment be made.

The Committee divided:

Ayes 9, Noes 10.

Rhif adran 6 Caledonian Pinewood Forest — Double taxation arrangements specified by Order in Council

Ie: 9 MPs

Na: 10 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Clause 32 ordered to stand part of the Bill.

Clause 34 ordered to stand part of the Bill.

Clause 35