Double taxation arrangements specified by Order in Council

Part of 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 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?