HOUSE OF COMMONS
First Standing Committee on Statutory Instruments, &c.
DRAFT DOUBLE TAXATION RELIEF (TAXES ON INCOME) (BULGARIA) ORDER 1987,
THE DRAFT DOUBLE TAXATION RELIEF (TAXES ON INCOME) (FRANCE) (No. 2) ORDER 1987,
THE DRAFT DOUBLE TAXATION RELIEF (TAXES ON INCOME) (NIGERIA) ORDER 1987,
THE DRAFT DOUBLE TAXATION RELIEF (TAXES ON INCOME) (PAKISTAN) ORDER 1987,
THE DRAFT DOUBLE TAXATION RELIEF (TAXES ON INCOME) (BELGIUM) ORDER 1987 AND
THE DRAFT DOUBLE TAXATION RELIEF (TAXES ON INCOME) (MALAYSIA) ORDER 1987
Tuesday 24 November 1987
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The Committee consisted of the following Members:
(Chairman: MR. GERAINT HOWELLS)
BEITH, MR. A. J. (Berwick-upon-Tweed)
Blaker, Sir Peter (Blackpool, South)
Brown, Mr. Nicholas (Newcastle upon Tyne, East)
Callaghan, Mr. Jim (Heywood and Middleton)
Cunliffe, Mr. Lawrence (Leigh)
Flannery, Mr. Martin (Sheffield, Hillsborough)
Janner, Mr. Greville (Leicester, West)
Kirkhope, Mr. Timothy (Leeds, North-East)
Lamont, Mr. Norman (Financial Secretary to the Treasury)
Leighton, Mr. Ron (Newham, North-East)
MacKay, Mr. Andrew (Berkshire, East)
Maclean, Mr. David (Penrith and The Border)
Maples, Mr. John (Lewisham, West)
Marlow, Mr. Tony (Northampton, North)
Raison, Mr. Timothy (Aylesbury)
Ridsdale, Sir Julian (Harwich)
Speed, Mr. Keith (Ashford)
Stanbrook, Mr. Ivor (Orpington)
Mr. D. R. Lloyd, Committee Clerk2 3 First Standing Committee on Statutory Instruments, &c. Tuesday 24 November 1987
[MR. GERAINT HOWELLS in the Chair]
The Financial Secretary to the Treasury (Mr. Norman Lamont): I beg to move, That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Bulgaria) Order 1987.
The Chairman: With this, I suggest that it will be convenient to discuss the draft Double Taxation Relief (Taxes on Income) (France) (No. 2) Order 1987, the draft Double Taxation Relief (Taxes on Income) (Nigeria) Order 1987, the draft Double Taxation Relief (Taxes on Income) (Pakistan) Order 1987, the draft Double Taxation Relief (Taxes on Income) (Belgium) Order 1987 and the draft Double Taxation Relief (Taxes on Income) (Malaysia) Order 1987.
Mr. Lamont: It is a pleasure to be on this Committee under your Chairmanship, Mr. Howells. We hope that it will not be too arduous. Thank you for suggesting that the six motions be considered together. In the past, the normal procedure has been for an outline to be given on the main purpose of the orders, together with one or two of the main provisions. I propose to follow the same practice. The United Kingdom has a very extensive network of bilateral double taxation treaties. Their purpose is to give relief from the burden of international double taxation which would otherwise result when income arises in one country, flows to another and is taxed in both. Broadly speaking, and depending upon the nature of the income and the laws of the countries concerned, relief is usually provided by the country in which the income arises reducing its rates of tax and in some cases giving up the right to tax altogether. In addition, where income remains taxable in both countries, the country in which the recipient is resident will give credit against its tax on that income in respect of the tax paid in the country of source, or will give relief from double taxation by exempting that income from tax in the country of residence. The United Kingdom's double taxation agreements follow, as a general rule, the principles laid down in the OECD model convention but, of course, it is necessary to tailor these to the circumstances of the partner country's tax system, and, where appropriate, to take account of the special needs of less developed countries. 4 By laying down rules for the taxation of income flowing between the two countries, and fixing maximum rates of tax which may be applied by the country of source to certain categories of income—rates which will remain unaffected by any subsequent increase in domestic tax rates in either country—these conventions help to create a stable fiscal framework within which mutually beneficial international trade and investment can develop. I now turn to the orders, starting first with those concerned with new agreements. The order relating to Nigeria contains the text of a new comprehensive agreement which replaces the old 1947 double taxation agreement terminated by Nigeria in 1978. The new agreement is broadly based on the OECD model, although there are some concessions which are consistent with similar provisions which we have made in other double taxation agreements with developing countries. The agreement provides that dividends may be taxed in the country of source at a rate of 15 per cent. for portfolio investment, and at 124 per cent. where the recipient of the dividend is a company controlling at least 10 per cent. of the voting power in the company paying the dividends. Generally speaking, interest and royalties flowing between the two countries will be taxed at 12½ per cent. Technical fees derived from Nigeria remain exempt from Nigerian tax, unless they are attributable to a permanent establishment or fixed base which the United Kingdom resident maintains in Nigeria. The agreement also contains provisions for relief from United Kingdom tax in respect of tax "spared"—which means tax given up—in Nigeria under special relief provisions and exemptions designed to permit development in that country. These "matching credit" provisions are a common feature of our tax agreements with less developed countries. The schedule to the order relating to Pakistan contains a new comprehensive convention with Pakistan replacing the old agreement dating from 1961, which had become very outdated in the light of developments in the domestic legislation of both countries. The convention generally follows the principles of the OECD model, but, once again, a number of concessions have been made, reflecting Pakistan's status as a less developed country. The convention provides that dividends paid by a Pakistani company to United Kingdom individuals will be taxed in Pakistan at a rate of 20½ per cent. Dividends paid to United Kingdom companies will be subject to a Pakistan withholding tax of 15 per cent., or 10 per cent. where the Pakistan company is engaged in certain enterprises and the United Kingdom company controls a specific proportion of the voting power of that Pakistan company. Interest flowing between the two countries will be taxed at 15 per cent., while royalties and technical fees will be taxed at 12½ per cent. The convention also contains provisions for relief from United Kingdom tax in respect of tax "spared" in Pakistan. The order relating to Belgium contains the text of a new comprehensive convention with Belgium replacing the old convention signed in 1967. It takes 5 into account the United Kingdom's imputation system of company taxation, introduces provisions for offshore activities, and generally incorporates changes in line with the current OECD model. The convention provides for a reduction in the present level of Belgian withholding tax of 15 per cent. on dividends paid to United Kingdom residents. The new rates will be 5 per cent. for a direct investor—that is where the United Kingdom company controls at least 25 per cent. of the voting power of the Belgian company paying the dividend—and 10 per cent. for a portfolio investor. In the case of dividends paid by United Kingdom resident companies to Belgian investors, the direct investor—that is the Belgian company controlling at least 10 per cent. of the voting power of the dividend paying company in the United Kingdom—will be entitled to half the United Kingdom tax credit less tax at 5 per cent. on the aggregate of the dividend and the half tax credit: the portfolio investor will be entitled to the full tax credit less tax at 20 per cent. The other major change is that branches of United Kingdom companies operating in Belgium will no longer be subject to a higher rate of corporate tax: they will pay the normal rate applicable to Belgian companies. The order relating to Bulgaria contains a comprehensive convention with Bulgaria, the first such treaty that we have concluded with that country. In broad terms it follows the provisions of the OECD model but, following the precedent set by the Soviet Union in its agreement with us, does not contain the usual associated enterprises article used to combat transfer pricing avoidance arrangements. The Bulgarians consider this unnecessary given the position of their state-controlled enterprises. The rate of withholding tax which may be charged on dividends in the source country is limited to 10 per cent. In respect of interest and royalties no tax may be charged in the source country. These are favourable rates from the United Kingdom viewpoint. The convention also contains provisions for relief from United Kingdom tax in respect of tax "spared" in Bulgaria under its joint venture legislation. I now turn to the orders embodying protocols amending the existing double taxation agreements. The schedule to the order relating to Malaysia contains the text of a protocol which amends the existing double taxation agreement with Malaysia. The protocol contains two main articles dealing with technical fees and independent personal services. Technical fees flowing between the two countries will be taxed at a maximum rate of 10 per cent. in the country of source while income from professional services provided by temporary business visitors is, subject to certain conditions, to be taxed only in the taxpayer's country of residence. The protocol also contains provisions for relief from United Kingdom tax in respect of tax "spared" in Malaysia. Finally, I deal with the schedule to the order relating to France which contains the text of a protocol to the present comprehensive convention making a number of changes which both countries now seek to include generally in their double taxation agreements. The protocol adopts the criterion of "beneficial ownership" found in the OECD model which we now 6 use in most of our tax treaties, and it also provides that interest paid by a resident of one country to a resident of the other country will be taxable only in the country of the recipient. Another significant change for United Kingdom businesses operating in France is the removal of the special tax charged on the French branches of United Kingdom companies. It also includes an article dealing specifically with the taxation consequences of the Channel link, thereby giving effect to the tax treatment of the concessionaires which was agreed and set out in the concession agreement between the United Kingdom and French Governments and the concessionaires. I believe that the provisions of these six orders are fair and balanced as between the interests of the United Kingdom and our treaty partners and I can therefore commend them to the Committee for approval.
Mr. Nicholas Brown (Newcastle upon Tyne, East): I do not want to detain the Committee for long. I wish only to raise one point with the Minister concerning the order relating to France. Will he confirm that the provision in the order relating to the Channel link does not include any element of concealed public subsidy?
Mr. Norman Lamont: I confirm that. The agreement places the joint operators of the tunnel on the same taxation footing as shipping and other forms of transport.
Mr. A. J. Beith (Berwick-upon-Tweed): I cannot forgo the opportunity of addressing a Committee of which you are the Chairman for the first time, Mr. Howells. We welcome the orders. We are fascinated by the possibilities that are opened up by a change in eastern Europe whereby the transfer of pricing becomes so serious a problem that we shall all return with a fresh set of orders designed to deal with it. However, we see no reason to query in any way the valuable provisions that the orders constitute.
Mr. Keith Speed (Ashford): I welcome particularly article 7A of the French agreement, both as constituency Member for Ashford, which stands to gain substantially from the Channel link, and also as one of the joint chairmen of the all-party Channel tunnel group.
Mr. Norman Lamont: I am grateful to my honourable friend the Member for Ashford (Mr. Speed) and to the honourable Member for Berwick-upon-Tweed (Mr. Beith).
Question put and agreed to.
Resolved, That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Bulgaria) Order 1987.
Resolved, That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (France) (No. 2) Order 1987.—[Mr. Norman Lamont.]
Resolved, That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Nigeria) Order 1987.—[Mr. Norman Lamont.
Resolved, That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Pakistan) Order 1987.—[Mr. Norman Lamont.]
Resolved, That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Belgium) Order 1987.—[Mr. Norman Lamont.]
Resolved, That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Malaysia) Order 1987.—[Mr. Norman Lamont.]
Committee rose at nineteen minutes to Eleven o'clock.
THE FOLLOWING MEMBERS ATTENDED THE COMMITTEE:
Howells, Mr. Geraint (Chairman)
Blaker, Sir Peter
Brown, Mr. Nicholas
Lamont, Mr. Norman
MacKay, Mr. Andrew
Ridsdale, Sir Julian