HOUSE OF COMMONS
Third Standing Committee on Statutory Instruments, &c.
DOUBLE TAXATION RELIEF (TAXES ON INCOME) (BELARUS) ORDER 1995
DOUBLE TAXATION RELIEF (TAXES ON INCOME) (BOLIVIA) ORDER 1995
Thursday 6 July 1995
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The Committee consisted of the following Members:
Chairman: Mr James Hill
Betts, Mr. Clive (Sheffield, Attercliffe)
Bowden, Sir Andrew (Brighton, Kemptown)
Bruce, Mr. Malcolm (Gordon)
Cann, Mr. Jamie (Ipswich)
Carttiss, Mr. Michael (Great Yarmouth)
Church, Ms Judith (Dagenham)
Cohen, Mr. Harry (Leyton)
Conway, Mr. Derek (Shrewsbury and Atcham)
Fenner, Dame Peggy (Medway)
Fowler, Sir Norman (Sutton Coldfield)
Hall, Mr. Mike (Warrington, South)
Hannam, Sir John (Exeter)
Hayes, Mr. Jerry (Harlow)
Jack, Mr. Michael (Financial Secretary to the Treasury)
Onslow, Sir Cranley (Woking)
Ottaway, Mr. Richard (Croydon, South)
Primarolo, Ms Dawn (Bristol, South)
Simpson, Mr. Alan (Nottingham, South)
Mr. P. A. Evans Committee Clerk2 3 Third Standing Committee on Statutory Instruments, &c. Thursday 6 July 1995
[MR. JAMES HILL in the Chair]
The Financial Secretary of the Treasury (Mr. Michael Jack): I beg to move, That the Committee has considered the Double Taxation Relief (Taxes on Income) (Belarus) Order 1995.
The Chairman: With this it will be convenient to consider to Double Taxation Relief (Taxes on Income) (Bolivia) Order 1995.
Mr. Jack: The basic ideas behind double taxation conventions are, I hope, supported by hon. Members on both sides of the Committee. I know that my predecessor has been through them before and I shall not repeat them now other than to emphasise that they aim to ease the flow of capital and investment across borders by eliminating the double taxation of income, profits and gains arising in one country and paid to residents of another country. Double taxation conventions thus help to integrate countries into the world trading system, which is in the interests of the United Kingdom and our treaty partners. The two orders deal with such conventions in the cases of Belarus and Bolivia. Belarus is an additional member of the former Soviet Union with which we have negotiated a double taxation convention in place of the United Kingdom/Union of Soviet Socialist Republics treaty. This is now the seventh such convention to come before the Committee concerning the former Soviet Union. Our aim in securing the new convention was to assist British business to take advantage of the opportunities of this important new market. Exports to Belarus are currently modest at £11 million, but there is great scope for British firms to take advantage of the potential growth in demand for goods and services as the Belarussian economy develops. The convention is modern and strikes a fair balance between the interests of the United Kingdom and the treaty partner, and I hope that it will be welcomed by all hon. Members. I deal now with the convention with Bolivia. Our trading relationship with Bolivia is expanding quickly—it grew by more than a quarter last year—and there are significant opportunities for trade, investment and invisible earnings, especially in the mining, oil, gas, and agriculture business sectors. 4 Boliva is a relatively small market for us: the United Kingdom accounts for around 3 per cent. of Bolivian imports, with exports totalling just over £10 million last year. However, signature of this convention is important for the further development of our already warm bilateral relations with Bolivia and as part of our efforts to develop a network of tax treaties in Latin America. This is the second comprehensive treaty, following that with Mexico, which we have concluded with a Latin American country. If there are any particular points which hon. Members wish to raise on either order, I will do my best to answer them now or by means of correspondence. I commend both orders to the Committee.
Ms Dawn Primarolo (Bristol, South): I welcome the hon. Member for Fylde (Mr. Jack) to his new post as Financial Secretary to the Treasury. Dealing with double taxation orders may be quieter than dealing with the fishing industry in Cornwall, but I am sure that some of his new responsibilities will cause as much controversy, even if they involve rather less flour and running than the hon. Gentleman's previous job. Today's Committee is a select band: what it lacks in numbers it makes up for in quality. I look forward to the Minister's participation in future debates. When I look up the Minister's parliamentary biography, I understood that he came from a horticulturalist background specialising in greenhouse gases. I do not know whether that background will be relevant in the Treasury, but I am sure that the coming debates on the Finance Bill, for instance, will enable us to find ways to make it relevant. I have said before in Committee that the Opposition welcome the expansion of the United Kingdom's treaty network. It is worth noting, however, that the United Kingdom has until recently had few treaties with south American countries. I have a series of questions on the treaty with Bolivia, and I should be happy for the Minister to write to me with his answers after the sitting. We would appreciate some clarification of those technical points, but I do not want to bounce the Financial Secretary into answers in Committee, and it would be acceptable for him to take some time to reflect on them. We have never had many treaties with south American countries because the tax system of many of them is based on taxation of local source income. That differs from the system in the United Kingdom and most countries of the Organisation for Economic Co-operation and Development, which is based on residence and taxation of world income. Will the Financial Secretary explain what advantages he expects to arise from making a general taxation agreement with countries that have such a source system? Under that system, residents are generally exempt from tax on foreign income and profits. Furthermore, the withholding tax rates under a treaty are higher than the usual domestic tax rates, which appears to be the case with the Bolivian treaty. That means that the treaty will reduce the tax revenue of the United Kingdom Exchequer, but 5 have little effect on that of the Bolivian Exchequer. That is not in keeping with the usual pattern for double taxation treaties. There is no benefit to United Kingdom residents, in contrast to the usual situation, in which a treaty generally reduces domestic withholding tax rates. Will the Financial Secretary explain the rather unusual and perhaps curious provision in article 8(4), which concerns the residence of certain shipping enterprises? At first sight, it looks as though the provision is circular. When effective management is situated on a ship, it may be deemed to be situated in the country of which the operator of the ship is a resident. Under article 4, however, the operator of the ship may be resident in the country in which effective management is situated. We are, therefore, going around in a circle and need some clarification. The treatment of tax avoidance in the Bolivian convention is inadequate because several provisions, which are commonly included in modern conventions and which are included in the Belarussian convention, are not in the Bolivian convention. Article 21 does not include provision for limiting the scope of the article in cases in which it is exploited by persons who have special relationships with each other or who create and assign rights to take advantage of that article. Such limitations are included in articles on interest and royalties, in article 21 of the Belarussian treaty and in several recent treaties that have already been agreed. Why has such a limitation been omitted from the Bolivian treaty? That treaty does not include articles on the limitation of relief and on partnerships, which are covered in articles 24 and 25 of the Belarussian treaty. Those articles are designed to avoid the exploitation of the treaty. When the Financial Secretary writes to me, will he explain why it is felt that the articles are unnecessary to the Bolivian trearty? Article 24(3) appears to contain two important errors, perhaps as a result of drafting. Should not articles 11(8) and 12(7) be included in the exceptions to the operation of article 24(3)? Similar provisions are included in other recent treaties, including the Belarussian treaty. Perhaps the Financial Secretary would explain that variation. Will he also explain the meaning of the statement in paragraph 1 of the exchange of notes? It states that the convention "shall not be opposed to the respective tax systems of the Contracting States and in particular to the Bolivian tax system based on source and to the United Kingdom tax system based on residence and worldwide income." Will the Financial Secretary confirm that the convention will, in all respects, have its usual effect of modifying the operation of domestic law to the extent that is stated in the provisions of the convention; that is, that the exchange of notes will not in this respect modify what would otherwise be the effect and purpose of the convention? Finally, with regard to the Belarus treaty and in the context of the convention, will the Financial Secretary explain the purpose of the provision in 11(3)(c), which appears to exempt from tax in the country of source interest arising on certain sales on credit? That is not 6 commonly found in treaties and we should be grateful for an explanation of why it is necessary in this case. I am grateful to members of the Committee for allowing me to put those questions to the Minister. As I have already said, a written reply will be acceptable.
Mr. Harry Cohen (Leyton): I shall make a brief contribution, and I add my congratulations to the Minister on his new post. I do not want to dispute the orders, which I hope will benefit British, Belarussia and Bolivian business without profiting Moscow and Colombian gangsters in the process. Perhaps the Minister will pass that comment on to the Foreign Office, which can write to me in due course. In my travels with the North Atlantic Assembly I meet representatives of different countries, including those from Belarus. I understand that their recent election resulted in a mess because of the system that they adopted. People who were elected as Members to their Parliament were meant to win 50 per cent. of the vote, but because it was a multiparty system, the majority did not achieve 50 per cent. That resulted in a chaotic Parliament, which does not benefit anybody, including those in business. The Belarussians need to develop their democracy and to put it on a stable footing. Just from looking at the Chair and the Clerk I know that we in this country have much constitutional expertise which could help the Belarussians. We could at least offer to help them to improve their constitution. Will the Minister put that to the Foreign Office and arrange for a response?
Mr. Jack: I will respond briefly to one or two of the points made by the hon. Member for Bristol, South (Ms Primarolo). I thank her sincerely for her kindness in offering me the chance to go into more detail by means of correspondence. I thank her, too, for her very kind words of welcome. One of the strange things about being the Minister of State at the Ministry of Agriculture, Fisheries and Food yesterday and today being Financial Secretary at the Treasury is the way in which the seamless web of government works. The waters close in one sense, but open in another. I look forward to our debates. It is right that the Government are probed on their economic policy, which is central to so much of what we do. The hon. Lady compared and contrasted the two treaties in several regards. As she knows, the treaties have to be designed to deal with differing local circumstances and we prefer to work on the basis of the so-called OECD model. It is profitable to compare and contrast the treaties, which are largely derived from that source, but there are important differences between them. I would like to discuss that further. 7 The hon. Lady initially raised a specific point about withholding taxes. The negotiated rates represent the maxima of what can be charged because the treaty overrides domestic law. Although we would have preferred lower ones, the rates are in line with those that Bolivia has agreed in other recent treaty negotiations. If Bolivia subsequently agrees lower rates in any tax treaty with an OECD member, those rates will also apply to that convention. The hon. Lady drew my attention to what seemed to be a circular discussion on shipping and associated air transport; I draw her attention to the helpful notes which were available to members of the Committee. The relevant article in the Bolivian treaty follows the OECD model and provides that profits derived by a resident of a contracting state from the operation of ships and aircraft in international traffic will be taxable only in the country in which the place of effective management of the operator is situated. If that does not entirely answer the hon. Lady's question, I am happy to elaborate on it. The other matters that she raised were, as she said, technical and I will write to her more fully about them.8
Question put and agreed to.
Resolved, That the Committee has considered the Double Taxation Relief (Taxes on Income) (Belarus) Order 1995
Resolved, That the Committee has considered the Double Taxation Relief (Taxes on Income) (Bolivia) Order 1995—[Mr. Jack]
Committee rose at thirteen minutes to Eleven o'clock.
THE FOLLOWING MEMBERS ATTENDED THE COMMITTEE:
Hill, Mr. James (Chairman)
Bowden, Sir A.
Fenner, Dame P.
Fowler, Sir N.
Onslow, Sir C.