Draft Double Taxation Relief and International Tax Enforcement (Israel) Order 2019 Draft Double Taxation Relief (Cyprus) Order 2019

Anneliese Dodds Excerpts

Tuesday 18th June 2019 General Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve in this Committee with you in the Chair, Mr Hosie. I am grateful to the Minister for his opening remarks, and congratulate him on joining the Treasury team. I am sure this will be one of many double taxation agreements that we discuss. I hope he enjoys debating each one just as much as he has enjoyed debating these.

As the Minister has outlined, the Double Taxation Relief (Cyprus) Order 2019 amends the entry into force provisions of the 2018 DTA so that a person in receipt of a Government service pension can elect to continue to be taxed in accordance with the provisions of the previous 1974 DTA for a period of up to five years. As was mentioned by the Minister, this has been introduced in response to concerns raised by the Opposition and other members of the Committee when it met previously about the new regime’s potential impact on British servicemen and women who live in Cyprus and others. I am pleased that the Government listened and that they sought to introduce a transition period in the light of these concerns.

In relation to the Double Taxation Relief and International Tax Enforcement (Israel) Order 2019, I am pleased to see that the DTA is being updated. It is encouraging to see the UK broadly following the OECD model and adopting the base erosion and profit-shifting compliant principal purpose test. None the less, there are a couple of issues: taxation of royalties and the principal purpose test.

As many Members know, aggressive tax avoidance schemes have been developed by multinational companies, often using loopholes in the international taxation of royalties. By artificially locating the legal ownership of their intellectual property in avoidance-facilitating jurisdictions such as the Netherlands and Luxembourg, a multinational can avoid UK tax on UK royalties. These royalties are within the scope of UK income tax but UK DTAs with those jurisdictions create exemptions meaning only the avoidance-facilitating country may tax them. At my estimate, almost a third of our tax treaties currently create an exemption on royalties-withholding taxes, including the Netherlands and Switzerland. Israel does not have the same reputation for that type of activity as those countries, but I am concerned that the Government’s prevailing approach to royalties-withholding taxes in DTAs is leaving us vulnerable.

The Government introduced measures to prevent such abuse in the previous Finance Act, but previously negotiated DTAs appear to be preventing them from applying them to the most problematic jurisdictions. In particular, it appears that the intangible property measure contained within the Finance Act 2019 does not apply to the jurisdictions with which we have a DTA, so it would not apply in the case of these DTAs with Israel and Cyprus. It would be helpful to understand from the Minister, either now or in a letter afterwards, the Government’s intended scope of that measure—if all DTA-covered jurisdictions are exempted, it will be applied to only a handful of jurisdictions.

Secondly, although I am pleased that the Government are adopting the BEPS-compliant principal purpose test, I am concerned that the test remains largely untested. Tax justice activists and academics have raised concerns about the burden of proof necessary as part of the test. It would be helpful if the Minister could help us understand, either in Committee or via letter, how practically workable the Government believe the principal purpose test will be.

In conclusion, while putting together these DTAs, the Government surely need to more carefully consider how they interact with attempts they are making to control the use of profit-shifting via royalties through mechanisms such as those set out in the Finance Act 2019. Surely they also need to look more closely at the implications of their approach to the principal purpose test for the workability of the measures for HMRC.

Finally, I have asked before in Committee for an indication from the Government of the schedule of negotiation of DTAs. They have stated that they are trying to work through the corpus of DTAs to bring them into line with the OECD’s multilateral instrument. It would be helpful to have a clearer picture of the exact stage. Some are being renegotiated, and others are taking much longer. As mentioned by the Minister, the Israel measure has not been renegotiated since the 1970s. Others were changed after being in force for just a few years. It would be helpful to have a clearer perspective of where we are going.