Ninth Standing Committee on Delegated Legislation
Wednesday 16 June 1999
[Mr. Barry Jones in the Chair]
Double Taxation Relief (Taxes on Income) (Kuwait) Order 1999
4.30 pm
The Paymaster General (Dawn Primarolo): I beg to move,
That the Committee has considered the draft Double Taxation Relief (Taxes on Income) (Kuwait) Order 1999.
The Committee will recall that, on previous occasions, when I and my fellow Treasury Ministers introduced double taxation orders to the Committee, we made clear the Government's commitment to maintaining and, when circumstances permit, extending the United Kingdom network of double taxation agreements. The agreements are welcomed by the business community because they reduce tax-related barriers to international trade and investment and provide certainty of treatment. I am sure that we can continue to look forward to the cross-party support that these orders have traditionally enjoyed for some time. I hope that all members of the Committee have received the usual guidance notes that set out the details of the treaty.
The new comprehensive treaty with Kuwait is a welcome addition to our treaty coverage in the middle east. Hon. Members will recall that our first full treaty with a Gulf state was that with the Sultanate of Oman, which was considered by the Committee in July 1998 and which came into force in November. My right hon. Friend the Member for Airdrie and Shotts (Mrs. Liddell), the then Economic Secretary, said at the time that we hoped that it would be joined soon by others. The agreements are the result of new negotiating initiatives in the region, principally in response to representations from both the private and public sectors. United Kingdom businesses have said that the existence of double taxation agreements is an important factor in determining their success in securing contracts in the Gulf.
It is particularly appropriate that we are considering an agreement with Kuwait given that, as I said on the occasion of signing the treaty earlier this year, 1999 is a special year for Anglo-Kuwait relations. It is the centenary of the historic treaty of friendship signed between the two countries. I remind members of the Committee that Kuwait is a rich country with a high per capita income and considerable foreign investments. In 1998, it was our sixth largest market in the Arab world. Our performance there is particularly strong in telecommunications, machinery and transport equipment, chemicals and food products. In addition, we continue to perform well in legal services, financial services and other consultancy activities. Our total exports to Kuwait in 1998 amounted to £335 million, bringing Kuwait into the top 50 of our overseas markets.
The new treaty conforms to the provisions of the Organisation for Economic Co-operation and Development model double taxation convention, with some additional protection against tax avoidance that we include in all our treaties. I am confident that it will give United Kingdom business the certainty that it needs to extend its activities in Kuwait. That is to be welcomed, because it will be good for employment and good for the economy. I commend the order to the Committee and I shall be happy to answer any questions.
4.34 pm
Mr. Nick Gibb (Bognor Regis and Littlehampton): This is the last time that the Paymaster General and I shall be exchanging words in Committee. I shall miss our exchanges, but I fear slightly for the hon. Lady because the easy time that she has had while I have been a shadow Treasury spokesman is now at an end. My hon. Friends—one of whom is my hon. Friend the Member for Arundel and South Downs (Mr. Flight), who is a member of the Committee—who are joining the shadow Treasury team are no slouches. They will form a heavyweight team who will, far more ably than I, hold Treasury Ministers to account. I thank the Paymaster General for her courtesy in arranging for me to be briefed by officials, and the officials for their thorough briefing in a technically complex area.
The Paymaster General is right about our country's double tax treaty network. Towards the end of the previous Government's term in office, Britain had achieved more than 100 such double tax agreements—a wonderful achievement for a great trading nation. Any measure that increases world trade and prosperity, through the invisible, magic hand of comparative advantage, and helps preserve peace is to be welcomed. Nothing more aids understanding between nations than free, unfettered trade. It is therefore highly appropriate that Britain should have a double tax treaty with our old ally, Kuwait—a country for whose freedom and independence was so recently fought.
The Paymaster General can therefore be assured that the Opposition fully support the treaty. However, I would be grateful if she could answer some questions. The first relates to the title of the treaty. Most of our double tax treaties have in the past been written between the Government of the United Kingdom and that of the country with which the treaty is made. The title of the treaty with Kuwait states that it is between the United Kingdom and Northern Ireland and the state of Kuwait. That leads to related questions. Why does the title refer to the state of Kuwait and why have the Government dropped the reference in recent treaties to the Government of the United Kingdom and the Government of the country with which we are treating? The original agreement with Kuwait, contained in the Double Taxation Relief (Air Transport Profits) (Kuwait) Order 1984, is between the Government of the United Kingdom and the Government of the state of Kuwait. Has there been a change to our constitutional arrangements or to the Government's interpretation of those arrangements? If not, what is the reason for the change?
Secondly, it seems odd that the definition of taxes in article 2 lists three taxes in regard to Kuwait: corporate income tax; the KFAS, which is the contribution from the net profits of Kuwaiti shareholding companies payable to the Kuwaiti Foundation for the Advancement of Science; and a local Kuwaiti tax known as the Zakat. The latter two taxes are specifically excluded by article 24 on the elimination of double taxation as taxes that are creditable against UK tax; why is that? If the taxes are not creditable, what is the point of including them in the original definition?
Thirdly, article 5 gives a definition of a permanent establishment as including a building site, construction or installation project that lasts for more than six months; the Organisation for Economic Co-operation and Development model says that that should be 12 months. Why does the treaty provide for only six months? Was it at the UK Government's or the Kuwaiti Government's insistence?
Fourthly, paragraph 5 of article 10 on dividends states that the other contracting state may not tax the undistributed profits of a company resident in a contracting state. Given that the UK does not have provision to tax undistributed profits, why is that considered a possibility? Does Kuwait have such provisions? If not, why are they needed?
Fifthly, will the Paymaster General explain how the definition of royalties in article 12(3) differs from the definition in the OECD model and what the treaty means by the phrase ``scientific experience''? Also, I note that the treaty will mean a reduction in the tax that UK residents will pay on royalty income from Kuwait to 10 per cent. The Kuwaiti-France double tax treaty reduces that to zero per cent. Will the Paymaster General explain how the French have managed to secure a more favourable arrangement?
Sixthly, with regard to article 14 on independent personal services, did the Government disclose, in the course of the negotiations, the proposals for personal service companies in Inland Revenue press release 35, published at the time of the Budget, and the impact that those proposals might have on IT consultants and other professionals?
Seventhly, article 21 on teachers and researchers is not in the OECD model treaty but is included in the treaty because Kuwait extends special treatment to researchers working in the public interest. Were the proposals in last year's Finance Act to abolish foreign earnings deductions discussed during negotiations on the treaty?
Eighthly, will the Paymaster General explain why article 26, which deals with non-discrimination, is included in the treaty when, according to part II of the treaty, its provisions
``will not be fully implemented''?
What is meant by ``not . . . fully implemented''? Will part of the article be implemented? If so, which part?
Finally, with regard to article 31, which deals with termination of the treaty, how many requests for renegotiation of treaties with the UK have been lodged, and how many are being renegotiated?
4.40 pm
Dawn Primarolo: I am delighted to hear of the promotion of the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) to the Opposition team on trade and industry affairs. I can assure him that today will not be the last time that we exchange words. We shall doubtless do so in the Chamber, although I doubt whether we shall discuss Treasury matters on the Finance Bill for some time.
I welcome the hon. Member for Arundel and South Downs to the shadow Treasury team. He will find our debates enjoyable, rigorous, never boring, often combative and always friendly. He will also find that the Government are nearly always right. I know that he has considerable expertise in financial matters, and I am sure that he will rise to the challenge.
The hon. Member for Bognor Regis and Littlehampton asked many questions and I shall do my best to answer them all now. If I miss some out, I shall write to him and his hon. Friends.
The hon. Gentleman asked about the agreement's terminology and why it was not made between the United Kingdom Government and the Kuwaiti Government. Kuwait does not use that formulation in international agreements, and could only sign an agreement made between the state of Kuwait and the United Kingdom of Great Britain and Northern Ireland. We agreed to that formulation, which exists in a few other double taxation treaties. We sought simply to facilitate the correct wording and to ensure that the documents are correct.
The hon. Gentleman asked about the Kuwait Foundation for Advancement of Science and about the Zakat. They were included in the agreement because Kuwait required it to be consistent with other agreements, but it is unlikely that many UK-resident individuals or companies will be liable for the taxes in Kuwait. Article 23, which deals with capital, restricts liability to the Zakat—the Islamic religious tax—to immoveable property situated in Kuwait and to any moveable property that forms part of the business property of a permanent establishment or fixed base in that country. The KFAS levy will be payable only where a UK resident is a minority shareholder in the company. The UK resident will not be able to claim credit relief for the levy or for the Zakat because the UK does not levy comparable taxes. Accordingly, they are excluded from the coverage of the elimination of double taxation article.
The hon. Gentleman also asked why Kuwait cannot implement the non-discrimination article now. The agreement contains a non-discrimination article in the form that the OECD recommends. However, paragraph 5 of the accompanying protocol explains that Kuwait will not fully implement the article until Kuwait harmonises the tax regimes applicable to enterprises that reflect that requirement.
The hon. Gentleman also asked about the term ``permanent establishment'' used in article 5, and about the reference to a building site or construction or installation project. The model OECD recommendation is that such projects must last more than 12 months, although that provision falls in the category in article 5 that can be varied. Under article 5, some premises must qualify as a ``permanent establishment'', and some can be varied slightly on negotiation. We have agreed to a six-month time limit in many of our double taxation agreements. Kuwait wanted that change to be made to be consistent with its other double taxation agreements, and because of the extent of involvement of foreign companies in its construction sector. I am sure that all hon. Members appreciate why extensive construction activity continues in Kuwait.
The hon. Gentleman also asked about Inland Revenue press release 35 on service companies. I assure him that the proposals in the Chancellor's Budget to introduce legislation to counter avoidance through the use of personal service companies and partnerships are very much part of these proposals. The proposals do not threaten genuine service businesses operated by individual entrepreneurs. The matter is subject to much discussion and consultation. I do not want to lead the Committee down that route, but the proposals are designed to deal with the problem of tax avoidance through the use of intermediary companies or partnerships to disguise employment relationships.
Those measures remain subject to extensive consultation, and the Inland Revenue is holding meetings with the business community. The measures will help to ensure that people who use the device pay their fair share of tax. The agreement will help create a level playing field for British business to win orders in Kuwait in competition with European and other funds. There is no reason to assume that the proposals will cut across the agreement.
The hon. Member for Bognor Regis and Littlehampton also asked about the exemption for teachers and researchers under article 21. Although the OECD model convention does not contain a teachers' article, the OECD commentary on article 15 notes that many double taxation treaties include special rules for that group. The main purpose of such rules is to facilitate cultural relations by providing for a limited tax exemption. More than half the UK's double taxation treaties include a teachers' article along broadly similar lines to the one in this agreement. It is not unusual. It is not necessary to disclose the abolition of foreign earnings deductions, which was not included in discussions on the agreement.
The hon. Gentleman's two concluding questions were about withholding tax on dividends with reference to the French treaty with Kuwait, which is set at zero to 5 per cent. France's agreement was the first treaty, negotiated by Kuwait in 1982. Provision in our treaties reflects the OECD's double taxation provision; we followed the model provided. That accounts for the difference.
Finally, the hon. Gentleman asked about the definitions of royalties including scientific experience. The wording in the double taxation treaty is the latest version in the OECD model for double taxation agreements. We and the Kuwaitis accepted that as part of the agreement. As the hon. Gentleman knows, the development of double taxation treaties followed by the previous Government and this Government reflects and uses the OECD models as starting points, and will vary only by negotiation on minor points and fringes to facilitate another double taxation agreement. I am sure that the hon. Gentleman would accept that, where the OECD model is improved, it is appropriate that we should use that wording.
I shall carefully check the record because the hon. Member for Bognor Regis and Littlehampton asked several questions rapidly, and I shall make sure that they have all been answered. As I said, if I have inadvertently missed out any points, I shall write to him and his hon. Friends. I wish him good luck in the Opposition's trade and industry team. I am sure that he will enjoy himself in it, although being in that team is not so exciting as being in the shadow Treasury team. Then again, opposition is not exciting anyway.
Mr. Gibb: I thank the Paymaster General for those comments and for a full response to my questions. She passed on two, which relate to the state of Kuwait and the general omission in recent treaties of the phrases ``Government of the United Kingdom'' and ``Government of'' the country treated with, which I would be interested to know the reason for.
Will the Paymaster General explain—I am happy to wait for a letter—how many countries we are now renegotiating treaties with, and how many countries have requested renegotiation to begin?
Dawn Primarolo: The formulation used—``the Government'' or ``the United Kingdom''—relates to the basis of what is agreed in the treaty. I am happy in general with that principle. I do not have information to hand about how many countries we are currently negotiating with, but I shall write to the hon. Gentleman.
Mr. Oliver Heald (North-East Hertfordshire): Is there any legal difference between the two forms of wording—between the Government of a state and the state itself?
Dawn Primarolo: I am not a solicitor, but those who advise me say that there is no difference. It is important that the document is binding, otherwise there is no point negotiating it.
Question put and agreed to.
Resolved,
That the Committee has considered the Double Taxation Relief (Taxes on Income) (Kuwait) Order 1999.
Committee rose at six minutes to Five o'clock.
The following Members attended the Committee:
Jones, Mr. Barry (Chairman)
Ainsworth, Mr. Robert
Berry, Mr.
Brady, Mr.
Campbell, Mr. Ronnie
Cousins, Mr.
Davey, Mr. Edward
Flight, Mr.
Gibb, Mr.
Heald, Mr.
Johnson, Mr. Alan
Linton, Mr.
Primarolo, Dawn
Sawford, Mr. Phil
Skinner, Mr.
Stinchcombe, Mr.
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