Clause 147 - Meaning of ''permanent establishment''
Finance Bill
3:45 pm
Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
I do not know which branches or banks the hon. Gentleman speaks to, but not only was the tax position of foreign branches in the City of London a matter of concern, particularly compared with UK banks, but there was international concern about whether the practice was fair. As I go through the amendments, I may be able to refer back to the hon. Gentleman's point.
Amendment No. 3 would copy into UK domestic law the existing provisions of paragraph 3 of article 5 of the OECD model tax convention by specifying that a building site, construction or installation would not constitute a permanent establishment unless it had existed for 12 months or more. If a foreign company had a building site in the UK for less than 12 months, there would be no permanent establishment, so it would not be chargeable to corporation tax in respect of its presence in the United Kingdom. A blanket 12-month time limit would not be appropriate because the general rules contained in the clause will be subject to the specific time limits contained in the United Kingdom's double taxation agreements with other countries, many of which contain a shorter time limit, such as three or six months.
Treaties can override domestic law to provide relief from UK tax, but they cannot create a charge to tax if none exists in UK domestic law. Therefore, if a treaty specified a time limit of six months, but UK domestic law set a time limit of 12 months, which would be the effect of the amendment, the domestic law would apply. The United Kingdom would, therefore, effectively give up taxing rights that it had achieved through bilateral negotiations with other countries. I understand that about 43 of our current treaties are for periods of less than 12 months.
It may help the Committee if I give an example. Our double taxation agreement with Ireland provides that a building site will constitute a permanent establishment if it exists for more than six months. After six months, Ireland can tax the profits of a UK company attributable to its Irish building site, and vice versa. However, if the UK were to introduce a 12-month time limit into domestic law, we could tax the Irish company's profits from its UK building site only if it existed for 12 months or more, even though the double taxation agreement set a six-month time limit. Therefore, the United Kingdom would be giving up taxing rights, but Ireland would not.
I am sure that that was not the intention of the hon. Member for Eddisbury when he tabled his amendment probing why the 12-month standard was not used. All members of the Committee can see that there is no good reason to give up taxing rights that have been agreed in negotiations with other countries. I therefore ask the Committee to reject the amendment if it is put to the vote. I have not asked anyone to calculate how much tax would be given up—it would be a substantial amount—on the basis that I understand that the amendment has been tabled to probe the 12-month issue and is not a serious suggestion that we should undermine our tax treaties in such a way.
I have explained why it is not appropriate to incorporate into UK law the exact wording used in paragraph 3 of article 5 of the OECD model tax convention. That is why there is no 12-month limit for building sites for permanent establishments. Hon. Members who sit on Committees that deal with double taxation will have heard me say on many occasions when discussing treaties for ratification by the House that we, like the previous Government, attempt to stick as closely as we possibly can to the wording, because we support the OECD model. However, it is not always possible to do that in negotiations, because the wording is affected by what our treaty partners seek to achieve in the negotiations.
However, for the purposes of the clause, the wording used in article 5 of the OECD model tax convention has been incorporated into clause 147, where possible. The OECD wording and terminology was used where it did not conflict with that commonly used in the UK's double taxation agreements, where it was clear and unambiguous and where the terminology fitted with the language commonly used in UK domestic law. Amendments Nos. 99 and 100 run contrary to that approach, as they seek to insert language that differs from that used in article 5 and from that commonly used in the UK's double taxation agreements.
It may be useful if I explain the two sets of circumstances in which there is deemed to be a permanent establishment. The first is if the non-resident company has a fixed place of business in the UK, and the second is if there is an agent in the UK who has the authority to do business on behalf of the company—that is, if the foreign company has what is commonly known as a dependent agent.
Amendments Nos. 99 and 100 seek to change that so that there will only be a fixed place of business, or a dependent agent, where there is evidence that the foreign company is trading through the fixed place of business or where there is evidence that the dependent agent has the authority to engage in trading activities on behalf of the foreign company. As I mentioned, that represents a move away from the wording generally used in the UK's double taxation agreements and from that used in the OECD model tax convention. The proposed change would also narrow the definition of permanent establishment, because the activities encompassed by the term ''trading'' are different and generally narrower than the activities encompassed by the term ''business''.
However, the narrower definition would not actually alter the tax position of foreign companies. That is because the permanent establishment of a foreign company is chargeable to corporation tax under section 11 of the Taxes Act 1988 only if it trades through a permanent establishment in the UK. Amendments Nos. 99 and 100 are unnecessary, as they would move away from the wording commonly used in defining a permanent establishment and would not alter in any way the tax position of the foreign company. Therefore, I ask members of the Committee to reject the amendment if it is pressed to a vote.
I come now to amendment No. 101. I have explained the circumstances in which a permanent establishment can exist, and explained that one such situation is if a dependent agent acts on behalf of the foreign company. The wording used in clause 147(1)(b) to define a dependent agent varies from the exact wording used in paragraph 5 of article 5 of the OECD model tax convention. It is based instead on the guidance given in the commentary on article 5, which can be found in paragraphs 31 to 35. The reason for that is that article 5 refers to the agent who has the authority to conclude contracts in the name of the enterprise. However, the OECD commentary on article 5 makes it clear that—
Sitting suspended for a Division in the House.
On resuming—