Amendment 7

Financial Services Bill - Report (1st Day) – in the House of Lords at 7:00 pm on 24th March 2021.

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Lord Sikka:

Moved by Lord Sikka

7: Clause 22, page 28, line 23, at end insert—“32B Gibraltar-based persons: reporting requirements(1) A Gibraltar-based person carrying on an activity approved under Schedule 2A, or which has permission by virtue of relevant Gibraltar provision to carry on an activity, in the United Kingdom must be registered under section 1046 of the Companies Act 2006.(2) A company of the type referred to in subsection (1) is to be regulated in respect of activities that it undertakes in the United Kingdom by a relevant person as defined by the Financial Services and Markets Act 2000.(3) A reference to a relevant Gibraltar provision is to be read with section 23 of the Financial Services Act 2021.”Member’s explanatory statementThis amendment would require any Gibraltar-based person carrying on activities in the UK to file their accounts at Companies House and to be regulated in the UK with regard to their UK activities.

Photo of Lord Sikka Lord Sikka Labour

My Lords, the right reverend Prelate the Bishop of St Albans sends his apologies. Due to unforeseen circumstances, he is unable to speak to Amendment 7. At very short notice, he has asked me to speak for him.

Amendment 7, in the name of the right reverend Prelate the Bishop of St Albans, the noble Baroness, Lady Bennett of Manor Castle, and myself, would require companies operating under the Gibraltar authorisation regime, or GAR, to be registered and to file their accounts in the UK at Companies House. It would also ensure that GAR companies are regulated in respect of their UK activities, in accordance with UK regulations.

I beg your Lordships’ indulgence. In order to minimise any disservice to the right reverend Prelate, my speech will be in two parts. First, I will relay what the right reverend Prelate would have said. Secondly, I will briefly add my own comments.

In the words of the right reverend Prelate the Bishop of St Albans: I have placed this amendment because I did not feel that my concerns about Gibraltar were adequately satisfied in Committee when I tabled a similar amendment. I will be frank: I got the impression that because Gibraltar was an associated territory, there was a reluctance to ensure that it could not be used by companies to reduce their tax obligations. I understand that the Gibraltar authorisation regime allows for continuity of the financial services that existed when we were a member of the EU. But this should not discount the fact that a single market in financial services is being created here. Gibraltar is not necessarily a serial, global tax haven. According to the Tax Justice Network, Gibraltar ranks 30th in the corporate tax haven index, whereas the UK is ranked 13th. In no way do I want this to be an attack on the territory of Gibraltar, particularly having highlighted that the UK is ranked as a worse tax haven.

This amendment attempts to speak to a specific UK-Gibraltar issue on tax avoidance. The current relationship allows a Gibraltar-based company to operate, conduct its business and receive what would be taxable income in the UK, but then to pay corporation tax in Gibraltar. There is a corporation tax disparity between the UK and Gibraltar. Our corporation tax is 19% whereas Gibraltar’s is 10%.

During his evidence session to the Commons Committee, the Minister from Gibraltar said that the corporation tax rate was not a factor in companies relocating to Gibraltar. No doubt the Mediterranean climate and lifestyle make it a very attractive place to reside, but I would not presume that the warm climate is responsible for 20% of the UK’s private insurance market being underwritten from Gibraltar, despite the territory holding not even 0.1% of the UK’s population.

Financial services are one of Gibraltar’s primary industries, hence the tabling of this amendment. One might assume that greater transparency would apply to the finance and other sectors, ideally through stricter and more thorough reporting standards between Gibraltar and the UK. It is common practice in many industries for transactions placed in the UK to be processed via servers in Gibraltar—a technicality that allows what is, in reality, taxable income in the UK to be taxed in Gibraltar.

Obtaining evidence on the cost of the system to the UK Treasury is difficult. However, we have reliable data for the online gaming and gambling sector. Research and private investigations have shown that some of the UK’s major gambling firms actually pay corporation tax in the UK of between 3% and 13% by either headquartering in Gibraltar or using subsidiaries based there. We know of this only because the size of these firms brought them under journalistic scrutiny. If these practices were well documented for one sector, it would be illogical if other sectors did not follow the same incentives. After all, the purpose of reducing corporation tax is only one major reason for relocation to Gibraltar.

This amendment does not deal with the issue of taxation. In fact, even if the Government adopted the amendment, these practices would still continue. It would ensure that companies operating under the GAR regime abide by the Companies Act 2006, which mandates foreign countries to register and file accounts at Companies House.

I believe that the continuation of access to the UK financial market by permitted Gibraltar-based persons ought to be contingent on effective information exchange and reporting transparency requirements between the two jurisdictions. The Treasury and the UK public have an interest in knowing the extent of financial business conducted in the UK by firms based in Gibraltar and the potential loss of corporation tax brought about by this arrangement.

Certainly, the GAR is a rather one-sided agreement, giving Gibraltar-based companies access to 65 million potential customers, whereas, in return, the UK gains access to only 30,000 potential Gibraltar customers. Leaning on the emotional, cultural and historic reasons for this agreement should not hide the fact that the agreement is of great financial benefit to Gibraltar as a territory, whereas it is not clear how this benefits ordinary UK citizens.

Since it is plausible that this arrangement may be a financial loss to the UK in terms of corporation tax, UK citizens and Her Majesty’s Treasury, as a minimum, deserve transparency and an equal reporting requirement between UK companies operating in the UK and those operating under GAR.

That concludes the statement from the right reverend Prelate. I will add a few words of my own. It is fairly conventional that the Government compartmentalises a number of Bills. Some are labelled financial services Bills, some relate to taxation, some relate to competition and some to other matters. But the effects are often interrelated. Changes in one place affect another, and therefore we should be asking questions about the cumulative effects. This is one such Bill and occasion.

We are constantly told by the Chancellor that the Government wish to tax companies where their customers are and where their sales and profits are made. Then the financial services Bill comes along and authorises Gibraltar-based companies to make sales to customers in the UK and generate profits in the UK, but to book profits in Gibraltar and thereby dodge UK corporation tax. The Government have with this Bill destroyed the entire basis of their policy for taxing digital companies. The profits from the sale of financial services in the UK will definitely be shifted out of the UK through concocted royalty and management fees, interest payments, transfer-pricing gains and related party transactions. Of course, the profits will ultimately not be physically located in Gibraltar. They will be spirited away by corporations and their controllers to unknown locations.

The interaction between the UK financial services regime and the Gibraltar tax regime will definitely create unfair competition, as financial services companies located in Gibraltar will pay a lower effective rate of tax than their competitors in the UK. The UK Government are providing unfair state aid to Gibraltar companies. Indeed, on 19 December 2018 many of the tax advantages showered on Gibraltar companies were classified as unfair state aid by the European Commission. The UK Government have failed so far to adequately respond to that decision, and on 19 March 2021 the European Commission referred

“the United Kingdom to the Court of Justice of the European Union for failing to fully recover illegal State aid of up to around €100 million, granted as a tax exemption for passive interest and royalties in Gibraltar”.

I hope the Minister will tell us how the provisions of the present Bill and their impact on tax avoidance affect state aid. What is the impact of the same on the Trade and Cooperation Agreement between the EU and the UK, which requires

“both sides to be transparent about the subsidies they grant and to establish or maintain an independent body with an appropriate role in their respective subsidy systems”?

I very much hope the Minister will tell us about the impact of the Bill on the UK’s international obligations.

I thank noble Lords for their indulgence. On behalf of the right reverend Prelate the Bishop of St Albans, I beg to move.

Photo of Baroness Bennett of Manor Castle Baroness Bennett of Manor Castle Green 7:15 pm, 24th March 2021

My Lords, it is a great pleasure to follow the noble Lord, Lord Sikka, who has presented the amendment so clearly and effectively, while I also regret the absence of the right reverend Prelate the Bishop of St Albans, who has been doing such sterling work in focusing on the practical real-world impacts of the Bill on people’s lives and welfare, to which, as we have discussed in other groups, a lack of effective regulation in the financial sector has done such damage.

In Committee, during a debate on a similar amendment, the noble Lord, Lord Rooker, referred to brass-plate economies and the damage that they do to societies if they become dominant. Indeed, much of our debate in Committee focused on the well-being of the people of Gibraltar. I have no objection to that; indeed, I welcome it. I wish them well in their difficult post-Brexit position, which they were put into despite 96% of them voting in 2016 to remain in the EU. However, we have to ask why 20% of the UK insurance sector and a large amount of our out-of-control, seriously damaging gambling sector is going through Gibraltar’s servers, with very little benefit to the people of the UK. I doubt whether ending it will make any great difference to the people of Gibraltar either; as the noble Lord, Lord Sikka, has just outlined—and he is one of your Lordships’ House’s experts in this area—very little of that money is likely to be seen in Gibraltar in any meaningful sense.

I note that the Minister said in Committee:

“This proposal cannot be supported by the Government because it does not reflect Gibraltar’s autonomy”,

but I am not sure that I understand that. If we are talking about regulating activities in the UK, which is what the amendment is explicitly about, surely that is a matter of sovereignty—the issue to which the Government are so attached. Perhaps the Minister can explain that further in his answer.

In Committee, the noble Lord, Lord True, said:

“The Government were satisfied that the Gibraltar authorisation regime is rigorous”,—[Official Report, 1/3/21; col. GC 308.]

but we have to ask why so much business is whizzing through Gibraltar, at least in electronic form, for no obvious reason.

The noble Lord, Lord Sikka, pointed out in Committee that Gibraltar has a population of around 33,000 but more than 60,000 registered companies, nearly two for every person living on the Rock. We know that Gibraltar as a society must need people to fulfil many roles, from childcare to garbage collection, food preparation and, probably now much more than before, customs officials. The regulators of those 60,000 companies must be kept very busy keeping a tight and careful eye on their activities. Perhaps the reason is simply the comparative corporation tax rates. As the right reverend Prelate intended to say, our corporation tax rate is 19% whereas Gibraltar’s is 10%. Of course, the Government promise that our corporation tax rates will rise to become somewhat closer to international norms—if not just yet—so the disparity and the potential attraction are likely only to increase.

I referred in Committee to the Tax Justice Network estimate that the Gibraltarian arrangements inflict costs of $4 billion on other nations, predominantly the UK. That figure could grow significantly with tax rises, so I would argue that the case for this amendment has become even stronger, and I remain, with many others, doubtful about the level of transparency and scrutiny.

Ultimately, this amendment is about activities in the UK. It is not about Gibraltar at all. It is about transparency, honesty and ensuring that profits made in the UK are properly taxed in the UK.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy)

My Lords, I am cautious about any further disruption for Gibraltar post Brexit. The challenge that Gibraltarians face is going to be an exceedingly difficult one and, since the UK put Gibraltar into that situation, we ought to be sympathetic and supportive.

I understand the motives of the right reverend Prelate the Bishop of St Albans and others to increase transparency, but we are talking about what is best described as legal tax avoidance, not tax evasion. I hear nothing but widespread respect for the Gibraltarian tax authorities and the way they manage the business that falls under their supervision.

This is a dangerous time to deny another party equivalence when we ourselves are seeking equivalence from the European Union. I would point out, as others have done, that we have rather a low corporate tax rate at the moment. It is due to rise in the future, but we will still be at the low end of the G7. At the moment, we are exceedingly low compared to most of our EU competitors. We have also granted equivalence to the EU, and that includes locations such as Luxembourg and Ireland, which have low corporate taxes much more akin to those of Gibraltar.

So I do not think we have a major problem here. I am always glad to see an opportunity for transparency but, in this case, we are not looking at shutting down criminal activities, which is the area where I would like to see us work very hard on transparency. I think we need to be responsible to the people of Gibraltar, who sit in a position that is not of their choosing.

Photo of Lord Eatwell Lord Eatwell Labour

My Lords, the measures in this Bill that refer to Gibraltar essentially create a single financial market, and an essential component of a single financial market should be a single registry standard. So I want to ask the Government about their approach to this. When they decided to promote the measures in the Bill in support of Gibraltar, did Her Majesty’s Treasury conduct a review of the Gibraltar registry, and could the Minister tell us the result of that review? For example, could he tell us whether the Gibraltar registry is as transparent as that of Companies House?

Noble Lords will be well aware, after Committee, that my opinion of the Companies House registry is pretty low, in particular regarding its inability to provide a verified register of beneficial ownership, which is at the foundation of the right reverend Prelate’s concern with tax issues. So could the Minister assure us that the Gibraltar registry has a verified register of beneficial ownership, as well as being transparent?

Photo of Lord True Lord True Chair, Intergenerational Fairness and Provision Committee, Minister of State (Cabinet Office), Chair, Intergenerational Fairness and Provision Committee

My Lords, I certainly regret, along with others, that the right reverend Prelate was unable to be here to speak to his amendment, but we fully understand the reasons for that. Obviously, the House has great respect for his expertise in these financial matters. We are grateful to the noble Lord, Lord Sikka, for delivering aspects of his speech.

In response to the noble Lord, Lord Sikka, who raised an issue relating to state aid, I should say for the record that the issue he raised is a legacy state aid issue, relating entirely to the period when the UK was a member of the European Union. The Government of Gibraltar have already recovered some of the aid and continue to work to recover the outstanding aid, in compliance with the European Commission’s decision to bring this case to a satisfactory conclusion as fast as possible.

As we have discussed before, the financial services industry plays an important role in Gibraltar’s economy. Gibraltar-based firms have made extensive use of the existing market access arrangements between the UK and Gibraltar. As the noble Baroness, Lady Kramer, mentioned, following the UK and Gibraltar leaving the EU, the Bill will establish a new legal and institutional framework that provides for mutual market access and aligns standards in financial services between both jurisdictions. This will enable Gibraltar-based firms to operate in the UK, provided that certain conditions are met, that law and practice are aligned and that co-operation between the various authorities is in place. In this way, the regime respects Gibraltar’s regulatory autonomy while ensuring the high standards of supervision and consumer protection that UK customers expect.

The right reverend Prelate’s amendment would require any Gibraltar-based financial services firms—the Bill relates to financial services—carrying on an approved activity in the UK to register with Companies House and file accounts there. The amendment also seeks to set up UK regulators as the supervisors for Gibraltar-based firms. I am afraid that this proposal cannot be supported by the Government, because it does not respect Gibraltar’s autonomy; indeed, it goes against the very grain of the intention of the GAR.

The first part of the amendment is intended to require Gibraltar-based firms to provide information related to profits and taxes. I must stress, as I have before, that, as an overseas territory, Gibraltar is fiscally autonomous and has the right to set its own policy to support its economy, within international standards, and to determine its own tax rates. The scope of the GAR is focused on enabling continued access to the UK market for Gibraltarian firms, based on aligned law and practice. It does not extend to taxation. The Government of Gibraltar are committed to putting in place reciprocal arrangements for UK firms accessing the Gibraltar market. I am sure that we would not contemplate this extending to the UK’s tax regime.

Gibraltar is already committed to meeting international standards on illicit finance, tax transparency and anti-money laundering, including those set by the OECD and the Financial Action Task Force. The noble Lord, Lord Eatwell, referred to beneficial ownership and registry issues. Gibraltar shares confidential information on company beneficial ownership and tax information with UK law enforcement bodies in real time and has agreed to introduce publicly accessible registers of company beneficial ownership.

On the second point of the amendment, it would not be appropriate to designate UK regulators as the supervisors of Gibraltar-based firms, and it is not necessary. The purpose of the GAR is to enable firms from Gibraltar to operate in the UK financial services market. It would not be a cross-border regime if we asked such firms to register here and require that they were supervised by our regulators. That would not facilitate cross-border trade with our friends in Gibraltar. It would, in effect, be pushing their businesses to move here and would impinge on Gibraltar’s autonomy by extending UK authorities’ powers into its jurisdiction. Again, this is something the UK would not contemplate in reverse.

Cross-border activity must, of course, be done in accordance with the standards expected in the UK market. That is why the GAR requires that, before there is any market access, Parliament must first pass secondary legislation, through the affirmative procedure, in which the Treasury can designate activities as approved only where there is sufficient alignment of law and practice between our two jurisdictions, and where there is sufficient co-operation between the UK and Gibraltarian authorities. Further, the Bill will grant powers to the UK regulators that can be used if it is necessary to ensure effective supervision and address issues that arise, for example in a situation that requires urgent action or where the UK regulator’s view is that problems have not been adequately dealt with by the Gibraltarian authorities.

The Government are confident that the GAR provides the safeguards needed to ensure financial stability and that our consumers will be protected by the high standards that they expect, but in a way that respects Gibraltar’s independence. I therefore ask that the right reverend Prelate should withdraw his amendment.

Photo of Lord Lexden Lord Lexden Deputy Chairman of Committees, Deputy Speaker (Lords) 7:30 pm, 24th March 2021

My Lords, I have received no requests to speak after the Minister, so I call the noble Lord, Lord Sikka, to conclude the debate on the right reverend Prelate’s amendment.

Photo of Lord Sikka Lord Sikka Labour

I thank all the contributors to this debate, which has been very informative and helpful. Given that roughly 25% of UK motor insurance is written from Gibraltar, it is clear that large amounts of profit made in the UK are being booked in Gibraltar and that the public purse here is being deprived of large amounts of tax revenue.

Of course, we might take the view that Gibraltar has been hit hard by Brexit and therefore deserves some support, but, as I pointed out, the beneficiaries of those profits are not necessarily people in Gibraltar but are actually corporations using Gibraltar to extract revenue from the UK. The ultimate destination of those profits is not really known because there is no transparency at all. Whether somebody is engaging in tax evasion or tax avoidance, the effect on the UK public purse is the same: the loss of revenue.

We still need greater transparency but at the moment, we do not have it. I hope that, when we have a public form of country-by-country reporting, perhaps that will provide some form of transparency, but at the moment the Government are not committed to that.

Nevertheless, I thank everybody for their contributions to the debate, and with the permission of the House and on behalf of the right reverend Prelate the Bishop of St Albans, I beg leave to withdraw this amendment.

Amendment 7 withdrawn.

Photo of Lord Lexden Lord Lexden Deputy Chairman of Committees, Deputy Speaker (Lords)

We now come to the group beginning with Amendment 8. Anyone wishing to press this or anything else in this group to a Division must make that clear in debate.

Clause 34: Debt respite scheme