Clause 147 - Meaning of ''permanent establishment''

Finance Bill – in a Public Bill Committee at 3:15 pm on 20th May 2003.

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Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General 3:15 pm, 20th May 2003

I beg to move amendment No. 99, in

clause 147, page 85, line 29, leave out 'business of the company' and insert 'company's trade'.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 100, in

clause 147, page 85, line 32, leave out 'do business' and insert 'engage in trading activities'.

Amendment No. 101, in

clause 147, page 85, line 33, at end insert—

'(1A) For the purposes of subsection (1)(b) an agent can only be a person who has authority to and does enter into arrangements on behalf of that person's principal which are contractually binding on that principal.'.

Amendment No. 3, in

clause 147, page 85, line 44, leave out paragraph (h) and insert—

'(2A) A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.'.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

We move on to my final part of the Bill before the Whitsun recess. Many members of the Committee will breathe a massive sigh of relief because I am on my last lap. My hon. Friends are encouraging me to stay, but I am keen for them to have an opportunity to speak.

Clauses 147 to 155 deal with the definition of the term ''permanent establishment''. Clause 147 is intended to set out the definition in line with the various internationally recognised characteristics commonly used in the UK's double taxation agreements. It will be effective for accounting periods beginning on or after 1 January 2003.

Without doing more than referring all members of the Committee to it, I commend the debate introduced by my hon. Friend the Member for Arundel and South Downs (Mr. Flight) on clause 148 in the Committee of the whole House last week. It would be helpful for members of the Committee to have in mind the arguments presented by him on that occasion and some of the responses given—I should say, issued and received.

I am now facing the Paymaster General instead of the Economic Secretary, and I welcome her to her place. The problem, as I understand it, is that the definition here departs in some respects from that contained in the Organisation for Economic Co-operation and Development model convention, although the relevant parts of that convention are generally contained in United Kingdom tax treaties.

I shall focus on clause 147(2)(h), to which I shall rapidly turn, as we have jumped 100 clauses. That might be false encouragement to some members of the Committee; no doubt we shall return to those that we have just skipped. Subsection (2)(h) treats

''a building site or construction or installation project''

as a ''fixed place of business'', although paragraph 3 of article 5 of the OECD model convention states:

''A building site or construction or installation project constitutes a permanent establishment only if it lasts more than 12 months.''

The clear and obvious solution would be to say that a building site or construction or installation project should not constitute a fixed place of business unless it lasts for more than 12 months.

We are concerned about the discrepancy between the meaning of permanent establishment in Untied Kingdom domestic legislation and the definition of permanent establishment in the bulk of the UK's double tax treaties. That could result, for no good reason, in different tax treatment for non-resident countries based in treaty jurisdictions and those based in non-treaty jurisdictions.

Amendment No. 3 replicates paragraph 3 of article 5 of the OECD model convention. Obviously, an alternative approach would have been to redraft subsection (2)(h) to read,

''a building site or construction or installation project that lasts for more than 12 months'',

which would compare to paragraph 2(g) of article 4 of the treaty with France. However, that would be less favourable than amendment No. 3, because a building site or construction or installation project that lasted for less than 12 months might still amount to a fixed place of business in certain circumstances. It is worth noting that the opening of subsection (2) states that the list in paragraphs (a) to (h) is

''without prejudice to the generality of''

the expression ''fixed place of business''. That series of arguments has been widely supported by the Chartered Institute of Taxation, the Institute of Chartered Accountants in England and Wales and the Law Society.

Turning to the other amendments, the Chartered Institute of Taxation, having already commented adversely on the new definition of ''permanent establishment'', thinks that the words ''authority to do business'' in subsection 1(b)

''are vague, and do not specify the essential criterion that the agent must be in a position to bring the principal into a binding agreement with the customer. The Inland Revenue have indicated in consultation that a person will only be treated as an 'agent' in circumstances where that person can bind the principal.''

The Inland Revenue has confirmed that the references in subsection (1)(a) and (b) to the carrying on of business and the exercise of ''authority to do business'' are limited to business activity of a trading nature by virtue of the provisions in section 18(1)(a)(iii) of the Taxes Act 1988. Therefore, looking at amendments Nos. 99 and 100, I support the Chartered Institute of Taxation's submission that in clause 147(1)(a) the reference to the ''business of the company'' should be replaced by a reference to the ''company's trade'', and that in subsection 1(b), the words ''do business'' should be replaced with the words ''engage in trading activities''.

The Inland Revenue said in consultation that the permanent establishment provisions will not apply unless the non-resident is exercising a trade in the UK; in other words, the carrying on of a non-trading business activity is outside the scope of the legislation. It went on to recommend that the legislation should clarify those points to avoid any misunderstanding over whether a person acting as a representative without authority contractually to bind their principal is an agent. It also recommends that it is confirmed that references to the carrying on or exercising of authority to do business are limited to activity of a trading nature, and that investment business activity is outside the scope of the legislation.

Turning to what the Institute of Chartered Accountants in England and Wales has to say, as already explained, the OECD published a consultative document in March 2001 on the issues surrounding permanent establishment. The ICAEW has identified that the problem arises in relation to ''dependent agents'', a point that was made earlier. It says:

''The authority of the agents should only apply to authorities to carry on the trade in question and not to authority to do business. This in particular will give rise to widespread compliance issues for potential agents who constitute permanent establishments even where there was no trade. These provisions should be amended accordingly.''

It also notes that in subsection (1)(b),

''an agent who 'habitually exercises authority to do business on behalf of the company' will constitute a Permanent Establishment of that company in the country where the agent operates. The OECD Model Treaty still only treats an agent as a Permanent Establishment when the agent '(has) and habitually (exercises) the right to conclude contracts' in that country''—

as opposed to its having authority in that country. It continues:

''We believe that the UK law should follow closely the relevant OECD model until such time as the OECD model is amended.''

I turn to the Law Society. It is very interesting that the submissions of these societies all support one another, and that they have all expressed concerns about the various difficulties reflected in the different amendments. The Law Society, after agreeing with what I have just said on amendments Nos. 3, 99 and 100, says on the matter addressed by amendment No. 101:

''The Inland Revenue have also confirmed that the reference in clause 147(1)(b) to an agent is restricted to those persons who contractually can and do bind their principals and not to persons acting in some other representative capacity falling short of having such authority.''

The Law Society suggests, and I agree:

''In order to clarify this point we recommend that that term 'agent' is defined to mean 'a person who has authority to and regularly does enter into arrangements on behalf of his principal which are contractually binding on that principal'.''

For the convenience of the Committee, you have been encouraging us to raise any stand part issues at the same time as the amendments, Sir Nicholas. Recognising that, I raise some small points that the Paymaster General may wish to contemplate addressing on Report, as well as directly addressing the amendments. They pick up on some further points suggested by the ICAEW. It notes that

''subsection (5) does not include a category (e) along the lines of the existing OECD Model Treaty. This subsection states that any combination of the activities listed under the equivalent of (5)(a) to (d) would also not constitute a Permanent Establishment. We recommend that an additional subsection along these lines be included for the avoidance of doubt and to ensure that the UK rules are consistent with the OECD rules.

This provision applies to accounting periods beginning on or after 1 January 2003. It is not acceptable for these provisions to apply before the relevant provisions are enacted. The start date should be amended so that it applies to accounting periods beginning on or after Royal Assent.''

I put those points on the record, and they will no doubt be considered when it is available.

I hope that the points that I have made were as succinct as they could have been on this quite complex matter, which is definitional because it constitutes a move forward. I have sought to make arguments that jointly and severally support amendments Nos. 3, 99, 100 and 101. I hope that the Paymaster General will find that they were made sufficiently cogently for her to accept the amendments. I look forward to her response.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

Sir Nicholas, I have not had an opportunity to welcome you. I have served under your chairmanship on many occasions, not just in various Standing Committees—you are also the Chairman of the most illustrious Committee in the House: the Procedure Committee.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

I want an opportunity to speak about amendment No. 101 in particular, although there are good reasons for the other amendments about which the hon. Gentleman spoke. The Chartered Institute of Taxation and the Law Society have raised points, as the hon. Gentleman said. There are two simple points on amendment No. 101. First and foremost, is it right that, under British law, including British tax law, any representative can be referred to as an agent? Surely it is part and parcel of the law of agency that someone is an agent only if they can bind their principal. Any representative cannot and should not be called an agent. That is part of British law and international tax practice.

The second point has been raised by the Law Society. As the hon. Gentleman said, the Revenue has confirmed, with reference to the definition of ''agent'', that it will treat only those persons who contractually can and do bind their principals as agents for the purposes of the clause. If that is the case, why can that not be in the Bill? That would be in the interests of the country's commercial activities. It is important that we trade overseas and welcome overseas investment. It is not in the interests of our economy to have vague laws and laws that do not stand on all fours in relation to international practice. It is in our interests for people to know exactly where they stand. I hope that the Paymaster General will accept amendment No. 101, in particular. It makes sense, is compelling and rights a wrong.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

My hon. Friend the Member for Eddisbury mentioned the OECD convention discrepancy. I fully agree with that point. More basically, the wording in the clause is vague, which is why I support amendment No. 99. We need to specify that the business of the company is the company's trade. I understand from what I read in the Chartered Institute of Taxation book that the Inland Revenue has indicated in consultation that the provisions in the clause will not apply unless a non-resident is exercising a trade in the United Kingdom. There is a need to make it clear that the continuation of a non-trading business activity is outside the competence of the legislation.

May I draw the Paymaster General's attention to what appears to be a typo? In subsection (1)(b) ''there'' should presumably be ''their'', or more properly, ''the company's''. Either way, it is pretty shoddy drafting.

On amendment No. 101, I essentially agree with my hon. Friend's analysis. I would just add that the word ''agent'' is a commonly used expression in business and is often used where there is, and is not, authority to bind the company that is using the agent. To that extent, it is necessary to clarify whether the provision will apply only when the agent can bind its principal, not only for technical purposes, but for those of the normal taxpayer when considering the legislation.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

Does the hon. Gentleman agree that it will be extremely confusing for overseas taxpayers sending representatives to this country if they do not have the authority to bind, and they are suddenly caught by the provisions?

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

The hon. Gentleman makes a good point and, considering the matter the other way round, I am concerned for the English taxpayer, who is the agent and might not know where he stands.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

My hon. Friend is making some very interesting and valuable points that support the arguments on the amendments, but to put his mind at rest on something that is not subject to the amendments, the spelling of ''there'' probably is correct in the context of the clause because it relates to territory. It happens to be rather inelegant word order, so I understand why he has found that difficult to pick up.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

I thank my hon. Friend for clarifying that for me.

On amendment No. 3, I fully support what my hon. Friend said. We clearly do not want a situation in which temporary building works to build the most minor projects could be subject to the same treatment as factories and offices. A building site of less than a year is clearly not permanent.

Photo of John Baron John Baron Conservative, Billericay

As we know, clause 152 replaces references in the Taxes Act 1988 to ''branch'' or ''agency'' with references to ''permanent establishments''. Clause 147 redefines the term ''permanent establishment'' in that context. The definition has been widened beyond the definition of ''branch'' and ''agency'' so that some non-resident companies, not previously subject to UK corporation tax, may become taxable under the new rules. I have one or two key concerns about that.

First, as my hon. Friend the Member for Eddisbury has already highlighted, in certain respects the definition departs from that contained in the OECD model convention, although the relevant parts of that convention are generally contained in UK tax treaties. An example was given with regard to building sites. That is an area of concern because the discrepancy could lead for no good reason to different tax treatment for non-resident companies based on treaty jurisdictions as compared with non-treaty jurisdictions. I ask the Paymaster General to clarify that, because it would be helpful for all concerned.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I wonder whether my hon. Friend has focused his mind on whether the changes could result in hedge funds outside the UK, whose transactions are frequently handled in the City of London, falling within the definition of residence. That would be a disaster for the City, because business would go elsewhere if that were the effect.

Photo of John Baron John Baron Conservative, Billericay

My hon. Friend makes an excellent point. That is a consideration. When it comes to the City, competitiveness is all-important, and if the new legislation ensnarls hedge funds, it could result in the City of London and other financial cities throughout the UK losing business. I ask the Paymaster General to bear that in mind, and address the issue when she sums up.

I turn to another issue that concerns me, and ask the Paymaster to address it. The definition of permanent establishment in clause 147 will widen the tax liabilities of foreign companies doing business in Britain. Although none of us would condone tax avoidance, I would suggest that the relatively favourable tax regime in this country for overseas companies has been one of the factors that has contributed to our economic well-being, certainly when compared with our competitors. It is no accident that our structural unemployment rate is far less than it is on the continent and across the eurozone as a whole.

Most independent observers would acknowledge that part of the reason for that is that we have had much more flexible practices than on the continent, thanks largely to previous Conservative Governments, part of the reason is that the United Kingdom has not signed up to the euro and part of the reason is that we have had a relatively favourable tax regime for overseas companies compared with other countries, particularly those in the eurozone and on the continent.

I believe that the clause threatens that tax advantage. On its own it will not be a major factor in weakening our economic competitiveness, but taken with all the other regulations on taxes with which the Government have burdened our economy since they came to power, I suggest that it will have an effect, and is having an effect now.

I therefore ask the Paymaster General three questions. To what extent do the Government believe that the definition of permanent establishment widens the UK tax liabilities of foreign companies? Have the Government estimated the likely impact of the definition of permanent establishment on foreign investment? Would she consider carrying out an impact assessment of those two issues to determine what effect the clause has on our economic competitiveness?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I congratulate the hon. Member for Eddisbury on introducing his amendments so succinctly. He is right: this is a complicated area of international tax law, relating to the combination of UK domestic law, international agreements through the OECD guidelines and the OECD's commentary on its standard guidelines. Regular members of the Finance Committee or hon. Members who, like the right hon. Member for Fylde (Mr. Jack), have in a past life been members of double taxation committees scrutinising the introduction of double taxation treaties in the United Kingdom will understand that the question of permanent establishment is crucial for determining the respective taxation rights of the United Kingdom and the country with which it is entering into the treaty. The hon. Member for Eddisbury is right that the OECD model recommends a 12-month period, but we now have more than 100 tax treaties and the time period for permanent establishments varies.

I want to deal first with the points raised in the amendments and then turn to the other issues that hon. Members have mentioned this afternoon.

As I said on another clause in the Committee of the whole House, UK banks are at a tax disadvantage compared with foreign banks as regards their operation in the City of London, whether or not branches of foreign banks pay UK corporation tax. That is the point at which the clause starts.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am happy to give way, but this is a general point about the clause rather than the amendment.

Photo of John Baron John Baron Conservative, Billericay 3:45 pm, 20th May 2003

Absolutely—point taken. I am delighted that the Paymaster General is defending UK banks, but the UK banks and the banking structure generally recognise that the tax advantages offered to foreign banks add to the vibrancy of the City and to its attractiveness as a commercial centre. Very few UK banks complain about the tax treatment of UK branches of overseas banks.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

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—

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:10 pm, 20th May 2003

Before we suspended the Committee, I referred to amendment No. 101, which deals with the issue of a dependent agent acting on behalf of a foreign company. I explained to the Committee that the wording used in clause 147(1)(b) to define ''dependent agent'' varies from the exact wording in article 5(5) of the OECD model tax convention. Instead, it is based on guidance given in the commentary on article 5, which can be found in paragraphs 31 to 45, because article 5 refers to an 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 that phrase is not necessarily to be taken at face value. For instance, it covers contracts in the name of an enterprise, contracts binding on the enterprise but not in its name, and contracts recognised by the agent but signed by some other person, while excluding contracts that do not relate to the business proper of the enterprise, although concluded by the agent. The area is very complicated and there is an interaction between the commentary and the article itself.

United Kingdom legislation cannot be directly interpreted by reference to the commentary, so the phrase used in clause 147 is intended to encapsulate the current OECD interpretation in respect of dependent agents. That would not have been achieved if the wording in article 5(5) were copied directly into UK domestic law.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

The Paymaster General will recall that one of the arguments used by me, the hon. Member for Eddisbury and one or two others who spoke on the matter was that the Inland Revenue confirmed that the reference to an agent in clause 147 is restricted to those persons who contractually can and do bind their principals and not to persons acting in some other representative capacity falling short of having such authority. The Paymaster General is obviously well aware of Pepper v. Hart and the reliance people may put on what she says in Committee. I would welcome her comments on that point raised by the Law Society.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I was coming to that important point, which was outlined in a letter to the Law Society and the Chartered Institute of Taxation on 8 May.

I was trying to explain that the article wording must be read in parallel with the commentary. The commentary needed to be part of the description that went into UK legislation in order to make that clear. In drafting the legislation, the importance of maintaining certainty on international understanding and practice on the OECD guidelines and model conventions while understanding how the commentary affects their operation was one of the major points, which was continually made to the Revenue and me. That is how we chose the clause's wording.

Amendment No. 101 seeks to add to the definition of dependent agent used in clause 147(1)(b). It would mean that an agent would be a dependent agent of a foreign company as long as they had the authority to enter into arrangements on its behalf and had entered into contractually binding arrangements with it. That may not have been the amendment's intended effect, but I ask the Committee to reject it nevertheless. The suggested addition is unnecessary and the language used in clause 147(1)(b) already reflects the current OECD position on dependent agents. As such, no further clarification or definition is required.

The hon. Members for Eddisbury and for Torridge and West Devon referred to correspondence and representations from both the Law Society and the Chartered Institute of Taxation. The Inland Revenue's view on dependent agents was set out in its letter of 8 May to the Chartered Institute of Taxation. Unfortunately, I cannot circulate the entire letter to the Committee because it covers other issues and it is up to the institute whether it wants to circulate them. However, I can ensure that the relevant parts of the letter are circulated.

The hon. Member for Torridge and West Devon wants the pertinent points in the letter read into the record. The letter states that the commentary—the OECD model tax convention—

''makes it clear that the phrase 'authority to conclude contracts' in para 5 (5) is not necessarily to be taken at face value. For instance it covers contracts in the name of the enterprise, contracts binding on the enterprise but not in its name and contracts negotiated by the agent but signed by some other person, while excluding contracts which while concluded by the agent do not relate to the 'business proper' of the enterprise.''

That was my precise point before we broke for the Division in the House.

''Given that UK legislation cannot be interpreted by reference to the commentary except where, in treaty cases, this might lead to a different result, the phrase used is intended to encapsulate the current OECD interpretation of para 5 (5)''.

When the hon. Member for Torridge and West Devon studies both the record of the Committee and the relevant sections of the letter from the Inland Revenue to the Chartered Institute of Taxation, he will feel happier about the issue.

I again ask the hon. Member for Eddisbury to withdraw the amendment. If he feels unable to withdraw it, however, I will ask my hon. Friends to reject it. The Bill does not extend the charge to tax on non-resident companies and there is no less certainty for an agent of a non-resident company on whether they are within the charge to corporation tax. The rules are set out in the OECD treaty and commentary and in UK law, which has had and will have specific rules to facilitate foreign investment in the City.

I apologise for the length and detail of my response to the hon. Gentleman's questions and amendments, but I hope that I have made it clear that clause 147 provides the certainty that business requires on the issues of dependent agent, permanent establishment and the need for certainty in the rules. I therefore ask the hon. Gentleman to withdraw the amendment.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am grateful to the Paymaster General for patiently setting out the reasons behind the drafting and the various complex considerations. She will recognise that the amendment and the broader arguments that I adduced in support of it in my introductory remarks necessarily took in a wide but detailed canvas, which is the nature of the clause.

I have listened carefully to the Paymaster General's argument. Amendment No. 3 relates to the 12-month period, and it forms no part of our argument wittingly or unwittingly to forsake revenue due to the Treasury. At the same time, we were looking for certainty. I make no apology for not being an expert in more than 100 double tax treaties and she is far more likely than I to be expert on them. I have, however, served on several Standing Committees and Delegated Legislation Committees that have examined the double taxation treaties. I understand that there are variations and that the model that informs them is, of course, a model and not a prescription. I will not therefore seek to press amendment No. 3.

Remarks made by the hon. Member for Gravesham (Mr. Pond) were ill-judged. He thought that the amendments were an attempt to argue for tax harmonisation across Europe. The point was unworthy, cheap and unnecessary given that we are looking for sufficient consistency and understanding to give certainty to those who must deal with those matters. He knows that—this point was well made by my hon. Friend the Member for Huntingdon—anything that attacks and erodes the UK's tax competitiveness is anathema to my hon. Friends and me.

We have put forward a series of arguments on amendments Nos. 99 and 100 and the Paymaster General has addressed them. I can therefore confirm that we will not press the amendments.

However, we are not in a position to seek to withdraw amendment No. 101. Although the Paymaster General set out with some care why she felt that the commentary could not be incorporated into domestic UK legislation, it is important to put down a marker on the concerns raised by the clause, some of which were articulated by the hon. Member for Torridge and West Devon. I should also like to emphasise that my hon. Friend the Member for Arundel and South Downs was very concerned, rightly, about the position of hedge funds, which form a significant sector of UK business.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I apologise. I did have a point to make about hedge funds. The position is the same as at present. If the manager of a hedge fund is independent, the same tests apply as before. They are not within the scope of corporation tax. The rules are the same.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am grateful to the Paymaster General, who anticipated what I was about to say. My hon. Friend the Member for Arundel and South Downs raised what is an important point, not least because were the Paymaster General not able to say what she has just said, there would be, to coin a phrase, real concern about ''flight'' capital. I was seeking confirmation that, in relation to hedge funds that are not based in the UK, the provisions will not affect the way in which business is done in London, bearing in mind the interaction between management in London and the broker agreement.

What the Paymaster General said was helpful. I am also grateful to her for saying that she will make available to all members of the Committee the relevant extracts from the letter to the Chartered Institute of Taxation and the Law Society. Clearly, they made a number of representations on the clause.

On the basis that it is important to register that there has been concern and to demonstrate that the matter has been properly considered, I will press amendment No. 101 to a vote. What lies on the record underpinning the arguments in relation to the incorporation of the commentary has been noted and we will be able to proceed on that basis. By pressing for a vote, we can convey to all those who are concerned that the matter has been fully considered.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 101, in

clause 147, page 85, line 33, at end insert—

'(1A) For the purposes of subsection (1)(b) an agent can only be a person who has authority to and does enter into arrangements on behalf of that person's principal which are contractually binding on that principal.'.—[Mr. Stephen O'Brien.]

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 17.

Division number 10 Adults Abused in Childhood — Clause 147 - Meaning of ''permanent establishment''

Aye: 10 MPs

No: 17 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Clause 147 ordered to stand part of the Bill.