There seems to be one person who would like to hear more from me, but perhaps he will make a few interesting interventions.
The chapter is motivated by the desire to move away from source-based taxation. The idea is that within the EU people should be able to make payments of interest and royalties without withholding tax. That is the intention of the directives that have been going through. As a result, the country with taxing rights would be the recipient country. The UK already has a vast battery of double taxation agreements designed to have just that effect. I do not know how many there are—[Interruption.] I have been informed that there are just over 100. There has also been a lot of work going on at EU level. The EU interest and royalties directive comes on top of the 1992 work on dividends. Along with other directives, it is designed to enable the free flow of interest, royalties and dividends without any application of withholding taxes. We all welcome that, so it is not really an issue.
I hope, Sir John, that you will allow me to refer briefly to the chapter in general. It contains some other advantages. A minor one is that some countries with double tax agreements do not supply zero taxation back to the UK. The tax liability remains 10 or 12 per cent., but that will fall to zero once the directive is in force. That benefit will come with implementation of these clauses.
The most important thing to consider when dealing with such clauses is whether there is any gold-plating on top of what the directive might in any case apply. Of course, putting a directive on the UK statute book sets the hearts and minds of small groups on both sides of the House racing. I have taken a good look for gold-plating, but apart from a few tiny odds and ends, I cannot find any at all. That is good, because it means we can spend less time on the clauses, but I would like the Economic Secretary to confirm that there is not any gold-plating that I have not spotted.
Thank you, Sir John, for your indulgence on those general points. On clause 94 specifically, only firms whose parent has at least a 25 per cent. interest in the subsidiary will take advantage of it. That raises several questions. I got into deep trouble by asking the Economic Secretary seven or eight questions the last time I spoke on a clause. As he felt that that was far too many at one go, I had better get my questions down to about three.
The first is a general question. Is the Economic Secretary confident that the clause deals with commercial reality, which often involves chains of companies that own small shares one after another? I am not sure that that has been taken into account, as the clause deals only with the direct subsidiary.
Secondly, why is the clause limited to direct holdings when most UK tax law deals with both direct and indirect holdings?
It may not be. There are two types of gold-plating: gold-plating that may make life much more difficult for UK firms, and the tiny permissible changes that can liberalise a regime. I am suggesting one such approach. Indeed, had I known that this subject would be of such enormous interest to everyone here this afternoon, I would have tabled an amendment. I have one with me but decided not to delay proceedings by tabling it. [Interruption.] The Paymaster General tempts me to do so.
My suggestion would be of the liberalising variety. The hon. Member for Wolverhampton, South-West can stand up and disagree with me if he thinks I am wrong. It would be genuine gold-plating, not the ''All that glisters is not gold'' type of gold-plating.
I do not wish to draw the hon. Gentleman into falling foul of the Chairman, but he seems to be proposing two types of gold-plating. I have often heard the expression ''gold-plating'' from Conservative Members when dealing with European laws. Could he delineate a little further the conceptual difference between good and bad gold-plating, specifically in terms of the clause?
I am grateful for your guidance Sir John.
If the hon. Gentleman reads what I said a moment ago, he will find a basic, generic definition. I shall now move on quickly before I am ruled out of order.
It would be logical to include the phrase ''and indirect'' somewhere in the clause and I would like the Economic Secretary to consider that suggestion. I do not think that there would be any downside whatever—there may be an upside to that appropriate and attractive gold-plating.
My third question is a practical one. To get the withholding tax back, someone must obtain an exemption notice from the Inland Revenue and, in practice, it may take months for that to be issued. Can anything be done to speed that up and avoid the long delay? For example, why not permit the exemption to be applied from the moment that the application is made? Someone with an application under a double tax treaty arrangement would be in that position. They would not have to have the exemption certification in their hand. They could make the application and, from that moment, it would be active. There is always a risk that the Inland Revenue would challenge that arrangement and that it would have to be reversed, and in that case they would have to cough up, but they would have to do that anyway under a double taxation arrangement.
I should be grateful for an indication of the Economic Secretary's view on those three questions.
As the hon. Gentleman says, clause 94 is part of the package of clauses 92 to 101. Together, they implement a European directive into UK law. They provide an exemption from UK tax for companies in other member states when a related company in the UK pays them interest or royalties. When the directive is fully implemented by all member states, it will ensure that tax is levied on those payments only once in the European Union—by the state in which the recipient is resident for tax purposes. That has not been fully achieved through the network of 100-plus bilateral double taxation treaties that we have with other member states.
The hon. Gentleman raised three particular points. First, he said that he had had a good look for gold-plating and had not found any. At the risk of trying your patience, Sir John, I do not know whether gold-plating will help the Paymaster General with her current tooth problem, but the hon. Gentleman did not find any gold-plating because there is none. The legislation closely and accurately implements the Council directive. It does not go further. To go further would have little practical benefit for UK companies and would have a downside for the Exchequer. It is important to recognise that the changes are useful but modest. The purpose of the clause is to implement the directive. Most of the advantages are already available through double taxation treaties.
A general point is the answer to the hon. Gentleman's second question: why are the Government not providing similar benefits when
there are indirect relationships? In the first instance, companies can often achieve the same results through bilateral tax treaties, but the directive—this is the important point—is being implemented throughout the Community. Unless all member states implement the directive similarly, the reciprocal effect will be lost, creating more winners and losers among member states. To be frank, the Government would welcome a general widening of the directive's application to more associated companies than are currently within its scope, but there is no advantage to us or to UK companies in acting unilaterally beyond the measures that other member states are putting into place.
What is the time scale in which other member states will implement the measures? Are we ahead of the game, or is this happening across the EU at the same time?
The hon. Gentleman will be aware that there is an implementation date that applies across the EU. The national legislation and appropriate moves of the 15 states that were members prior to 1 May are proceeding together. Arrangements are being put in place and negotiated for the 10 latest members of the EU. Therefore, the short answer to his question is that the other member states are proceeding pretty much together with us.
Will the Economic Secretary confirm that it is his view that there will be no benefit whatsoever to business activity—in terms of removing complication and unfairness—by adding the word ''indirectly'' to the clause? He seemed to be saying that adding it would have no effect. I understand his first point—that we are faithfully reproducing the directive and putting it straight on to the statute book. My point was that this might be one of those rare occasions where a benign bit of gold-plating will reduce some unfairness and eliminate some complications.
Perhaps I did not make myself clear enough. My main point is that for the benefits of the provisions—modest though they are—to come to UK companies, consistency with the provisions that are being put in place in other member states is important. Unilaterally widening the scope—I understand the hon. Gentleman to be arguing that we should—would be inconsistent with what is happening across the European Union.
The hon. Gentleman asked about exemption notices. He said, rather loosely, that it can take many months for exemption notices to come through. The directive provides for a period of three months. In many case, the Inland Revenue issues an exemption certificate well within that period. He asks why we do not allow relief when the application is made. The procedure that we have in place, and which will be consistently followed if the Finance Act contains the clauses, is that the Inland Revenue needs to ensure that a non-resident is entitled to relief. There is no other way to collect tax when payment has crossed the border. That is the reason that we have exemption certificates at the moment.
We are treating the payments in the same way as we treat the existing double taxation treaties. We are treating interest payments differently from royalties, as the hon. Gentleman will know. The reason that we have a cautious system for interest payments in place is that the potential flows of those payments are enormous—around £100 billion is at stake in such transactions. Therefore, it is right that we take a cautious approach and have a system of prior approval. That is what the exemption certificates are designed to provide. On that basis, I hope that the Committee will support the clause.
Question put and agreed to.
Clause 94 ordered to stand part of the Bill.
Clauses 95 to 101 ordered to stand part of the Bill.