Clause 102 - Introductory

Finance Bill – in a Public Bill Committee at 3:30 pm on 20th May 2004.

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Question proposed, That the clause stand part of the Bill.

Photo of Chris Bryant Chris Bryant Labour, Rhondda

We were doing so well.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

We were doing so well, but a tiny bit must be said about chapter 7. I will do my best to be even quicker on it than I was on chapter 6. There is even less to say about chapter 7, but the whole area is a result of the huge withholding tax debate that took place in the EU. I found it absolutely fascinating and followed it closely. In response to popular demand and if I am provoked, I might develop some of the arguments.

We have an exchange of information regime to prevent evasion because, quite rightly, we do not want to go down the withholding tax route. We managed to fend off pressure, particularly from Germany, for a withholding tax, and chapter 7 reflects part of a series of agreements to deal with countries that have strict restrictions on disclosure. Those countries, Austria, Belgium and Luxembourg, are not prepared to go down that road and they want a withholding tax anyway, which is consequential upon a citizen of the UK or of any of the other countries having an account in those three countries.

We want UK citizens to get a credit on any interest they earn from an account in those countries. Under the clauses in chapter 7, they will be able to do so and get a complete tax exemption if they obtain a certificate. I cannot see any difficulties with the clauses, but it is very important that the Government do what they can to encourage citizens to certify themselves. It is important that people do not pay tax inadvertently, but it is unreasonable and very difficult for the Government to take active and vigorous steps to ensure that.

Generally, it is important to ensure that legislation cannot act as a first building block towards the spread

of a withholding tax beyond those three countries, and it would be helpful if the Paymaster General confirmed that the determination of the Government, which they eventually showed after some early hesitation, will continue. I wonder whether the battle is over and whether the issue will not return in one form or another. I will make a prediction, which I do not often do, that it will return, and it is important that the Government fight it vigorously. Beyond that, I have no objection to any provisions in chapter 7.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

If any British resident were foolish enough to put money on deposit in Luxembourg and Austria, under the current arrangements, would the British Government get the withholding tax stopped? There are obviously other jurisdictions to which the point applies, but are the arrangements robust enough? They are not much good to us if we do not get the tax into our coffers.

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

May I deal with each point briefly? Clauses 102 to 110 are the last provisions necessary for the implementation of the savings directive, which will be considered by ECOFIN to ensure that all measures are in place in all component parts, member states and third countries. Its agreement will trigger the commencement of the directive on 1 January 2005.

Last year's Finance Bill had the lion's share of the regulations, including provision for the City of London and other providers to know exactly what information they would be required to collect about European citizens, over what period and at what point the regulations would be switched on.

It is important to say that the regulations are not active. The preparation has been made but the final switching on comes as soon as we are satisfied, and that is supposed to be this June when the final decision is made that all the measures are in place.

The hon. Member for Chichester (Mr. Tyrie) asked a general question about withholding tax versus exchange of information. As he knows through debates on double taxation treaties, the Government's view, and I think the Opposition's view as well, is that exchange of information is the fairest, simplest and best way to ensure that the right of amount of tax is paid by the right person in the right place. All the arrangements ensure that UK citizens pay tax to the UK, or that German citizens pay it, if liable, to Germany.

The debate about exchange of information ranges much wider than the European Union, although that is now very large. All accession countries must comply as of 2005, when the directive becomes active. It was part of the key negotiations with those countries. The three countries that the hon. Gentleman named are in a transition to exchange of information from withholding tax, which goes from 15 per cent. for three years, to 20 per cent. for three years and 35 per cent. thereafter, with an ultimate commitment to move to exchange of information. The directive will cover all member states of the European Union.

The same debates are being conducted within the Organisation for Economic Co-operation and Development. As the hon. Gentleman knows, the

Crown dependencies, overseas territories and Caribbean countries are also committed. They are going initially with a withholding tax, but on the same basis as the three member states. They have made a commitment to move to exchange of information when the three member states do so.

The debate is also being taken forward in the G7 on the basis that it is right to ensure that tax is paid in the correct place. Extensive discussions about providing for exchange of information on a much wider basis have taken place with several countries.

Withholding tax was first discussed under the previous Government. It was not that they managed to fight it off—it collapsed. This Government started in a minority of one, with 14 favouring a withholding tax, but we have clearly established an international principle in the European Union and elsewhere that exchange of information is the way forward.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

I remember being in a Treasury meeting in about 1989 when we succeeded in fending off withholding tax after a particularly vigorous French attempt to impose it, so the Paymaster General's suggestion that it collapsed—that it was not in any way an effort of the Government of the time—is quite wide of the mark.

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

Actually, there was never a vote on the issue, so it was not fended off in that sense. As the hon. Gentleman knows, decisions in ECOFIN are taken on the basis of unanimity, so there is always the veto option and the debate never reached that point. Of course, I am not privy to the papers because the Government then—

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

The right hon. Lady will have to take what I said at face value.

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

I will certainly take the word of the hon. Gentleman, with just a little pinch of salt. I have heard what our European partners thought at the time. It is also true that that Government did not bring forward an alternative and say, ''Yes, there is a real issue with cross-border transactions of that type, where tax does not go to the relevant authority and most of the transaction is not taxed at all.'' They did not raise the question of banking secrecy, how that needs to be confronted in international forums and how it is not the way forward.

There have been some heated debates on that in the OECD, which has aimed to encourage those member states that still insist on banking secrecy—the three that the hon. Member for Chichester mentioned—and other countries in the world, that it is time that they moved away from that. It is perfectly possible to maintain confidentiality without condoning tax evasion.

With regard to sharing, 75 per cent. of the moneys collected through the withholding tax on British citizens in any of the three member states must be passed to the UK authorities and will be identified in the consolidated fund as a tax receipt. Those payments must be transferred no more than six months after the

completion of that member state's tax year. So, assuming that the mechanisms start in 2005, payments will be transferred in 2006, because all the arrangements will be in place, and 25 per cent. remains to cover the requirements of the member state that levies the withholding tax.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

How can that be done? Is it dependent on passports or on disclosure of address? This country will not be involved in that for obvious reasons, but it struck me that it is questionable technically whether we will get our fair cut.

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

The member states concerned have to follow the arrangements in the directive that specify exactly when the withholding tax should be applied. It is important to remind everybody that this year's directive applies to individuals and not to corporates.

The gearing up of the withholding tax from 15 per cent. to 20 per cent. to 35 per cent. means that it will come in at a high rate. UK citizens who suddenly find themselves paying a tax when they were not before, need to decide whether they want to declare it for the purposes of getting the relief, so that they can claim that tax back and have their income counted in the United Kingdom system.

I am sure that the hon. Gentleman can imagine—he will know of our discussions with the City of London; it was an extremely good consultation and we worked together well—that, in the process of any agreement, the aim is for the details on collection to be as tight as they can be. In fairness to the three member states concerned, they intend to be bound by the directive and to make provision accordingly. Therefore, I do not think that we need to be concerned.

I think that we need to be vigilant on the point that the hon. Member for Chichester made, which is that we need to ensure that we move forward on exchange of information and that there is no sliding back, or any other way in which withholding tax could appear on the horizon. I give him and the Committee a categorical assurance that the Government intend to do precisely that, for all the reasons that we know about: the damage that a withholding tax would do to the City of London, to the financial service industries based in the UK and, in particular, to the eurobond market. I commend the clause to the Committee.

Question put and agreed to.

Clause 102 ordered to stand part of the Bill.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

It has been put to me that it may be convenient for the Committee to take clauses 103 to 110 en bloc. Is it the wish of the Committee that I do that? [Hon. Members: ''Aye.''] In that case, I shall proceed accordingly.

Clauses 103 to 110 ordered to stand part of the Bill.

Further consideration adjourned.—[Jim Fitzpatrick.]

Adjourned accordingly at fourteen minutes to Four o'clock till Tuesday 25 May at half-past Nine o'clock.