I welcome the Minister of State at the Department of Finance, Deputy Cullen, and his officials to the meeting. We will now consider the two double taxation relief orders. I propose to call the Minister of State and the spokespersons to speak for as long as they wish, provided they are finished at 6 p.m.
Double Taxation Relief Orders.
This is an agreement between the Government of Ireland and the Government of the People's Republic of China for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and also a convention between the Government of Ireland and the Government of the Republic of Bulgaria for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains. On 19 April 2000 the Irish Government signed an agreement with the People's Republic of China for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. On 5 October 2000 the Irish Government signed a convention with Bulgaria for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains.
Draft Government orders confirming and giving force of law in Ireland to the agreements were laid before Dáil Éireann on 2 November 2000 in accordance with the provisions of section 826 of the Taxes Consolidation Act, 1997. A resolution by Dáil Éireann approving the draft orders is required before the Government makes the orders. The proposal that Dáil Éireann approves the orders has been referred to the Select Committee on Finance and the Public Service and we are here this evening to deal with it. It shall send a message to the Dáil in the manner prescribed in Standing Order 79B not later than 9 November 2000. Such a message shall, in accordance with Standing Order 79A(2), be deemed to be the report of the select committee.
The agreements were negotiated by the Irish Revenue Commissioners with their counterparts in the Chinese State Administration of Taxation, SAT, and the Bulgarian Ministry of Finance. The negotiations for the Chinese agreement opened in Beijing in June 1998 and were concluded in Dublin in December 1998. The rapid progress of the negotiations is an indication of the importance which China has attached to concluding the agreement. The negotiations for the Bulgarian convention opened in Sofia in July 1999 and were concluded at a second round in Dublin in April 2000.
The agreements are comprehensive in scope and generally follow the OECD model convention. They apply to taxes on income and capital gains imposed by each country. In the case of China, the agreement does not apply to Hong Kong or Taiwan on the basis that China's tax laws do not apply to those territories.
The main purpose of the agreements is to avoid the taxation in both countries of the same income or capital gains. This is achieved by either allocating exclusive taxing rights to one or other country, or, where both countries retain taxing rights, by requiring the country where the taxpayer is resident to grant credit against its tax for the tax paid in the other country. In the case of dividend interest and royalty payments, substantial reductions in domestic withholding taxes are provided for in both agreements. This will significantly reduce fiscal barriers to investment flows between each country. Other important articles in the agreements include the non-discrimination provisions which protect nationals of each country from discriminatory tax provisions in the other and the exchange of information provisions which are necessary to counter tax evasion.
The agreements are expected to have a positive impact on trade and investment between Ireland and China and Bulgaria. China, with a population of more than 1.1 billion and with recent economic reforms aimed at attracting foreign investment, offers significant potential for Irish business and investment. In 1999 it was Ireland's 19th largest trading partner and is a priority market for certain sectors of Irish business. Enterprise Ireland, which has offices in Beijing, Shanghai and Hong Kong, has reported an increase in Irish company activity in China with notable successes in the engineering sector. Key opportunities have been identified in various sectors, including the aviation services, education services, electronic components, software, construction, health care and telecommunications.
In September the Minister for Enterprise, Trade and Employment led a successful trade mission to China. More than 450 business contacts were made and the feedback from the business members of the mission was positive. Substantial business was conducted and two or three further missions to China next year are under consideration. The putting in place of the double taxation agreement with China at this important juncture in Irish-Sino commercial relations is, therefore, timely.
While Ireland's trade with Bulgaria is modest, it is an emerging economy anxious to promote investment and economic development and presents investment opportunities for businesses in Ireland. Export of goods to Bulgaria have been increasing significantly, doubling between 1995 and 1999 to £15 million. There are also a number of Irish consultancy companies competing for contracts associated with Bulgaria's economic reform programme. All the main Departments have been consulted and none has expressed any dissatisfaction with the terms of the agreements.
Our function is to welcome the fact that the double taxation agreements have been successfully negotiated. I appreciate the importance of having a double taxation agreement with China. It is potentially the leading economy at some time in the next century. It has 25% of the world's population and will represent a very significant proportion of world trade in the future.
The emerging middle class in China is, in percentage terms, quite small relative to the entire population, but is probably in excess of 120 million people. We would prioritise any country with a middle class population of 120 million for trade purposes.
I understand significant progress has already been made following the Tánaiste's recent trade mission to China in terms of commercial links with that country. We appreciate the work of the Tánaiste on that occasion for the Irish business community, particularly the representatives of those firms which accompanied her on the trip.
I am neither technically competent nor have had the time to go through the draft orders, so I will be taking them on trust. There is nothing we can do by way of amendment, anyhow, since they are international agreements. We are simply going through the necessary requirements on the Irish side to ratify double taxation agreements.
It is important when trade is developing between countries that there is no discrimination against the taxpayers of either jurisdiction in the other's jurisdiction. It is also important that countries do not provide locations for tax evasion. The potential for tax evasion arises when there are substantial trading links. It is important for such double taxation agreements to be in place. I understand both these agreements follow the OECD model, so there is nothing unusual about them.
I was interested by the exclusion of Hong Kong. I can appreciate immediately why Taiwan would be excluded because, regardless of the political theory in Beijing, Taiwan is for all intents and purposes a separate country, although there is a jurisdictional claim. However, Hong Kong is different. I would have thought the potential for tax evasion and the benefits of a double taxation agreement with Hong Kong would be more significant than the benefits of a double taxation agreement with mainland China.
Will the Minister of State give us any other information he has about the exclusion of Hong Kong? It is not enough to say it is excluded because Chinese tax law does not apply to Hong Kong. Their position is that, as they put it themselves, "One China, two systems", or, if one includes Taiwan, "One China, three systems". From a constitutional point of view, they have allowed for two systems within the one China.
While the taxation systems are vastly different, there are also differences in the taxation systems in the United States between one state and another. Obviously, the divisions here are much wider. There are differences in Germany between the taxation systems in one Lander and another. It is not sufficient explanation to say there is not a universal taxation system in China which also applies to Hong Kong and, for that reason, we cannot have a double taxation agreement with Hong Kong. If the man in the street were interested in this, he would take the conventional view that a double taxation agreement with Hong Kong would be more ad rem than a double taxation agreement with mainland China at this point. I do not want to make too much of this, but I would appreciate it if the Minister of State could give us more information.
The double taxation agreement with Bulgaria is not of any great significance. Our trade with Bulgaria is quite small. Bulgaria is quite off the pace, even in terms of east European economies. My curiosity is aroused here, however. I wonder what gave rise to a prioritisation of a double taxation agreement with Bulgaria, of all places, when there are other countries with which we do not have double taxation agreements. Can the Minister of State give an insight into the policy process which prioritised Bulgaria?
I am doing my best to keep this going until 6 p.m. when the Minister will arrive, but I am running out of wisdom so I will have to let somebody else take over.
Could we bank the questions?
I do not have a great deal to say.
The Deputy can make a contribution and the Minister can then reply.
As Deputy Noonan said, we only got a copy of the order as the meeting was starting. In any case, we do not have the expertise to peruse it in the sort of detail that would be required to make intelligent comments about its provisions.
In regard to Bulgaria, we should be paying more attention to eastern Europe, not just in terms of economic links but also in terms of political links. Many of the smaller emerging democracies of eastern Europe look to Ireland as the classic case of a small country which has made a success of European Union membership. They are very anxious to establish and cultivate links, exchanges and business with Ireland.
We have been too slow off the mark in making an impact in eastern Europe. I know we have set up direct missions in Budapest, Prague and Warsaw. However, we still do not have direct representation, as far I know, in any of the other eastern European countries. At the very minimum, we should have diplomatic representation and everything that goes with that in first phase entrants, which are countries which may be members of the European Union in a few years time. As I understand it, we are in the slightly strange situation where some of those countries, such as Romania and Estonia, have embassies here but we do not have reciprocal embassies in those countries. We have been a little slow to cultivate what could be very profitable political and economic links with those countries. It is important for us to catch up at this stage. There are possibilities there in terms of contractual work for our semi-State companies, for example, and general economic and trade links.
I had the opportunity to travel two years ago as part of a delegation led by the Ceann Comhairle to Beijing and Hong Kong. It was a fascinating experience and not what I had expected. As Deputy Noonan said, I found there was an economic middle class there which was not small. There are many people there with a fair disposable income who are interested in buying consumer goods. That obviously offers opportunities to companies looking to export to China.
I assume the principal purpose, from our point of view, of the agreement with China is to facilitate Irish business in China, rather than the other way around. I know nothing about the taxation arrangements in China. Do they have what we would recognise as capital gains taxes, withholding taxes and so on? Will the Minister of State give an indication of the benefits to Irish business looking to locate in China of this agreement?
I note that at point ten we talk about substantial reductions in domestic withholding taxes being provided for in the agreements. Will the Minister of State spell that out in more detail? I am not sure I understand exactly what is provided for there.
I want to ask about the technical parts of the agreement. The purpose of section 9 is to avoid the taxation in both countries of the same income or capital gain. If a person disposes of property they have purchased in China or Bulgaria, where, for example, the tax rate might be 30% or 35%, does the person pay tax in that country? Am I correct in saying that, having declared it on his income, he does not pay the same again if his main residence is here? Is there a tax credit or is he expected to pay again, that is double on the income that he derives from the sale of the asset?
I thank Deputies for their comments. Starting with Deputy Noonan's question, it was the obvious one that occurred to me when I was made aware of the fact that Hong Kong was not included. I learned that there are two very distinct and separate tax regimes with their own set up. The Chinese tax regime - I am talking about mainland China which signed the agreement with us - is totally and fundamentally different to that which pertains in Hong Kong. The Chinese authorities would in no way negotiate a double taxation treaty on behalf of Hong Kong; we would have to do it directly with the authorities there.
The Deputy is probably aware that the fiscal base that exists there is guaranteed for the next 50 years, so it is separate and distinct. He is probably aware also that the tax regime in Hong Kong is significantly lower than that which pertains in mainland China. It is something around 16% or 16.5% for corporation tax, so it is quite low to start with. We do not have an aversion to a double taxation agreement with Hong Kong if that is possible, but we have got into where we thought the opportunity was - to have a deal with China. The Deputy confirmed it himself, as everybody has, that for the future the potential of the Chinese market is in building on the sort of trade that is obviously growing. The visits that have been made, by the Tánaiste and others, are important and will facilitate even further growth in both directions.
On that point, Deputy O'Flynn asked me whether it was to facilitate Irish trade in China, rather than the other way around. It was to facilitate both and that is the bottom line when one is doing business.
With regard to Bulgaria, the opportunity just arose. Obviously, they made the approach to us, but sometimes in the timing of these matters it is hard to set up the process. It slotted in and was achieved. We have an agreement with Romania which we have ratified, although the Romanians have yet to do so. That is also the case with Estonia and Bulgaria.
Deputy McDowell's point is correct. The opportunities are there for the future in eastern Europe, even though, as the Deputy correctly pointed out, the Bulgarian economy might not be all that Europe would want it to be at this stage. It does not do any harm, however. At the moment, Navan Mining, Aer Rianta and the ESB are involved in Bulgaria. So, there is activity there at this point, albeit at a low level. We should be conscious of the fact that, in future, there will be opportunities to expand our connections in eastern Europe. It is something we should be doing and, certainly, we will continue to do so where the opportunities arise.
Deputy O'Flynn asked about the sale of capital assets. Irish citizens are taxable world-wide, but if the person has paid tax in another country it is credited against whatever the final bill might be under Irish tax law. One would obtain a credit for the amount one would have paid.
To bring the committee up to date, agreements with the following countries have been signed and are awaiting ratification, Bulgaria and China, with which we are dealing; India, which will obviously be a very important one; the agreement with Romania, as I said, has been signed by us and we are waiting for the Romanians to ratify it; agreements are under negotiation with Greece - we have two rounds completed there; the Ukraine, where the first round of negotiations has been completed. The Ukraine is a country where, if they got their act together, could be a hugely important area for the future. We are re-negotiating existing treaties with Canada and France. Texts have been agreed with Egypt, Slovenia and Norway, and in that case a new treaty is there to replace the existing treaty.
I have not read these, obviously, because they have only just been circulated. Is there provision for an exchange of information——
There is, yes.
——about tax defaulters, money-laundering and related matters; everything from tax evasion to downright criminal activity on the financial side?
On the specifics of this particular agreement, of course, it would cover all tax matters. There is the facility for an exchange of information which covers all that. Money laundering, specifically, would not come under this order, but it does come under the Criminal Justice Act, where there is a facility to exchange information and it is being used world-wide in the context of those agreements. During the last 18 months, I was discussing such a Bill with this committee in relation to something else with which we were dealing.
Customs and excise?
Yes, exactly.
Let us suppose a Bulgarian gentleman was to set up a company here and he applied for IDA grants, would it be possible for the Revenue Commissioners to obtain a revenue check on him under the provisions of this Act from the revenue commissioners in Bulgaria?
I would have no doubt that, certainly, under the provisions of the Act, in terms of the exchange of information directly - and information covers everything to do with taxation - it would be possible for the Revenue Commissioners here to contact their counterparts in Bulgaria to obtain a full brief on the standing of that company, from the perspective of the full gamut of their obligations to the revenue authorities in another country. That is very much a part of the agreement.