SELECT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Wednesday, 15 Dec 2010

Double Taxation and Exchange of Information Agreements: Motion

Chairman

The purpose of the meeting is to discuss a motion referred by the Dáil relating to 11 double taxation agreements with Malaysia, Austria, Germany, Albania, Hong Kong Special Administrative Region, Kingdom of Morocco, Montenegro, Republic of Singapore, United Arab Emirates, Kuwait, and the Republic of South Africa and eight exchange of information agreements with the Cook Islands, Antigua and Barbuda, the British Virgin Islands, Samoa, St. Vincent and the Grenadines, Saint Lucia, Republic of Marshall Islands and Belize.

I welcome the Minister of State at the Department of Finance, Deputy Mansergh, and his officials and I thank them for attending and assisting in our consideration of the motion. A briefing note was provided by the Department and if we adhere to a strict schedule, the Minister of State will address the committee, after which each Opposition spokespersons will respond. We will have a vote at 2.50 p.m. I ask everyone to switch off their mobile telephones.

Minister of State at the Department of Finance (Deputy Martin Mansergh)

I move:

That Dáil Éireann approves the following Orders in draft:

(i) Double Taxation Relief (Taxes on Income) (Malaysia) Order 2010,

(ii) Double Taxation Relief (Taxes on Income and Capital Gains) (Republic of Austria) Order 2010,

(iii) Double Taxation Relief (Taxes on Income and Capital and Gewerbesteuer (Trade Tax)) (Federal Republic of Germany) Order 2010,

(iv) Double Taxation Relief (Taxes on Income) (Republic of Albania) Order 2010,

(v) Double Taxation Relief (Taxes on Income) (Hong Kong Special Administrative Region) Order 2010,

(vi) Double Taxation Relief (Taxes on Income) (Kingdom of Morocco) Order 2010,

(vii) Double Taxation Relief (Taxes on Income) (Montenegro) Order 2010,

(viii) Double Taxation Relief (Taxes on Income) (Republic of Singapore) Order 2010,

(ix) Double Taxation Relief (Taxes on Income and Capital Gains) (United Arab Emirates) Order 2010,

(x) Double Taxation Relief (Taxes on Income) (State of Kuwait) Order 2010,

(xi) Double Taxation Relief (Taxes on Income and Capital Gains) (Republic of South Africa) Order 2010,

(xii) Exchange of Information relating to Taxes (Cook Islands) Order 2010,

(xiii) Exchange of Information relating to Taxes (Antigua and Barbuda) Order 2010,

(xiv) Exchange of Information relating to Taxes (British Virgin Islands) Order 2010,

(xv) Exchange of Information relating to Taxes (Samoa) Order 2010,

(xvi) Exchange of Information relating to Taxes (Saint Vincent and the Grenadines) Order 2010,

(xvii) Exchange of Information relating to Taxes (Saint Lucia) Order 2010,

(xviii) Exchange of Information relating to Taxes (Republic of the Marshall Islands) Order 2010, and

(xix) Exchange of Information relating to Tax Matters (Belize) Order 2010.

copies of which were laid before Dáil Éireann on 19 November 2010, 1 December 2010 and 2 December 2010.I am pleased to have the opportunity to come before the committee regarding a subject matter in which there is agreement across all political parties, which is the expansion of our network of double taxation agreements and tax information exchange agreements.

I am glad to report substantial progress since I last appeared before the committee in this regard this time last year and to introduce 19 draft orders giving the force of law in Ireland to seven new double taxation agreements, four protocols to existing double taxation agreements and eight new tax information exchange agreements. I will explain why so many agreements are being presented to the committee at one time.

First, there has been a significant acceleration of the process of signing tax information exchange agreements between OECD countries and offshore jurisdictions. This acceleration has resulted from international pressure against tax evasion through the use of offshore jurisdictions and also strict bank secrecy rules. Of most significance was a G20 communiqué in April 2009 advocating a much tougher stance against tax secrecy and later that year in Pittsburgh a call by the G20 for the use of countermeasures against jurisdictions that did not adopt the standards developed by the OECD.

As part of a Franco-German initiative, I attended and spoke at two meetings, as Minister of State representing Ireland, of selected EU and OECD countries, the first on transparency and exchange of information on 20-21 October in 2008 in Paris, and a second meeting focused on responses to the failure of implementing the standards of transparency and exchange of information for tax purposes in Berlin on 23 June 2009, where the then German Finance Minister, Peer Steinbruck, spoke with passionate indignation about the impact of tax evasion and tax havens on the public services the state was able to fund. There is no doubt that the net effect of the pressure that has been exerted has produced significant progress.

Second, the new climate of engagement that resulted from the G20 and related actions in which we were directly involved has afforded opportunities for Ireland to secure double taxation agreements with jurisdictions that had previously been beyond our reach because of their prior refusal to accept the OECD Article 26 exchange of information standard.

The seven double taxation agreements before the committee are with Hong Kong, Albania, Singapore, Morocco, United Arab Emirates, Montenegro and Kuwait. The four protocols to existing double taxation agreements concern South Africa, Germany, Austria, and Malaysia and the eight tax information exchange agreements relate to Samoa, St. Lucia, Antigua and Barbuda, British Virgin Islands, the Cook Islands, St. Vincent and the Grenadines, the Marshall Islands and Belize. The double taxation agreements represent a significant spreading of the Irish tax treaty network into key developing countries and trading partners for Ireland. Their addition to the Irish network will be welcomed by Irish business, as they will allow greater freedom of access to markets in the countries concerned.

The second batch of draft orders concerns four protocols to existing double taxation agreements. Three of those - Austria, Malaysia and South Africa - facilitate the updating of existing double taxation agreements to the OECD information exchange standard. The protocol to the South Africa double taxation convention also amends the dividend provisions to align them with South Africa's current tax policy. The fourth with Germany amends the provisions of the German treaty dealing with double taxation relief for dividends paid by Irish companies to residents of Germany.

Finally, eight draft orders are presented in respect of new tax information exchange agreements, which will allow the Revenue Commissioners to request directly information from those jurisdictions that is relevant to an Irish tax investigation such as bank account information, or company or trust ownership information. The agreements will, therefore, greatly assist the Revenue Commissioners in tax investigations involving entities and bank accounts located in these jurisdictions. The committee's consideration of these double taxation agreements and tax information exchange agreements is an important step in their ratification process, as required under the Constitution and the Taxes Consolidation Act. I commend these draft orders to the committee and will be happy to deal with any questions.

Deputy Michael Noonan

I thank the Minister of State for his remarks and his full account of what is happening. I have no problem with most of what he said but I have a problem with the double taxation agreement with Hong Kong. The problem is it applies a 10% withholding tax in exchanges between Ireland and Hong Kong. Such tax applies to certain payments, usually just dividends, interest or royalties paid from one country to another. The logic behind the tax is that the source state, the country in which the taxpayer pays the interest, should be able to obtain tax revenue because, in the absence of any withholding tax, it would not be able to tax the non-resident recipient. However, when a taxation agreement is in place, the tax is normally eliminated but that has not happened in the negotiations with Hong Kong and a 10% tax still applies.

Ireland is trying to develop a significant financial services industry, particularly in Dublin, and a key factor for a multinational group in deciding whether to establish a banking, treasury, leasing or holding company in a country is to establish whether the country has tax treaties and whether withholding tax applies in double taxation agreements with that country. The other side of the equation is that when Ireland receives interest from a treaty country, it is also relevant and it is important that there would be a zero rate in the treaty. To date, our treaty negotiators have done an excellent job in all the double taxation agreements they have negotiated but there are exceptions to the zero withholding tax rule, principally Australia and Japan. They still apply a 10% withholding tax but they also do so with countries that have a double taxation agreement with them. It is not relevant, therefore, for the purposes of the discussion. Perhaps because Hong Kong is in the same part of world, our negotiators applied the 10% withholding tax rate of Japan and Australia to that country as well. However, Hong Kong does not apply a 10% rate in its double taxation agreements. Its officials are happy with a 0% rate. My information is that Hong Kong did not want, nor seek nor ask for a 10% withholding tax. It was happy with a zero rate and the 10% was included at the behest of the Irish authorities. Given the growing importance of China and Asia and the long-established status of Hong Kong as a financial centre, it is clearly a retrograde step to impose this 10% withholding tax when attracting finance vehicles to Ireland. I ask that an amendment be made to remove the 10% withholding tax. If my information is correct, it is included entirely at the behest of the Irish authorities. The Hong Kong authorities wanted it at zero rate, which is their practice in double taxation treaties. I do not know the procedure or whether the Minister of State can accept amendments or whether this has to be withdrawn for reconsideration and further negotiation. Fine Gael objects to this proposal and will not agree to it.

Deputy Martin Mansergh

I thank Deputy Noonan for his general support for the agreements. I will say a few words about the importance of Hong Kong and then I will deal with the points he has raised.

I visited Hong Kong for the Asia-Pacific forum at the end of September and in connection with World Expo 2010 in Shanghai. Hong Kong has a population of approximately 7 million people. It is a major Asian commercial hub. The Hong Kong Government's economic policy is guided by the need to harness the opportunities offered by mainland China's spectacular economic growth while protecting Hong Kong's lead over rival business centres such as Shanghai, in terms of infrastructure, regulation and the rule of law. The closer economic partnership arrangement between Hong Kong and China is at the core of this strategy.

Hong Kong is used by China. Most of the outward investment from China, including banking investment, will be done from a Hong Kong base rather than a mainland China base. Hong Kong was Ireland's 16th largest merchandise trading partner in 2009. We had exports of merchandise totalling €765 million last year and exports of services of a further €120 million. Principal merchandise exports include office machines, automatic data processing machines, medical and pharmaceutical products and organic chemicals. It is expected that the tax agreement will encourage further growth in trade and investment between both countries, or in the case of Hong Kong, jurisdiction.

Irish companies active in Hong Kong include Smurfit, Baltimore Technologies, Intuition Publishing, Kingspan, Kelly Group, Data Control, Apex, Iona Technology, Butler Manufacturing, Parthos Technology, Smart Force, PARC Aviation and Network 365.

Hong Kong has signed double taxation agreements with several OECD countries including Austria, Belgium, France, Hungary, Japan, Luxembourg, Sweden, Switzerland and the United Kingdom.

Hong Kong has a territorial taxation system. Under this system, foreign-sourced income, including interest, will not be taxed in Hong Kong. Furthermore, Hong Kong does not have a withholding tax on interest payments paid to non-residents. These features of its tax system could open up possibilities of aggressive tax planning involving the Ireland-Hong Kong double taxation agreement.

Ireland's usual treaty policy is to seek nil withholding rates for interest payments. However, to avoid double non-taxation, a 10% rate was agreed to be included in the treaty. This presents opportunities for international tax planning. If Ireland did not take protective measures in this regard it could damage its ability to get beneficial terms, including a zero rate on interest, from other jurisdictions.

Up to the enactment of the Finance Act 2010, under Irish domestic taxation laws, interest payments to companies resident in a country with which we have a double taxation agreement, were exempt from Irish tax. This Irish domestic tax provision was amended in the Finance Act 2010 so that interest payments from Ireland to companies resident in a treaty partner country are only exempt when the interest payment is liable to taxation in the treaty partner country. I can provide the Deputy with a copy of this briefing note if he requires it.

Deputy Terence Flanagan

I welcome the Minister of State. Will the Revenue Commissioners be in a better position to take cases against individuals or companies as a result of these agreements? Are there any cases in the pipeline? Are there cases of Irish companies or individuals evading taxes which the Revenue Commissioners could collect? How much could they expect to collect as a consequence of these agreements becoming law?

Deputy Martin Mansergh

All these agreements enhance the ability of the Revenue to follow up cases of suspected tax evasion, for example, offshore revenue investigations and reference to tax information exchange agreements, TIEAs. The trust and offshore structures investigation commenced in 2009 and is focused on identifying undeclared tax liabilities by persons who have transferred or settled assets or funds onto trusts, whether Irish or foreign or offshore structures. The inquiries involve an examination of the tax treatment of the underlying assets and funds and the income and gains arising within the structures, as well as any disbursements made out of the structures. The yield from the investigations so far is €32.45 million from 160 cases. The investigation is ongoing and it involves the examination of third party information, the use of legislative powers and tax information exchange agreements, TIEAs. This third party information was provided to Revenue by professional advisers, solicitors, accountants, banks, etc., under section 896A of the Taxes Consolidation Act 1997 and also section 93 of the Finance Act (No.2) 2008 refers, giving details of Irish resident or ordinary resident settlers, non-resident trustees and dates of settlements. This information related to offshore settlements made since 24 December 2003, namely, five years prior to the amendment of the 2008 Finance Act. Some 1,100 persons with offshore settlements involving non-resident trustees were identified as part of this process.

Deputy Terence Flanagan

With regard to these new agreements with these countries, how many such cases are involved?

Deputy Martin Mansergh

I do not have that information to hand. The agreements before the committee today have not yet been ratified so taxation information exchange agreements are not as yet in place with those countries. I presume there will not be retrospective arrangements.

Both the double taxation agreements and tax information exchange agreements, TIEAs, will assist greatly in investigating individual cases. We do not have a number for the individual cases at this stage in those countries but these agreements greatly reduce the potential hiding places and secrecy jurisdictions where undeclared income can be hidden. The benefits will be evident from here on in, after the agreements have been ratified.

Deputy Terence Flanagan

These are not exactly the countries we have heard mentioned on the news in the past, in the context of the activities of Irish citizens.

Deputy Martin Mansergh

We already have agreements with places like the Cayman Islands.

Deputy Terence Flanagan

The Cayman Islands and Jersey would be the most popular locations in this context.

Deputy Martin Mansergh

Unless these agreements are in place, it is sometimes difficult to identify the extent of the problem, if any.

Deputy Andrew Doyle

I would like to ask about the taxes and the persons who will be covered. I am aware that income tax, corporation tax and capital gains tax are covered. I am concerned about those who exclude themselves from this country for tax purposes. I am thinking particularly of artists and band members who normally reside here but exclude themselves from the State for a certain number of days each year. Do they avail of tax provisions in the countries where these agreements apply?

Deputy Martin Mansergh

The sort of people to whom the Deputy refers have already been identified, in a sense. These agreements can be used to make sure they are acting in compliance with tax law.

Chairman

There are no other questions. Do Deputy Noonan's colleagues know whether he intends to return to speak on the Hong Kong issue?

Deputy Terence Flanagan

I do not think we are pressing it.

Deputy Andrew Doyle

He had to go to meet somebody. He said he will not be pressing the objection.

Chairman

Okay.

Deputy Terence Flanagan

If this is agreed by the committee, how long will it take to become law?

Deputy Martin Mansergh

After it has been agreed by the committee, it has to be incorporated in the finance Bill. We arranged this meeting to take place now, before Christmas, so that the agreement could be included in the finance Bill. We have to wait for the other countries to complete their processes of ratification as well. The negotiation is complete. It is a question of parliamentary ratification in the respective jurisdictions. This is part of that process.

Chairman

I thank the Minister of State and his officials for attending today's meeting. We have completed our consideration of this motion.

Question put and agreed to.