DOUBLE TAXATION RELIEF. (Hansard, 31 January 1947)

§ The Financial Secretary to the Treasury (Mr. Glenvil Hall)
I beg to move, That an humble Address be presented to His Majesty, praying that the Double Taxation Relief (Taxes on Income) (South Africa) Order, 1947, be made in the form of the Draft laid before this House on 21st January. As the House will be aware, the Finance (No. 2) Act, 1945, provides for the making of agreements between this country and other countries for the avoidance, if possible, of double taxation; to give any agreements so made validity, this House has to present an humble Address to His Majesty praying that an Order may be made to ratify the agreement. These agreements have already been made with the United States of America, Canada, Australia and Southern Rhodesia; today we ask the House to pass an affirmative Resolution with regard to two draft Orders for double taxation relief agreements with South Africa in respect of taxation on income and estate duties.
Generally speaking, these two agreements follow, except in a manner to which I will refer later, the agreements already come to with other Dominions and with the United States of America. As far as concerns industrial and commercial profits, shipping and air transport profits, these agreements follow the other agreements. That is to say, shipping and air transport profits are taxed only in the country of residence of the concern. Other trading profits are equally taxed only in the country of residence, unless the trader has what is described as a permanent establishment in the country of origin of the income. Where that occurs, the country where the establishment is situated charges taxation only on the income which is applicable to that particular establishment. Under Union law—and I think it is perhaps necessary to refer to this, because it may be raised later by the right hon. Gentleman the Member for North Leeds (Mr. Peake)—a non-resident company is liable to taxation on the undistributed profits; in addition, non-resident shareholders are liable to pay a tax which, in the Union of South Africa, amounts to 7— per cent. on the profits which accrue. Under the present agreement, the Union are giving up these charges respectively in the case of United Kingdom companies and companies controlled by a company in this country.
1296 The agreement also follows earlier agreements with other Dominions, as far as salaries and pensions are concerned. Generally speaking, tax will be charged on these. Government salaries and pensions will normally be taxed by the paying Government; other pensions, purchased annuities and certain earnings of business visitors will be taxed by the country of residence, and not by the country where the profit or income actually accrues. This, however, does not apply to public entertainers. The only agreement where public entertainers are put in a class apart is the agreement which this country made with the United States; the House will remember that even here it did not appear in the original agreement, but was the result of a protocol made some months later.
I turn to the field of investment income. This is taxed in the Union and, except for the tax to which J have already referred, on profits paid to nonresident shareholders, is not touched by this agreement. No provision whatever is made for adjustments of interest, royalties, nor of dividends other than those to which I have already referred. I admit straightaway that this is different from the agreements we have made with the United States, Canada and Australia. In the United States agreement interest and royalties are totally exempted in the country of origin; these are taxable only in the country of residence. As far as Canada is concerned, copyright royalties are totally exempt in the country of origin, although patent royalties, interests and dividends do remain taxable in Canada. Full credit, however, is given in this country for any tax so levied.
The Union of South Africa was unwilling to exempt any investment income that might be flowing to this country. We therefore decided, in negotiating this agreement, to concentrate on what we thought vastly more important—an agreement to provide against double taxation on trading profits, shipping profits, and profits from aircraft transport concerns. We did that with all the more reason because, under the Finance Act, 1920, individuals and companies in this position do get a certain amount of relief under the Dominion Income Tax Relief Section of that Act. This means, in effect, that, as the Income Tax rate in South Africa is somewhat lower than it 1297 is in this country, even under the 1920 Act most people do get full benefit for the tax levied on investment income reaching them from South Africa. The only type of investment where that would not apply would be investments from gold mine shares, where, as I am sure the House knows, the tax levied is on the average from 50 to 55 per cent., and in some cases as high as 70 per cent., and quite obviously, a United Kingdom concern or resident would not, under the 1920 Act, get the full benefit of the relief which otherwise would come to him.
This agreement was negotiated in the summer of 1945, although we are only now asking the House to agree to an humble Address to His Majesty to ask that it should be ratified. Thus it was the first of these Dominion agreements that we made. At that time all the Dominions, I think, were anxious not to sec any relief given in this field of taxation. I am glad to say that since then considerable headway has been made, and that, as the House knows from previous agreements that we have put through, both Australia and Canada have agreed that all types of income should come within the ambit of any agreement made. I hope that, as time goes on, further negotiations may take place with the Union of South Africa on this matter in order that we may cover outstanding items; but it is most important to cover trading profits, and I think they are in fact completely covered in this agreement. The Union of South Africa have already ratified the agreement, and I think it is essential that we should take steps to follow suit at the earliest possible moment.
Perhaps I may refer also to the second draft Order in respect of which there is a Motion on the Order Paper. In this country, Estate Duty is generally levied, irrespective of domicile, on both movable and immovable property in Great Britain, and on movable property which may be situated overseas, providing the deceased was domiciled here when he died. In the Union the Estate Duty is levied on a strict definition of the property to be taxed. The test there is ordinary residence of the deceased and the situation of the property. This agreement, in Article III, lays down a code of rules by which we can determine the situs of the main categories of the property left by the person when he dies. We think this will assist both countries 1298 to see that death duties are levied in a just and equitable manner, to the satisfaction of both.

§ Mr. Osbert Peake (Leeds, North)
It will not be necessary for me to detain the House very long in my observations on this agreement, because the right hon. Gentleman has to a large extent foreseen the main criticism I have in mind. That is that the agreement is nothing like so far reaching as those previously negotiated with Australia, United States, and Canada. These agreements are highly technical, and I am quite sure very few hon. Members of this House, if any, will understand their purport. I think it is fortunate that only a very few taxation experts, lawyers, and accountants, will ever have to try to fully master the contents of these agreements. By way of example of their almost complete unintelligibility, I may cite Article V (2) (b) of the agreement relating to estate duties which tells us: in the case of any other property each Contracting Government shall allow against so much of its duty (as otherwise computed) as is attributable to the property a credit which bears the same proportion to the amount of its duty so attributable or to the amount of the other Governments duty attributable to the same property, whichever is the less, as the former amount bears to the sum of both amounts. These agreements are certainly difficult to construe, but I discerned from the terms of the agreement dealing with income and other direct taxes, that this was nothing like so far reaching an agreement as those made with other Dominions, and with the United States. The position remains the same in regard to dividend income as laid down in the Finance Act of 1920, which gives partial relief only from double taxation, where the recipient of a dividend resides in this country, and where the dividend is received from profits earned in the Dominions.

§ Mr. Glenvil Hall
Up to half.

§ Mr. Peake
Yes, but relief only to the extent of half of the taxes levied in one or other of the two countries may still leave the taxpayer with a very heavy burden to bear, and something considerably in excess of the standard rate of tax in either country.

§ Mr. Glenvil Hall
I agree that the agreement does not cover the whole field, but I hope I made it clear that it covers 1299 a very wide field, only one thing is omitted, and that is investment. Even there, the relief is considerable under the 1920 Act, except in regard to gold mining.

§ Mr. Peake
I think most of us who are at all familiar with taxation law are familiar with Section 27 of the Finance Act of 1920. I need not trouble the House with that, but the Explanatory Memorandum to the Income Tax Order makes it perfectly clear when it states that the agreement with the Union of South Africa relates mainly to trading profits, and goes on to say: As regards income other than trading income, the Agreement provides for reciprocal exemption (subject to certain conditions) of certain types of income, pensions and so on. It also says: Where income continues to be taxable in both countries, the existing system of Dominion income tax relief"…continues to apply. The latter case is that of dividend and investment income. The important point is that we have secured with Australia, Canada, Southern Rhodesia, and the United States of America, agreements which avoid double taxation in the case of dividend and investment income. We have failed to do so to the same extent in the case of this agreement with the Union of South Africa. Therefore, to some extent, there is a greater inducement for a British subject to invest in any of the other Dominions, or even in the United States, than in the Union of South Africa. That is a little unfortunate. The right hon. Gentleman has explained that the Treasury did their very best to persuade the Union Government to go as far in this matter as the other Dominions have been prepared to go. He told us that this agreement was negotiated in the summer of 1945. Quite wisely and rightly, the right hon. Gentleman and his advisers have in the meantime negotiated some better agreements elsewhere. I hope he will not abandon his endeavours to secure an agreement with the Union which is as far reaching as those admirable agreements which have been secured with the other Dominions.