1. Where tax is paid under the law of a territory outside the United Kingdom in respect of income which, for profits tax purposes, is or forms part of the profits for a chargeable accounting period ending at or before the end of March, nineteen hundred and fifty—
(a) credit for the tax so paid shall not be allowed by way of unilateral relief against the profits tax; and
(b) the tax so paid may be deducted in computing the amount of the profits for profits tax purposes notwithstanding that
credit (being credit by way of unilateral relief) falls to be allowed therefor against income tax; and
(c) where the income is, for income tax purposes, income of the year 1950–51, subparagraph (3) of paragraph 7 of Part I of the Ninth Schedule to the Finance Act, 1947, as modified by paragraph 2 of Part II of this Schedule, shall apply or not apply in relation to so much of the tax so paid as cannot be allowed as a credit against income tax according as the next chargeable accounting period of the trade or business in question does or does not end after the said end of March:
Provided that where the said next chargeable accounting period falls partly before and partly after the said end of March, the tax which would, but for this proviso, go to reduce the amount of the profits for the said next chargeable accounting period shall be apportioned between the two parts of the said next chargeable accounting period, and so much only of that tax as is apportioned to the second part of the period shall go to reduce the profits for that period.
§ 2. Where tax is paid under the law of a territory outside the United Kingdom in respect of income which, for profits tax purposes, is or forms part of the profits for a chargeable accounting period falling partly before and partly after the said end of March, the tax so paid shall be apportioned between the two parts of the period, and sub-paragraphs (a) and (b) of paragraph 1 of this Part of this Schedule shall apply in relation to the tax apportioned to the first part of the period as they apply in relation to income which, for profits tax purposes, is or forms part of the profits for a chargeable accounting period ending at or before the said end of March.
§ 3. Profits tax for any chargeable accounting period ending at or before the said end of March shall be left out of account in ascertaining under the proviso to subsection (2) of the section (Unilateral relief for double taxation) of this Act, the total amount of the credit by way of unilateral relief which may be allowed in respect of any tax.
4. Profits tax for any chargeable accounting period falling partly before and partly after the said end of March shall be apportioned between the two parts of the period and—
(a) the credit by way of unilateral relief to be applied in reducing the amount of the profits tax for that period shall not exceed so much of the profits tax as is apportioned to the second part of the period; and
(b) paragraph 3 of this Part of this Schedule shall apply in relation to so much of the profits tax as is apportioned to the first part of the period as it applies in relation to profits tax for a chargeable accounting period ending at or before the said end of March.
5. Any apportionment falling to be made under this Part of this Schedule of—
(a) tax which would, but for the proviso to paragraph 1 thereof, go to reduce profits for a chargeable accounting period falling partly before and partly after the said end of March; or
(b) tax paid under the law of a territory outside the United Kingdom in respect of income which, for profits tax purposes, is or forms part of the profits for any such chargeable accounting period; or
(c) profits tax for any such chargeable accounting period,
shall be made by reference to the number of months or fractions of a month in the two parts of the chargeable accounting period.—[The Solicitor-General.]
§ Brought up, and read the First time and Second time.
§ Mr. Selwyn Lloyd
I beg to move, as as Amendment to the proposed Schedule, in paragraph 1, to leave out "arising" and to insert "chargeable."
This would alter the beginning of Part I of the Schedule, and I submit that this is a reasonable change to make. I am told that there are certain cases in which income chargeable under the law of a foreign territory may not be income arising in that territory. As the purpose of this Schedule is to give relief in respect of double taxation, for which we are grateful to a certain extent, I urge on the Chancellor that he should make the relief as comprehensive as possible.
I am told that an example where income may be chargeable although not arising, is the case of a company operating in one territory and having a branch in another territory and that it may be chargeable to tax in the case of income arising in both countries. Under the new Schedule this company could only get relief from tax in the country in which the income arises. I am told the other type of case is that of India, where under the law of India a United Kingdom company would be liable to pay Indian tax on its profits arising inside and outside India if more than one half arises inside India. Therefore, according to the Schedule with the term "arising" still in it, there would be no relief in respect of the Indian tax charged on the profits of that company which did not arise in India. This is not an easy matter to explain in detail, but it must be obvious that there is a difference between the two terms "arising" and "chargeable." I should have thought that the better test would be that "chargeable" would extend the relief as widely as possible.
§ The Solicitor-General
I am sorry, but we feel we are not in a position to accept 1704 this Amendment. The proper framework for these bi-lateral agreements is that each country should grant relief to its own residents in respect of income of those residents arising in the foreign country or Commonwealth country as the case may be. It cannot be said to be consistent with proper taxation principles to admit the right of a foreign country to tax non-residents in respect of income not arising in that country. What the Amendment proposes is that the United Kingdom should grant relief to United Kingdom residents in respect of tax charged in a foreign country, not only upon income arising in that country, but also on income which that foreign country purports to charge, although it arises outside the confines of that country.
Unless one is going to have a great deal of untidiness and muddle in these reciprocal agreements when they are negotiated—and we are doing our best to negotiate them—we feel we ought to adhere to the same principle as where reciprocal agreements are entered into, the system of unilateral relief should only be applicable to income arising in the foreign countries, and should not extend to income charged in the foreign country. There is only one exception, and that is for special reasons, in the Isle of Man and the Channel Islands, but these special reasons cannot be said to be reasons for general application, and I hope, therefore, that the Committee will agree to reject the Amendment.
§ Colonel Crosthwaite-Eyre
Can the right hon. and learned Gentleman say whether, under the existing bilateral agreements, it is not a fact that the income subject to the reliefs we are discussing are the amounts chargeable and not arising, and that this new term is only in respect of the new Schedule?
§ Mr. Foster
I think the argument of the learned Solicitor-General is based only on tidiness. I ask the Committee to support this Amendment on the ground that it is illogical to give relief for foreign tax only in respect of tax arising in that foreign territory. The idea of unilateral relief is to regard foreign tax as a kind of expense. I am putting it crudely, and not in a technical way. From the layman's point of view, it says that where a trader is taxed abroad that should be accounted as expense. What logical reason is there 1705 for not counting it as an expense if it is, let us say, Indian tax levied upon income in India, but not as an expense when it is Indian tax levied upon income going into India, say from Egypt.
There is no logical reason for the distinction. The Solicitor-General says it is for the sake of keeping it tidy, and that otherwise there would be too many complications. I promise him that there will not be. American legislation is beneficial to American traders and just says that foreign tax shall be an expense. That is all that need be said. I do ask the Solicitor-General to reconsider this.
§ The Solicitor-General
In answer to the first question, our present reciprocal double taxation relief arrangements relate only to income arising, not to income chargeable. I did use the word "tidy-ness." It was perhaps a bad word, but I meant that we thought it was consistent with taxation principle only to extend this relief to income arising. It is for that reason that we have worded the Schedule in the way it appears. We would only recognise the right of foreign countries to impose tax upon income