HC Deb 17 June 1953 vol 516 cc1029-39
Mr. Erroll

I beg to move, in page 25, line 39, at the end, to insert: (3) Notwithstanding that arrangements having effect by virtue of section three hundred and forty-seven of the Income Tax Act, 1952, have been made with the Government of any territory outside the United Kingdom, any taxes which take the place of a foreign income tax or profits tax and are payable under the laws of the territory concerned shall be allowed as a credit against tax payable in the United Kingdom and the provisions of the Sixteenth Schedule to the Income Tax Act, 1952, shall have effect accordingly. The Income Tax Act, 1952, shall have effect, and this section shall be construed, as if this section were contained in Part XIII of that Act. The Royal Commission's recommendation that full unilateral relief should be given is most welcome, and I am sure that we are all glad to see this recommendation being given effect in the two Clauses of which this is the second one. It is a relief which will help some companies to overcome the barriers to international trade which are occasioned by double taxation.

Unfortunately, the scheme of double taxation relief as now operating is useful only if other countries have developed their fiscal systems to the same technical stage of progress as those of Western European countries. In many cases overseas countries either do not accept the idea of a net income basis for taxation, or—because of the stage their economies have reached—prefer to assess taxation on a simpler or more primitive basis. This applies even to one or two European countries, notably to Portugal, where a mine is assessed on the value of the ore at the mouth of the mine and not on an Income Tax basis.

6.15 p.m.

In Spain, quite a different system operates. I should like to quote briefly from a letter I have received, because it shows how entirely different the system in Spain is from that in other countries in Western Europe. The letter says: In Spain private persons in business pay an annual fixed sum which varies according to the size of the town where the business is carried on and to the nature of the business. The actual application of an assessed amount to each business is made by a sort of guild committee appointed for the purpose. This guild committee in turn takes its instructions from a department of the national fiscal board who fix annually a round sum to be contributed by each class of business in each town or province. The taxes are there, but they are not taxes on income as we understand them. I would not limit my examples solely to Spain or Portugal, because certain of our Colonial Territories—where the Colonial Government is often under the guidance of our Colonial Office—have seen fit to levy a sliding scale tax which increases with the profitability of the concern. These Governments often call such taxes royalties, but because they are called royalties it does not make them any the less like Income Tax. which is what they truly are.

These overseas taxes, whether they are called production taxes, taxes on output or on turnover, are effective income yielders in these overseas territories, and they penalise the British companies operating in competition with local firms, who pay those taxes as their contribution to the local exchequers. The British companies contribute to the local exchequers in just the same way, but their contributions are ignored for double taxation relief, and they are allowed only as a working expense. This is quite inequitable, and the Inland Revenue should recognise that these overseas levies are a drain on the taxable capacities of the overseas companies, none the less because they may be called something other than Income Tax.

It is worth looking at the practice which is followed in the United States of America, where this position is recognised in their tax law. In their scheme of double taxation reliefs they will allow for double taxation relief taxes other than Income Tax, which have broadly the same effect. It would be a great help to British companies operating in competition with American companies if they were placed tax-wise, so to speak, on the same competitive footing.

I have tried to put this matter in the form of the Amendment which I have proposed so as to afford a substantial relief to companies operating in countries where Income Tax as we know it is not the main or principal tax, so that they may get the benefit of the relief in the same way as if they were taxed on the basis of a pure Income Tax.

Mr. Mitchison

We might have considerable sympathy with the general purpose of this Clause, but I earnestly hope that the Government will not accept this Amendment. I really never knew what was meant by any taxes which take the place of a foreign income tax or profits tax. I am afraid that the hon. Member for Altrincham and Sale (Mr. Erroll) has made it perfectly clear that the phrase is too hopelessly vague to be put into any tax legislation.

I listened to his vivid description of Franco's poll tax. I thought at first that it might depend on the colour of one's hair, but apparently it is applicable to those hairless entities called companies, and it appears to depend more on the size of the place in which one is living. I suppose that any form of revenue takes the place of another form of revenue, unless both taxes are imposed at once. In no other sense can I see that there is any particular connection with Income Tax. It opens the most alluring possibilities. Apparently the amount paid did not depend on one's Income Tax, and as far as it did not depend on the town where one lived, it depended on what appeared to be the local equivalent of a Treasury decision. I hope we have not got as far as that yet. It would be an intolerable burden on the Treasury, and instead of providing the relief, we should provide what is now called a loophole leading to a vista at which I somewhat shudder from the public point of view. I see no particular reason for treating the tax in the way suggested.

I will not go through the other suggestions. Surely we should watch very carefully the whole position of relief against Income Tax in respect of tax paid in another country. I should have thought it should be carefully watched and very clearly defined and limited to what are fairly clear cases; indeed, I go a little further—limited to absolutely clear cases. When the hon. Member was moving the Amendment I wondered whether, if we had been able to take him on a world tour of taxation, he himself would have been able to say which taxes did and which did not fall in the description of his Amendment.

Mr. Maudling

I find myself in the rather embarrassing position of having to disappoint my hon. Friend the Member for Altrincham and Sale (Mr. Erroll) and of giving comfort to the hon. and learned Member for Kettering (Mr. Mitchison). For reasons which I will try to explain, we cannot accept the Amendment.

The Clause is designed to carry out one of the recommendations of the Interim Report of the Royal Commission which said that unilateral relief should be fully granted and that the existing restrictions of three-quarters for the Commonwealth and one-half elsewhere should be abolished. This we have done, and the Clause carries out faithfully the recommendation of the Royal Commission. The cost will be between £2,750,000 and £3 million annually, and we believe that it is a considerable assistance to industry and is justified.

My hon. Friend asks us to go a great deal further and to extend the whole basis of double taxation practice and theory which so far has depended upon the tax for which relief is given being a charge on income or profits and corresponding to the Income Tax or Profits Tax imposed in the United Kingdom. There are many other forms of taxation imposed overseas, and my hon. Friend referred to the example of Spain. There are various taxes or royalties in the Colonies, the Malayan export duty on rubber, the special oil duties in some Middle Eastern countries and Venezuela. There are a great variety; some are royalties, and royalties, as was decided in the case of the Ashanti Goldfields Corporation Ltd. versus Merrifield, are not the same thing as taxes. It could be argued that some of these taxes are a substitute for Income Tax or Profits Tax but others— for example, the Malayan rubber export duty—are in addition to and not in substitution for Income Tax or Profits Tax, and would not fall within the scope of the Amendment.

All these matters are being further considered by the Royal Commission. Their Interim Report was not a final conclusion on these matters, and we hope to have further advice upon them when their final Report is prepared. But I must say that even at this stage I see considerable difficulties, in particular in extending double taxation relief on the lines suggested. There is a great difference between direct and indirect taxes. Purchase Tax and indirect taxes of that kind are allowable deductions in computing profits. In the case of direct taxation, £ for £, relief is given for every £ of tax charged by the overseas tax, so that relief from United Kingdom Income Tax is conferred. Indirect taxes are charges which are deductable in assessing profits.

There is a clear distinction which must be maintained in double taxation matters between direct taxes and indirect taxes. At present the Government do not think it possible to accept the Amendment or the ideas underlying it. This matter is still before the Royal Commission, however, and the Government, and I hope the whole Committee, will await with great interest any further remarks they may have to make on the subject.

Mr. Erroll

As the matter is still being considered by the Royal Commission, who are doubtless still prepared to receive evidence, I will not press the Amendment. I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Motion made, and Question proposed, "That the Clause stand part of the Bill."

Sir F. Soskice

I must confess that I thought we should hear a little more from the Minister by way of justifying the Clause. He has told us—and it is of course the case—that this formed the subject of an interim recommendation by the Royal Commission, but it seems to me that the Minister should be prepared to deploy the reasons which justify a departure from the policy which hitherto has been pursued on the principle of double taxation relief. I am not saying necessarily that we oppose the principle of the Clause, but if we are being asked to accept it the Minister should make a case for it. With respect to him, it is not enough for him simply to point to the Interim Report and say that automatically, in effect, it must be accepted.

He said the Clause will cost the public purse a substantial sum of money— something like £2,750,000. Hitherto, we have proceeded cautiously for very definite reasons in the way of granting this double taxation relief. We started some time ago by the Clause which is now Section 347 of the Income Tax Act, 1952, which provided for reciprocal arrangements between various countries. Efforts were made to procure the extension of the relief in the way of granting unilateral relief without the negotiation of such a reciprocal agreement. It was pointed out when these attempts were made that the disadvantage of granting unilateral relief was that it provided a not inconsiderable disincentive to other countries in negotiating reciprocal agreements. I think that in Finance Bill debates in previous years the Committee gave full weight to that point.

Finally, as the matter was still pressed, the previous Government went as far as to grant the relief which is now part of the existing law—namely, the unilateral relief to the extent of three-quarters of the tax in the case of Commonwealth countries and one-half of the tax in the case of foreign countries. Now it is proposed at one swoop to remove those limits and to grant the relief at the rate of 100 per cent. I should have thought that the argument about the negotiation of reciprocal agreements still stood. If it was good before, it is good now.

Possibly it applies to a somewhat lesser extent because considerable progress has been made in the negotiation of these agreements and many countries are already party to them, but the Minister will no doubt agree with me that it is in the general interest that, as far as possible, all countries should become parties to agreements of that sort so that the burden of granting relief does not fall only upon this country but is shared by countries which have entered into reciprocal agreements with us. I suggest that the Minister should tell the Committee something about the present state and prospects of these negotiations with countries which are at present not parties to reciprocal agreements. How are the negotiations progressing? What, broadly speaking, is the range of the countries already covered by such agreements?

6.30 p.m.

What reason have the Government for forming the view that it is no longer necessary to retain the advantage of having some incentive to other countries to enter into such agreements? I have no doubt that the Government have good reasons, and I feel sure that they must have weighty considerations in mind which were weighed when these matters were discussed in previous debates, but I think that the Economic Secretary, instead of just asking the Committee to accept this Clause without further scrutiny, is under the duty to explain the Government's view with regard to it on the merits, leaving aside the technicalities, leaving aside all the things that could be brought within the scope of the relief, leaving aside the rather technical problems we discussed when the last Amendment was before the Committee. I think he should give the Committee the broad merits of the case to justify this Clause, justify the step the Government are now taking of charging the public purse to the tune of some £2,750,000 by abolishing the half-limit or three-quarter limit.

Speaking for myself, I would not oppose the purpose of the Clause at this stage without knowing more of the reasons for which the Clause was introduced, but I think it is scarcely fair that the Economic Secretary should come to the Committee and ask the Committee to pass the Clause without a word of explanation and without assuring the Committee that the Government have carefully pondered the recommendations that have been made, as I am sure they have done.

I think the Economic Secretary should be able to give the Committee the results of that pondering, and why the Government think this particular expenditure is worth while. Do they think that the disadvantage is no longer continuing from the point of view of the conclusion of other reciprocal agreements? Do they think that the loss is sufficiently compensated by the advantages to be gained by the removal of these limits? I have indicated to the Economic Secretary the request I would make to him, and I hope that he will see the justice of my request, and will say what are the reasons for commending this Clause to the Committee.

Mr. Maudling

I will gladly respond to the right hon. and learned Gentleman's very reasonable and proper request. This Clause does involve a very substantial sum of money. The real reason which prompted the Government to this decision was the importance of removing all handicaps on our exporters and on our companies operating abroad in competition with those of other countries.

There have been examples, and I think the Committee may be aware of some— in Ceylon, in particular—where British companies which have to pay both local tax and the United Kingdom tax, which together may amount to an enormous sum, have had as a result to quote prices which put them out of competition with other countries, or which result in a business becoming not profitable at all. The real reason we wanted to go ahead with the complete abolition of the restrictions unilaterally was to give this further assistance to British companies operating abroad often in keen and growing competition with other countries. That was, of course, the idea, the motive, that underlay the original unilateral relief.

I was asked why we felt we could go the whole way. Up to now unilateral relief has been the subject of definite restrictions, the idea being that it was desirable in every case where possible to achieve a double taxation agreement, and that if we for our part were to grant relief unilaterally the incentive to other countries to make agreements would thereby be diminished. That has been an argument of some force, but we consider that its force has been diminished as double taxation agreements have been acquired pretty widely throughout the world.

The right hon. and learned Gentleman asked for some account of what progress has been made. There are double taxation agreements so far as Commonwealth countries are concerned in force with all Commonwealth territories except India and Pakistan, and some territories in which the taxation certificates have, perhaps, political significance but where their economic significance is not so high—Malta, Gibraltar, and Hong Kong Otherwise the Commonwealth is completely covered. Agreements are in force, so far as non-Commonwealth countries are concerned, with the United States of America, France, the Netherlands, Norway, Sweden, Denmark, Finland, Burma and Israel. An agreement has been reached with Belgium, and is being reached with Greece, and, subject to one or two small points, with Western Germany. Negotiations are going on with Switzerland and Austria.

So the right hon. and learned Gentleman will see that a very wide range of agreements has already been reached. When we received this recommendation of the Royal Commission we weighed very carefully the advantages to British firms operating overseas of the granting of relief against the possible disadvantages to the conclusion of double taxation agreements, which might be affected by our granting relief unilaterally. Taking into account the number of countries with which we have not got agreements and the unlikelihood of there being agreements with them because of their little advantage to them, from their point of view, we did think that, on balance, to grant this relief unilaterally would be justified in the national interest, and that the quite substantial cost of £3 million would be fully repaid by the compensating advantage of the removal of competitive disadvantages under which British firms are at present labouring.

Mr. Jay

It is agreed, of course, and always was, that a concession of this sort is likely to be welcome to the trading companies concerned, but, as has been stated, the objection was always felt to be that if unilateral relief was given it would not be so likely that we should reach further double taxation agreements with those countries which hitherto had refused agreement. I do not think that the hon. Gentleman will deny that they do require some incentive, and that the incentive is lessened if this relief is given.

The hon. Gentleman has replied to that point only that we have succeeded in reaching a number of additional agreements and that a larger number of countries are covered, but surely the question still remains: Is he satisfied that, in the case of those countries not yet covered —and there are, as he admits, some—we have sufficient weapons left in our hands now that this change has been made to induce them to reach an agreement in future? Have the Government any reason to think that it will now be easier to persuade the remaining reluctant or recalcitrant countries to make an agreement without this type of instrument?

Mr. Maudling

The major point is that we felt, for the reasons I have stated, that our unilaterial action would not gravely affect the reaching of agree- ment with those other countries, because those other countries concerned have very often very little interest in making agreements, as they have no firms operating here, while British companies are operating there. We think that the disadvantage of the reduction of the possibility that further agreement will be reached is very much less than it has been in the past. It is still some disadvantage, but weighing one against the other we think the advantage to industry is much greater than the disadvantage to the possibility of concluding further double taxation agreements

Mr. Gaitskell

This is obviously not a party matter but a highly technical issue, and it is on that ground that I would press the hon. Gentleman a little further on the matter. What has happened recently to cause the change in view? It may simply be, of course, that the judgment of the Chancellor, the Economic Secretary and the Financial Secretary is different from ours on this matter, but I wonder whether there has been any new development in the last year or two about the prospect one way or the other of reaching agreement with the various countries concerned. That is my first question.

The second question I should like to ask is this. The Economic Secretary felt that now there was no prospect of an agreement with India on a 100 per cent. basis. I think that India is one of the most important countries concerned, and I was a little depressed by his reply just now, because it seemed to suggest that agreement with India was now hopeless, and that there was no chance of getting any agreement at all. I should have thought that in the case of India there would have been every incentive, so far as the Indian Government were concerned, to obtain the import of foreign capital. I should think, therefore, that we are giving away a possible inducement in making this unilateral concession.

Mr. Maudling

There have been certain developments in the last year. I think the main one would be that some of the negotiations are proving more difficult and more protracted than we had suspected. Another development is the growing competition in some of these countries which makes it very important for us to give this assistance to our enterprises. The third factor is the Interim Report of the Royal Commission, which was specially asked for and which added great weight to this.

We certainly have not abandoned hope of concluding these agreements. We consider that they are valuable and we shall continue to try to achieve them, particularly with India. However, as the right hon. Gentleman knows, the negotiations with India started in 1949, and they have not proved at all easy; there are a number of technical difficulties. In the circumstances we did not feel that we should be justified in delaying this measure of relief to industry by reason of the continuation of those negotiations. Certainly, we have not abandoned hope, and we shall continue to try to achieve those agreements.

Question put, and agreed to.

Clause ordered to stand part of the Bill.