HC Deb 08 June 1961 vol 641 cc1404-29

3.56 p.m.

The Solicitor-General (Sir Jocelyn Simon)

I beg to move, in page 9, line 42, at the end, to insert: Provided that this section shall not operate so as to increase, under paragraph 7 or 8 of the said Sixteenth Schedule, any amount of income or of income received in the United Kingdom.

The Chairman

I think that it would be convenient to discuss with this Amendment the Amendment in page 9, line 45, at the end, to insert: (3) In the said Schedule sub-paragraph 2 of paragraph 7, and sub-paragraphs 2 and 3 of paragraph 8, shall not apply to relief given under this section.

The Solicitor-General

Thank you, Sir Gordon. The Government Amendment—

Mr. John Diamond (Gloucester)

I apologise for interrupting, Sir Gordon, but it was simply not possible to hear what was said. Is it the case that the first two Amendments are not selected and that only the Amendment in line 42 is at present being discussed?

The Chairman

We are discusssing that Amendment and the one in line 45.

The Solicitor-General

The Amendment which I have moved raises the same point as the Amendment in line 45 in the names of a number of my hon. Friends, but, for reasons which I hope it will not be necessary to go into, ours is technically preferable. Both Amendments raise a rather recondite point. To explain it, it will be necessary for me to explain the purpose of the Clause. I hope that the Committee will, therefore, bear with me in the hope that anything which I say now on the Amendment will redound to the benefit of any debate which we may want to have on the Question, "That the Clause stand part of the Bill".

The Clause is designed to enable double taxation agreements to be made so as to embrace a type of tax relief which some of the underdeveloped countries find particularly advantageous to them. As the Committee knows, under the existing law double taxation agreements can be entered into between Her Majesty's Government and a foreign Government to give mutual relief against a single source of income being taxed both in the country of origin and, roughly speaking, in the country to which it is remitted. For example, if a United Kingdom resident enjoys an income from a foreign source which is remitted to this country, without a double taxation agreement it would be taxed both in the country of origin and on its receipt in this country.

Under the existing law, double taxation agreements can be entered into which will limit the total amount of the tax payable to the highest amount payable either in the country of origin or in the country to which it is remitted. For example, if income is remitted to this country from a foreign country and it bears Income Tax at only 4s. in the £ in the foreign country, credit will be given for the amount of tax represented by that 4s. against the higher tax which is exigible in this country and only the balance will be payable in this country.

Certain underdeveloped countries give what are sometimes known as tax holidays; at any rate, they give tax reliefs to encourage all types of investment, particularly investment in the nature of long-term funds to help the setting up of industry in those underdeveloped countries and generally to promote their economic expansion and welfare. The effect of the existing double taxation agreements is that the benefit of those reliefs is frustrated.

What happens, in effect, is that in so far as tax is reduced and dispensed with in the country of origin it merely means that the tax liability in this country is higher; and, as I said, the benefit is frustrated in the country of origin. I think that I carry the whole Committee with me when I say that that is undesirable, because it is stultifying the effect which is conducive to the industrial development and the general economic progress of the underdeveloped countries.

The object of this Clause is to obviate the frustration of the foreign tax relief, by enabling credit to be given against United Kingdom tax for the foreign tax which is spared as well as the foreign tax which is paid. That cannot be done, as I have said, under existing law. Indeed, the expression "double taxation agreement" really crystallises the difficulty, because there is in the case I postulated no double taxation; the taxation is spared in the country of origin.

That brings me to the need for the Amendment, because the Clause, as it operates, does have an untoward effect. The general position in double taxation agreements is that the amount of income which is to be assessed to United Kingdom tax is the gross amount before the deduction of the overseas tax. That is necessary because otherwise there would be excessive relief to the taxpayer. What he would get, in, effect, would be, first, the deduction of the overseas tax in order to arrive at his assessable income in the United Kingdom, and, secondly, the same sum as a credit against United Kingdom tax on the sum so reduced.

To give an example in the simplest case of all. If we have a United Kingdom resident who got an income of £100 from a foreign source with £20 overseas tax, what he would actually receive would be £80; and if £80 only were charged to the United Kingdom tax he would get the double benefit of first of all of having the £20 deducted before his income was assessed to tax and then the same £20 set against United Kingdom tax on that £80, £100 less £20.

So what the paragraphs of the Sixteenth Schedule referred to in the Amendment say is that the foreign tax of £20 in the case I postulated must be added back to the net sum received, and under the existing double taxation agreement that is obviously the correct procedure in order to arrive at the correct result. But that does not work at all in the case with which we are concerned in this Clause. The effect of adding back the overseas tax to the net income received is quite irrelevant to the case with which the Clause deals, because the Clause proceeds on the very basis that no tax has been paid.

In the example I gave it would mean that the income which was assessed to United Kingdom tax would not be the £100 actually remitted but £120, which is £20 more than was ever received at any time. What the Amendment does is to prevent the Clause from operating in that way in the particular circumstances which I have described, and I hope that it will commend itself to the Committee.

Mr. James Callaghan (Cardiff, South-East)

I should like to say a word about this Amendment. I listened to the Solicitor-General's explanation, which was clear, as always, and I have also had the benefit of advice from my hon. Friends to whose advice I have listened for the last thirty years, and I think that I understand the purpose of the Amendment. It is, of course, of some marginal importance, but I should like to say that while I do not oppose this Amendment I think that this is an example of how the Treasury strains out the gnat and swallows the camel.

Frankly, it is only of marginal importance in the sort of territories the right hon. and learned Gentleman was talking about, the underdeveloped territories. In those territories the real nigger in the woodpile, if that is not an inappropriate term in this connection, is the Treasury, because of its ideological objection which it has to allowing the Colonial Development Corporation to expand its enterprises in territories which have become independent. Having taken some recent advice on this matter, I do not think that this Amendment would be either here or there; in certain circumstances it would really be of no very great importance.

If only the right hon. and learned Gentleman would get his Treasury officials over this hurdle that they will not allow the Colonial Development Corporation to expand its activities. I do not know, but I cannot think of any businessman on the other side of the Committee who would ever agree that his business should not be allowed to expand but that it must remain static, but that is the prescription which is placed on the activities of the Colonial Development Corporation.

As the object of this relief is to enable development to take place in these territories, and to encourage development there, all I want to say to the Solicitor-General is that I think that he could really do a great deal more to help that other than by this Amendment if only he would allow the Colonial Development Corporation to expand its activities in these territories. That is the simple message I want to leave with him.

We have raised it many times. We never get any acknowledgement from the Treasury of the force of the argument, which is held in common by the Corporation and on his own side and which certainly would be held by any businessman in connection with his own business. I imagine that it is like riding a bicycle: unless you go on you will fall off. No businessman could possibly ever accept a condition that he must not be allowed to expand his business.

In the constantly diminishing Colonial Territories which we have at the present we not only place an unnecessary burden on the Colonial Development Corporation, which may or may not be regarded as important, but we offset the advantage or one of the advantages of this Amendment which the Solicitor-General has commended to us because we are handicapping ourselves by preventing the Corporation from doing the job it was set up to do.

I put it to the Solicitor-General that if he is thinking in terms of developing investment and expanding activities then, before the next Finance Bill comes round, he should release the Colonial Development Corporation from the straitjacket in which he has put it.

Mr. G. R. Mitchison (Kettering)

On a point of order. In view of what the right hon. and learned Gentleman has said, and of what my hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) has also said, are we to consider this debate as being a debate on the Question "That the Clause stand part of the Bill", or are we to have a separate debate on that Question?

The Chairman

It occurred to me that it might be convenient to have one discussion on this Amendment and on the Clause, but it is a matter for the Committee.

Sir John Barlow (Middleton and Prestwich)

Many of us who have been concerned about this matter for many years are grateful to the Government for trying to put it right. There has been considerable difficulty in overseas taxation of this sort for many years and the House of Commons is anxious that under-developed countries should be helped. In the past taxation has been very onerous on people who have been trying to do that and for that reason we welcome the Amendment.

I should like to ask the Chancellor of the Exchequer, however, to look at the matter again. It is a very complicated subject and I suggest that in certain circumstances, by grossing up, the Government may overdo the case and take more in taxation in some cases than they had actually proposed to do. Three Amendments have been tabled more or less on these lines. This is much too complicated a subject to go into here and now.

Hon. Members


Mr. Diamond

On a point of order. The hon. Baronet the Member for Middleton and Prestwich (Sir J. Barlow) refers to three Amendments, the third being the Amendment in his own name Which is No. 114 on the Notice Paper, but, in fact, comes after the Amendment which has been moved and which is No. 120. You, Sir Gordon, have not indicated whether the Amendment in the hon. Baronet's name will be called or not.

The Chairman

It will not be called because it is wider than the Budget Resolution.

Sir J. Barlow

I hope that the Government will look into this matter carefully before we reach the next stage of the Bill. I am sure that we all want to do the right thing. We want to help the under-developed countries. We do not want to overtax any dividends coming into this country, but, at the same time, we want to do the just thing. I urge the Government to have another look at the matter and to consider whether they are doing by means of the Amendment exactly what they wished to do in the circumstances.

Mr. Diamond

We are, apparently, to have a discussion on the principle of the Clause as well as on this Amendment. I hope, therefore, that the Solicitor-General will go further and explain why he is limiting the relief to relief under double taxation as opposed to further relief under unilateral agreements. No doubt the right hon. and learned Gentleman has that in mind, but I hope that he will indicate why the Clause follows this form.

Those of us who have received literature on the technicality of the Clause have had brought to our notice that because of the way in which the Clause is drawn there will be inevitable delay between the point of time of the passing of the Bill and the point of time of the necessary amendment of arrangements between two countries which form the basis of double taxation relief. We are told that there might well be delay which would prevent the Clause coming into effect so as to give relief immediately. The Solicitor-General is the one who is able to read a Clause of this kind, and not myself, and, therefore, I should be grateful if he would say whether this is the case, or whether, as soon as the Bill becomes law, the relief provided in the Clause will have immediate effect.

The third question that I would ask, which refers purely to the Amendment, may seem unnecessary, but I had better ask the Solicitor-General whether he is satisfied that the Amendment is necessary. Is he satisfied that under the Clause as it stands a tax not paid in a foreign country, not collected and not charged, has to be added to the gross amount to assess the amount in this country?

Sir Henry d'Avigdor-Goldsmid (Walsall, South)

Taking advantage of the pleasurable fact that a Clause of this kind is being discussed at a time other than the twilight hours, I should like to congratulate the Chancellor on the idea that inspired it. I cannot help feeling, however, that my hon. and learned Friend's generous desire to help underdeveloped countries has been frustrated by the massive caution of his officials who may have seen with some regret cancellarian generosity transported into a net loss to the Revenue. We have, therefore, an unfortunate situation where this important purpose will be frustrated, as far as pioneer reliefs are concerned, for a good many countries offering these reliefs and to which the additional investments attracted by the reliefs would be important.

This is an enabling Clause. It would enable my right hon. and learned Friend to negotiate double taxation agreements with the various countries concerned. I understand that views have been expressed that if this were treated not under the head of double taxation, but of unilateral agreement—a point made by the hon. Member for Gloucester (Mr. Diamond)—this country would be losing bargaining power. I wonder how much weight there is in that consideration. First, we in this country do not offer special inducements in the form of tax holidays for overseas investment here. Certainly—and this is more to the point—there is not much likelihood of countries which offer relief on taxation to induce investments being in a position to invest funds on an important scale in this country. If they were they would not need to offer these tax holidays. The bargaining argument, therefore, falls to the ground.

4.15 p.m.

The Treasury would wish to deal with the most important countries with which we have double taxation agreements and it would be a long time indeed before the lesser countries—those without double taxation agreements—for the assistance of which the Clause was inserted, would reach the head of the queue. I ask my right hon. and learned Friend, therefore, to consider whether the generous instincts which prompted the Clause are not being frustrated by the way it is framed.

I should like to refer particularly to the remarks of the hon. Member for Cardiff, South-East (Mr. Callaghan). One of the advantages of private investment over public investment is that there is an element of precision about it, that is to say, where there are international agreements there are constant calls for their revision. Many years ago there were long negotiations between this country and the Argentine over the sale of the Argentinian Railways. These were almost infinitely protracted negotiations and the terms were changed constantly. In present circumstances, if a business makes a business investment those terms are settled legally when they are made and they are not subject to revision except by the agreement of both parties.

I suggest to my right hon. and learned Friend the Solicitor-General and to the hon. Member for Cardiff, South-East, that there are advantages in having the terms of reference clearly defined as against the spaciousness and the number of things unsaid in an agreement between one nation and another. Particularly when it is between a rich nation and a poor one, one finds that the rich nation will be asked to make some modification of its terms because of later circumstances, which would not occur in the case of a commercial investment.

Mr. Callaghan

The Colonial Development Corporation, as the hon. Member knows, does not operate on a nation-to-nation basis. It makes commercial investments with the aid sometimes of local directors and local capital on a purely business basis, and a number of these countries wish the Corporation to carry on doing so after their independence.

Sir H. d'Avigdor-Goldsmid

The hon. Gentleman knows a great deal more about the Colonial Development Corporation than I do. But where we have an organisation which is, in fact, controlled politically, the political argument must come in. I do not want to put more weight on it than that, but the hon. Gentleman must accept that.

There is one point about the Amendment moved by my right hon. and learned Friend the Solicitor-General. It is difficult to go into the arithmetic of taxation on the Floor. The hon. Member for Gloucester (Mr. Diamond), like the hon. Member for Glasgow, Craigton (Mr. Millan), brushes aside these difficulties, but I should like an assurance on this point.

Perhaps I may roughly call it the auctioneer's guinea. If a sale is made at an auction and an article is knocked down in guineas, and if the seller expected to receive the same number of pounds and the auctioneer to take his commission in shillings, the seller would find that he was mistaken. The auctioneer deducts from the price he pays to the seller a commission of 5 per cent. on the full amount. For the sake of argument, in the case of an article sold for 1,000 guineas, the seller receives not £1,000, but less than that, because the auctioneer takes his commission on the guineas. I see the hon. and learned Member for Kettering (Mr. Mitchison) is looking puzzled, but I should have thought this a reasonably clear proposition.

Mr. Mitchison

It is kind of the hon. Gentleman, but I followed it perfectly.

Sir H. d'Avigdor-Goldsmid

Then I was wrong in my interpretation of the expression of the hon. and learned Member for Kettering.

The point here is that under the present double taxation legislation the gross amount of the tax spared is added to the gross amount of the dividend and that sum is then subject to the deduction of British taxation at the standard rate, that is, dividend plus interest spared. From the amount of British tax levied there is given a notional credit for the amount of foreign tax that was spared and then there remains a residuary charge which the recipient has to pay.

If the notional tax spared were exactly the same as the British rate of taxation—I must apologise for arithmetic, but this is a technical point and I do not know how to put it without the use of arithmetic—if there were a dividend of £100 and the notional tax spared were £54, British taxation would be charged on £154, which is about £80.

The Solicitor-General indicated dissent.

Sir H. d'Avigdor-Goldsmid

I am glad to see my right hon. and learned Friend is shaking his head. This is a thing which has been worrying me and is the basis of an Amendment which was put down but not selected. If this point has been overcome in the Amendment moved by my right hon. and learned Friend, that is a very satisfactory state of affairs. I am quite certain that if it has not been overcome he will undoubtedly put it right in this or a later Finance Bill.

I conclude by saying that this Clause shows the generosity of the Chancellor which, I hope, will not be frustrated.

Mr. Geoffrey Stevens (Portsmouth, Langstone)

On a point of order, Sir Gordon. I am sorry to harp on a point which has been raised before, but I am not clear about the Ruling you gave. I have a point to raise which is decidely in connection with Clause 14, but equally certainly has nothing to do with the Amendment we are discussing. Is there to foe a debate on the Question "That the Clause stand part of the Bill"?

The Chairman

We are taking the Amendment and the Clause together.

Mr. Mitchison

The first question which I wish to ask is a minor question on drafting, but I find it difficult to see how this section shall not operate to increase income or income received in the United Kingdom. No doubt it has the notional effect which the right hon. and learned Gentleman explained. But perhaps, to reassure me at any rate, he will tell us that these are the appropriate words for what he intends to do.

From that, I turn not to the detailed point raised in the Amendment but to the general intention of the Clause which, as I see it, is this: that on what we might call for the moment development expenditure, where it receives this particular form of encouragement in a foreign territory, no tax, ex hypothesis, is payable to the foreign Government, and this Clause will ensure that no tax is payable to this country.

Accordingly, as I understand it, the effect will be that to the extent of the encouragement given by the foreign country, to the extent of the tax help, whether total or partial, that slice of income escapes tax in either country. If I am wrong, I should like to know. That seems to be the clear intention of the Clause, and I hope that the Amendment may be correctly described as a comparatively minor piece of machinery to ensure that that end is reached.

If that is the position, this, of course, is a considerable concession from the fiscal point of view. Whether or not it is sufficient is a matter on which my hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) is more competent to speak than I am. I wish to know what it will amount to. I appreciate that there are difficulties about giving anything like an exact figure. But the three Clauses we are to discuss today have one peculiarity. Neither in any speech in connection with the Budget, nor with the Bill, nor in the Financial Statement itself is there any mention at all of the financial results which are contemplated. I should have thought that a most important matter on which we are entitled to be told either that the Government have no idea what the result will be, or what kind of result they anticipate.

I should like to remind the Government that estimates were given in connection, with the overseas trading corporation. Rumour has it—but rumour is a fickle jade—that these estimates were proved to be somewhat incorrect. I do not wish to go too far into this matter, but I should like to know, both in relation to this Clause and, in due course, in relation to the other two Clauses, what are the fiscal hopes, so far, of the Government. It is odd to have three Clauses of this sort in a Finance Bill and to find no mention of them at all in the Financial Statement, or, at any rate, of the yield that they are expected to give, or the results that they are expected to produce one way or the other.

This is, of course, a tax concession and it seems to me that the third of these Clauses is also a tax concession. I am not certain how the second will work out. But I think that we ought to be given the best estimate which the Government can give us. It is a matter to which we on this side of the Committee attach considerable importance. We are anxious that encouragement should be given to the extent of this Clause and, indeed, well beyond the extent of this Clause, to the expenditure likely to attract a tax holiday in a foreign country.

We are bound to consider the total amount and to make come comparison between the fiscal results as regards private expenditure and the possibilities of the same sort of thing being done in a way which would have a very different fiscal effect. I have in mind the possibility of Colonial Development Corporation action, or something of that sort. As the law is at present, it clearly would not apply in all the cases to which this Clause will apply, but I think that we ought to be in a position to make a comparison. At the moment there is the fiscal point of view between what is being done in the one way, that we cannot discuss here, and what is contemplated to be done by this Clause in quite a different way.

4.30 p.m.

It seems to me that there is a very considerable variety of ways in which help can be given to under-developed countries in the course of development, but the one we are considering depends, as I see it, on the initiative of the country in question. It seems to follow, unless I have misconceived the purpose of the Clause, that the country in question can decide to give a tax holiday and thereby oblige the Exchequer to relieve from British taxation part of the money which would otherwise have attracted British tax.

We are getting a fiscal concession in which the initiative depends, and solely depends, I suppose, on the underdeveloped country, unless we are to be told that all this in its turn depends on double taxation agreements, and there is no obligation to make a double taxation agreement. I hardly think that the Treasury would wish to use an argument of that sort and differentiate in that way and on those lines between cases where help of the same kind may be given by foreign countries.

Then, we ought to be told, if possible, whether there are particular cases in mind. I do not wish to interfere with negotiations, or anything of that kind, but wish to have it clear that these fiscal holidays are intended to be for countries that need assistance. If the position is as I have outlined, it seems to me that in certain circumstances the Government here would be put in an extremely difficult position by a country that was not under-developed at all giving relief of this kind. I can see circumstances in which it could be to the advantage of that Government to do so.

I ask these questions in all seriousness, and I say to the Government, finally, that I think I am right in suggesting that there has been some comment in the Press on the amount of money which is escaping taxation—not, I think, so much money of the character considered here, but foreign remittances of large international companies; I think that this is perhaps a case of "no names, no pack drill"—domiciled in this country and operating through an overseas trading company and the like, and a good many others. It is always a possibility that machinery of this kind, well-intentioned though I believe it to be, and much as I approve the intended purpose of this Clause so far as it goes, could be used to escape British taxation, and nobody wants that to be done. It is, therefore, in a rather inquiring, but not necessarily critical, spirit that I approach this Clause at present.

Mr. Stevens

Far be it from me to look a gift pioneer relief in the mouth, but in Clause 14 the Government mean well, I am sure. I think that it is undoubtedly true that at some time in the future, in certain circumstances, so far as operations in other countries are concerned, some people will be placed in an equal position with companies operating in the same countries, but not managed or controlled in the United Kingdom. It is not a question of giving unusual tax advantages to those companies managed and controlled in the United Kingdom, but of putting them on the same footing as companies not managed and controlled abroad.

Like other hon. Members, I am very sorry that these provisions are not dealt with through the Seventeenth Schedule of the 1952 Act—the unilateral relief Schedule—instead of the Sixteenth Schedule. The hon. Member for Gloucester (Mr. Diamond) asked what I thought was a slightly sarcastic question—whether these reliefs operate immediately once this Finance Bill becomes law. Of course, they will not. The hon. Gentleman knew that when he asked the question, as I did.

In regard to other countries with which we have double taxation agreements, it will mean renegotiating the whole of those double taxation agreements. My hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) suggested that we shall not necessarily be in a very strong position in the course of negotiations, and that we may well lose some of the benefits and advantages that are incorporated in existing double taxation agreements. That may well be, but what is certainly the case is that it will be only after months and very probably years of negotiations that new double taxation agreements are reached. For these reasons, I strongly support the view that the proper way to have dealt with this concession would have been through the unilateral and not the double taxation relief.

There is another point which I wonder may have escaped the notice of my right hon. and learned Friend the Chancellor. The first of all the taxation agreements which were entered into by this country with another country was made in 1926, when we entered into a taxation agreement—not a double taxation agreement—with Eire, the free part of Ireland. That is not a double taxation agreement. A special provision is that where a company is operating in Eire, but is managed and controlled here, no Eire taxation shall be levied in respect of the profits made, but the profits made there shall be subject to United Kingdom taxation only.

As I think most hon. Members will agree, that is an excellent form of taxation agreement, and one which we should like to see much more widely spread in the context of this Clause. It has the rather remarkable result that, as there is no taxation payable in Eire, there is no taxation in respect of which pioneer relief can be used. This is not a hypothetical case, but a practical case of what is happening at the moment. In respect of the Shannon Development Scheme, the Eire Government has arranged pioneer reliefs which accrue to the benefit of the companies taking part in that very large undertaking, if they are not managed and controlled in this country.

By the Clause as drafted, therefore, United Kingdom companies will be at a tax disadvantage as compared with their competitors from all over the world who fought for part of the contract for this great work.

I wonder whether that point has been overlooked by my right hon. and learned Friend, or, alternatively, if he was fully seized of it, and, for some reason, decided not so to amend the Clause as to bring the pioneer relief in Eire within the ambit of the Clause. Whichever way it is, I should be very glad to hear what my right hon. and learned Friend the Solicitor-General has to say on that point.

Mr. Stanley R. McMaster (Belfast, East)

I am sure that my hon. Friend does not want to mislead any hon. Members of the Committee, but he did refer to Eire as the free part of Ireland. I hope that he will withdraw that comment.

Mr. Stevens

I unreservedly withdraw, and regret my slip of the tongue.

Mr. Bruce Millan (Glasgow, Graigton)

I think that the points made by my hon. and learned Friend the Member for Kettering (Mr. Mitchison) were very valid ones, and that what the hon. Member for Portsmouth, Langstone (Mr. Stevens) said about Eire emphasised one of the points which my hon. and learned Friend raised, for this is a question about which we need to be a little clearer. Many countries are likely to be involved in this matter, because we have double taxation agreements with a great many countries which cannot, by any stretch of the imagination, be called underdeveloped, because they include the United States of America and Canada.

There are a number of other European countries. They are not underdeveloped countries, although in his opening remarks the Solicitor-General talked exclusively of under-developed countries. The hon. Member for Lang-stone gave the example of Eire, which is giving certain taxation reliefs. Again, Eire is not the kind of under-developed country about which the Solicitor-General was speaking.

Let us suppose that one of the other countries with whom we have a double taxation relief arrangement—a country of a similar character to Eire—were to introduce some sort of tax relief or holiday. Would it be the intention of the Government to make special provisions in the double taxation arrangements to provide for that taxation holiday? If that is the intention of the Government it goes far beyond what the Solicitor-General said in his opening remarks. It seems clear from what has been said that this is an enabling Clause. It is not a question of applying the existing double taxation agreements indiscriminately.

There is also the question of timing. The hon. Member for Langstone raised that question, and in that connection the Solicitor-General may say something about subsection (4). As far as I can see, that has a retrospective effect. I should like the Solicitor-General to explain exactly what retrospection it has. Is it retrospective from the time at which the agreement was signed, or adjusted, to the time of the passing of this Finance Bill, or it is retrospective even further back than that? We ought to be clear about that. The point made by the hon. Member for Langstone is probably covered, but I am not sure that some of my hon. Friends would like the retrospective effect to go back beyond the passing of the Finance Bill.

Mr. Anthony Crosland (Grimsby)

As this debate is on the Clause as a whole, as well as on the Amendment, our remarks may be of a more general character. Linking up with what my hon. Friend the Member for Glasgow, Craigton (Mr. Millan) said, it is the object of this Clause, by providing this relief, to encourage investment for purposes of development in other countries. To the extent that this will operate solely with what are commonly called under-developed countries I am completely in sympathy with it, but for the reason given by my hon. Friend—that it may have the effect of encouraging indiscriminate overseas investment—I feel very unhappy about the whole trend.

I take the view, which many others take—possibly including hon. Members opposite—that in the last two years we have been investing overseas more than our balance of payments will stand. If we go on as we are now, I do not see any prospect of bringing to an end the situation in which our total commitments overseas every year exceed our surplus on current account in the balance of payments. Therefore, any Chancellor in this situation must look very warily at the total amount of our overseas investment. Many people think that the concessions given over the last decade to the O.T.C. have been very much too large, and have had a bad effect on our balance of payments, which has outweighed any good effects. I want to strike only this one brief slightly discordant note, to the extent that the Clause might have the effect of increasing indiscriminate overseas investment on a scale which our balance of payments certainly cannot support.

4.45 p.m.

The Solicitor-General

I am grateful to the Committee for the way in which it has received the Amendment and the Clause. In answer to the point made by the hon. Member for Cardiff, South-East (Mr. Callaghan), the C.D.C. and its use is not a matter for me, but I will see that the hon. Member's remarks are drawn to the attention of the appropriate Ministers.

As the hon. Member recognises, the Clause is a comparatively narrow one, but it is useful. Its purpose, which I know to be the purpose that the hon. Member has at heart, is to prevent development in underdeveloped countries being stultified by the operation of our fiscal laws. Secondly, the Clause is capable of being operated for countries outside the Commonwealth. It is not limited to Commonwealth countries, although I have no doubt that they will have a special claim to our consideration.

I turn to the general operation of the Clause and the question asked me by the hon. and learned Member for Kettering (Mr. Mitchison). Broadly speaking, he is right in saying that the purpose of the Clause is to ensure that the income remitted to this country which is represented by the tax spared in the foreign country should escape tax in this country as it has already in the foreign country. This is an enabling Clause. It does not operate immediately. It enables this country to do what it cannot do under the existing law, namely, negotiate double taxation agreements which will prevent frustration of the tax reliefs in the foreign countries.

The hon. Member for Glasgow, Craigton (Mr. Millan) and my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) asked me how far it was intended to go. It is in very wide terms, and each case will be decided on its merits. But it is part of the machinery of double taxation agreements that they have to be brought before the House of Commons and approved by affirmative Resolution. The House will be able to control the negotiation of the agreements. By and large, it is intended to use the sort of reliefs which the Clause will enable to be negotiated in special cases to which they are peculiarly appropriate.

The hon. and learned Member for Kettering asked whether we had any particular case in mind. We have. We have already negotiated a double taxation agreement with Pakistan which gives effect to matters which we have been discussing with that country. Pakistan denounced the previous double taxation agreement that we had with her, mainly because we were frustrating precisely this type of relief, but she invited us to renegotiate a double taxation agreement. That has been done, and a draft is available in the Vote Office. Having negotiated such an agreement, we are constitutionally bound to pass legislation, if the House of Commons thinks fit, to enable effect to be given to it; and if the Clause is passed the agreement will, in due course, be brought before the House for its scrutiny.

That brings me to the point about retrospection, asked by the hon. Member for Gloucester (Mr. Diamond) and answered by the hon. Member for Craigton. If hon. Members will look at subsection (4) they will see that there need not be any delay of the kind to which the hon. Member for Gloucester referred, because retrospective effect can be given. That is especially relevant to a case like Pakistan, where we would otherwise have a gap between the termination of the previous agreement and the coming into force of the new one. Subsection (4) enables the agreement to operate retrospectively so that there is no interim period.

Mr. Mitchison

The Solicitor-General has used the word "may". Am I to understand that it is permissive, or is it definite?

The Solicitor-General

The whole Clause is permissive. Subsection (4) has the effect that we are enabled to negotiate a double taxation agreement implementing this Clause with retrospective effect. The Pakistan agreement contains such a provision, and it will come before the House for approval.

Mr. Millan

What the Solicitor-General said about Pakistan is reasonable. One does not want to have an interval, but if an agreement is subsequently negotiated with another country, will the retrospection apply to the date of the passing of the Act, or will it go further back?

The Solicitor-General

The Clause enables one to go further back. I cannot answer that question more specifically. It must depend on the circumstances of each agreement. At any rate, it is necessary in the only case where we have entered into renegotiation, namely, Pakistan.

My hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow) and my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor Goldsmid) raised a technical point which I will look into before we come to Report. My view is that the Amendment, and indeed the Clause, operate in the way we intend, but I will look into that point. However, I should make it plain that the grossing-up operation which I described does not take place under this Clause at all, but under the existing law. I think that it operates to produce the right result. However, I will look into that again.

The hon. and learned Member for Kettering asked what was the cost of this Clause. I think that it will be apparent from the observations I made that I cannot answer that, because it depends on each agreement which is negotiated and brought before the House of Commons; but as each agreement is negotiated and brought before the House it may be possible to give an estimate of the cost of it.

Mr. Mitchison

Surely the Government have some idea of the amount of money they propose to allow by this fiscal concession? I am not critical of its purpose, but I should have thought that it was the most ordinary housekeeping wisdom to have an idea of how much was going to be allowed.

The Solicitor-General

It is not until the agreement is negotiated and the concessions which are given in return for our concessions are negotiated that one can possibly tell what the net cost will be. It all depends on the terms of each agreement.

Mr. Mitchison

Does that mean that the Government have no idea of the prospective cost of this? Have they made no estimate at all?

The Solicitor-General

It will be entirely under the control of the Government in the circumstances of each case.

Mr. Mitchison

Under the control of Parliament?

The Solicitor-General

Under the control of Parliament, in the way that I have described, because no agreement can come into force until it has been approved by the House of Commons.

Mr. William Ross (Kilmarnock)

The Solicitor-General said that there is a draft agreement in relation to Pakistan. What is the estimated cost of that agreement?

The Solicitor-General

I do not think that I can answer that question without notice. It means comparing it with the operation of the previous agreement and the counterbalance of the mutual concessions, but I will see whether an answer can be obtained in respect of the Pakistan agreement. An attempt will be made to assess it and, if possible, the House will be informed when the affirmative Resolution comes before the House.

The question of cost brings me to the point to which a number of hon. Members referred, namely, why does the Clause not extend to unilateral relief? I suppose the short answer is that it could not do so because it would be outside the Ways and Means Resolution, which covers only the bilateral reliefs. But the answer was given by the hon. Member for Grimsby (Mr. Crosland) in his intervention, namely, that this might be a costly matter. At any rate, it is a matter which one ought to keep under review and under control. If we are giving this concession, it is valuable to make sure that it fits into a proper agreement in which reasonable concessions are made from the other side.

Secondly, all these reliefs mean that there is some infringement of a principle which the House has shown itself to be jealous about, namely, that people in this country should not, so far as we can see to it, enjoy income which has not borne any tax anywhere. We are prepared to see a breach of that principle in particular cases, of which the development of underdeveloped countries is one, but it is not one to be used indiscriminately. For those two reasons, as well as the procedural reason, advisedly the Clause did not extend to unilateral relief.

Two technical questions were asked. The hon. Member for Gloucester asked whether the Amendment was really necessary. I am satisfied that it is. I might take as an example paragraph 8 (2) of the Sixteenth Schedule which says that the amount received in the United Kingdom shall be treated as increased by the amount of the credit allowable against income tax. What we are making allowable against Income Tax is the notional sum, in other words, the tax spared. Unless we have the Amendment as I have described it, it will mean an adding back of a notional amount which had never been received. For that reason it is necessary.

The hon. and learned Member for Kettering's final question was purely on the drafting. He asked how the section could increase any amount of income. The answer is that the section, combined with the Sixteenth Schedule, operates to increase, in the eyes of the law, the amount of the income received in the United Kingdom in the way that I described. The Amendment is necessary, and I commend it and the Clause to the Committee.

Sir Derek Walker-Smith (Hertfordshire, East)

Before my right hon. and learned Friend sits down, will he be good enough to add to his very lucid exposition of this complex matter a clarification of one point on which I might conceivably not be the only hon. Member in the Committee to be in some doubt?

My right hon. and learned Friend referred more than once to the permissive nature of the Clause. It is permissive in the sense that any double taxation relief arrangements under Section 347 of the Income Tax Act have to be initiated by the Government and then approved by Parliament. But, once a double taxation arrangement has been initiated and brought to fruition under Section 347, is it right that this principle is then mandatory in the sense that it must apply in any such arrangement? That would seem to be so because the Clause says: …shall be treated as having been payable…". Is that the right construction?

5.0 p.m.

The Solicitor-General

Perhaps it would be to the convenience of the Committee if I answered that right away. In spite of the mandatory drafting of the Clause it is permissive, because the principal section—Section 347—gives a wide discretion to the Government in negotiating double taxation agreements as to the terms which may be included. Therefore, it is purely a matter of the discretion of the Government whether they extend to any country the concession which the Clause operates. I think that the matter will be made plain if hon. Members care to look at the Pakistan agreement and see how it is phrased there.

Mr. Stevens

Before my right hon. and learned Friend sits down again, could he say something about the special position arising from the special provisions of the taxation agreement with Eire?

Mr. Callaghan

To save the right hon. and learned Gentleman sitting down for a third time, may I now press him a little more on the point raised by my hon. Friend the Member for Grimsby (Mr. Crosland)? All who have watched the development of the under-developed territories have been conscious of the fact that capital seems to flow to the more developed parts of those territories. It is easier to get capital in Australia than it is in Uganda.

I fully realise that double taxation has to be negotiated, as has been said by the hon. Baronet the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), but I would say that here is a way in which we could use taxation as a discriminatory weapon—if "weapon" is the right word—to guide investments in a particular direction in which we would like it to go for political reasons or, indeed, for social or economic reasons.

As the rubric of the Clause runs and, indeed, as subsection (2) runs, it would obviously be possible to give this relief for the purpose of promoting development in a territory whether it were developed or not in the conventional sense. I think that there must be a measure of discrimination to the Government in the matter, but it would be helpful if the Solicitor-General could give the Committee an assurance that when double taxation agreements are brought forward this particular relief will be drawn to the attention of the House.

When we are being asked to approve such an agreement, we should know whether, in fact, the specific basis on which the right hon. and learned Gentleman recommended the Clause and the Amendment, namely, that it is for the purpose of helping the under-developed territories, is being fulfilled. A Minister's assurances may be forgotten with the lapse of time, but words written into the rubric and into the Statute will persist. If we were given the assurance that the House would be allowed to make sure that the relief is being given for the purposes for which the Government designed it, that might be a reminder to those framing such agreements that it must be the decision of the House.

Mr. Diamond

Now that the right hon. and learned Solicitor-General is firmly sitting down, I wonder whether I may take up a point very closely allied to what my hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) has just said. But, prior to doing that, I hope that I may be allowed to thank the right hon. and learned Gentleman for having been so courteous in replying to every point which has been made. He is aware, of course, of the fact that we are all trying to do the best we can with the Clause.

I think that we should all be able to understand it a little better had the debate taken its normal form and had the right hon. and learned Gentleman given not only the background remarks relative to the Amendment, but also the background remarks relative to the Clause. He would then have covered many of the points which have been elucidated by question and answer and would have saved himself a little trouble.

Mr. Ross

The right hon. and learned Gentleman said that that was what he was doing.

Mr. Diamond

I am not quite sure whether I understand the right hon. and learned Gentleman accurately, but he seems to be saying that there is a complete correlation between those countries where it is appropriate on economic and humanitarian grounds to enter into agreements of this kind and those countries where double taxation agreements exist.

Let me amplify that, if I may. If there is not correlation, then I think that the point which I put still remains not fully answered. The Committee is, I think, generally taking the view that this is a wise provisoin provided, of course, that the benefit is directed in the most helpful way to countries which are truly in need of industrial, commercial, scientific and other developments.

The right hon. and learned Gentleman has said that this Clause takes the form of giving relief under double taxation agreements but not under unilateral agreements because we cannot afford the amount under unilateral agreements. Does it necessarily follow that under all double taxation agreements the Government will be able to give help wherever it is needed? Is it the case—I do not know—that there is not a single country which we would wish to help which is not the subject of a double taxation agreement?

Otherwise, the Government are being denied the right, which they might wish to exercise, of giving encouragement under the Clause to a certain country because there is no double taxation agreement with that country and, therefore, are unable to negotiate with that country which they might wish to help or to give it help by way of unilateral relief. Therefore, are the Government satisfied that they have taken sufficient powers under the Clause to do the things that we want to do?

Allied to that, I want to take up further the point about the cost. I can understand there being no reference to the cost of agreements which have not yet been negotiated, but I cannot understand a Money Resolution and a Financial Statement which leave out of account any financial results from this Clause, although what the Clause proposes is mentioned earlier in the same Financial Statement as one of the things which the Chancellor proposes to do. I cannot understand there being no information available with regard to costs as far as we are committed at the moment. I have not the Money Resolution, and I do not suppose that it is mentioned there.

Surely the Government should give us a little information on this matter so as to enable us to see where we stand. Perhaps the Government will go a little further and say specifically with which countries they have in mind opening negotiations on these lines.

The Solicitor-General

I am very glad to answer the remaining questions that have been asked. The hon. Member for Cardiff, South-East (Mr. Callaghan) is quite right, of course, when he says that subsection (2) is drawn in very wide terms. That is done intentionally. Although I do not want to commit the Government in any way, by and large the relief that is allowed to be negotiated in the double taxation agreements under this Clause will be negotiated in agreements to which it is appropriate. In other words, there must be a proper case, it seems to my right hon. and learned Friend, for a pioneer relief before we will regard it as a matter which demands concession in a double taxation agreement.

That leads me to the question which has just been asked by the hon. Member for Gloucester (Mr. Diamond). In the first place, it would only be appropriate to countries which give tax holidays or the like. Secondly, we regard it as valuable as a negotiating point in order to encourage the negotiation of double taxation agreements—in other words, to be fitted into a generally satisfactory agreement whereby the end result is fair, looking at the different circumstances of both this country and the foreign country.

The hon. Member for Gloucester, too, asked about cost. I have asked about the cost of the Pakistan agreement and I have been told that it is very small, but my right hon. and learned Friend will see whether a more specific answer can be given when the matter comes before the House. The hon. Member said that he ought to have been told the cost as far as we are committed at the moment. The answer is that we did not give the cost because we are not committed at all at the moment. All that happens at this stage is that the agreement is initialled, but it has no efficacy until it has been approved by the House.

The hon. Member for Cardiff, South-East asked that when these agreements came before the House attention should specifically be drawn to this relief. I will see that his request is noted in the proper place. I have not dealt with the question of my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) about Ireland. He is quite right; Ireland is a unique case. But from the purely fiscal aspect I point out that we cannot be expected to give credit for purposes of United Kingdom tax in respect of tax which Ireland would have given up if the United Kingdom company had been, liable to Irish tax.

Amendment agreed to.

Clause, as amended, ordered to stand part of the Bill.