DOUBLE TAXATION RELIEF (JAPAN) (Hansard, 5 December 1962)

§ Sir Frank Soskice (Newport)

We ought to put some questions to the Financial Secretary before we agree to this proposal. I do not think that I am in any sense necessarily hostile to it, but it is a contention of some importance, and is one of a series of three which we have to discuss this evening. The questions which I want to put should not take long to answer, but they ought to be put, and the Minister ought to give attention to his answers.

First, there are many double-taxation agreements between this and many other countries all over the world. Is this agreement, broadly speaking, in common form? Does it contain any special or unusual features to which the attention of the House should be drawn, or is it one which follows the usual type of double-taxation agreement with such necessary changes as are involved because Japan is a party? I have done my best to scrutinise it and to make such comparisons as I can, and it seems to me to be of the ordinary type and not to possess any special features. However, I should be glad if the Minister would confirm that my impression is correct. If there are special features, no doubt the House will want to consider them before accepting the agreement.

I suppose that we do not have a great deal of knowledge of the exact Japanese tax structure, and I would welcome a word from the hon. Gentleman shortly describing the nature of the correlated Japanese taxes with which this Convention deals. Are they broadly analogous to those which we charge in this country, and is there any special feature about them about which the House should know?

The third question which I should like to ask the Minister, and this is a question which, I think, should be asked in 1445 relation to each of the double-taxation agreements which we have to consider, is what its effect will be on the United Kingdom revenue. It obviously means that the United Kingdom Treasury forgoes some tax revenue. Broadly speaking, the scheme of this double-taxation agreement is that the loss is, in effect, shared by the two countries concerned, hut, at the same time, I think that if the Minister could give us some idea as to the loss of revenue this country would sustain, it would be of help to the House.

It may be that the Minister will have to say that that must be purely approximate and can only be estimated in very broad terms. If he says that, I ask him this. Section 348 of the Income Tax Act, 1952 provides, as the Minister well knows, for unilateral relief. In the case of other than Commonwealth countries, the unilateral relief is up to 50 per cent. of the corresponding tax paid in the two countries. If the Minister can tell us what the unilateral relief provided for under Section 348 of the Income Tax Act, 1952, has cost in the last few years, that I should have thought would be a very good guide as to what the Convention will cost the United Kingdom Treasury. Presumably, as Section 348 allows only 50 per cent. relief and the Convention allows 100 per cent. relief, the loss can be measured by approximately doubling the loss which we sustained under Section 348 by way of unilateral relief.

There is one small point on Article VI (I, a) about which I should like to ask the Minister. I notice that the arrangement from the point of view of the United Kingdom is that dividends paid from the United Kingdom to Japanese shareholders in companies in the United Kingdom shall be exempt from Surtax. This, so far as I know, is a comparatively novel provision. It may be that I have missed it in other agreements, and I would be grateful if the Minister would say a word about it so that we may see whether this is something to which we should direct special attention, or whether it is one of the provisions which has generally been accepted as appropriate for this type of Convention.

Finally. I compared Article XII in the Japanese Convention with Article XII in the Israel Convention which we are to consider later this evening. The Article 1446 in the Japanese Convention is considerably narrower in its scope than the Israel one. Why the difference? Article XII in the Japanese Convention simply relates, I think, to visiting professors and students. Article XII in the Israel Convention relates to all professional persons. A wide range of professional persons might have an interest in this sort of provision. No doubt there is a good reason for the distinction, but I would be grateful if the Minister would tell us what it is.

Those are my questions. I am sure that the Minister will be able to give an answer which will satisfy me and the House as a whole, and, in principle, I do not want to be taken for a moment as being opposed to Conventions for the purpose for which these Conventions are prepared.

§ The Financial Secretary to the Treasury (Mr. Anthony Barber)

The first question put to me by the right hon. and learned Member for Newport (Sir F. Soskice) was whether this agreement with Japan was more or less in common form, or had any special features which might distinguish it from the generality of double taxation agreements. It does, in fact, follow the general pattern of double taxation agreements which we have made with many other countries, and I think that there is only one special point which I might mention, because it is an unusual one.

Article V of the agreement, which deals with the profits which an enterprise of one of the Contracting States derives from the operation of ships or aircraft is wider than the corresponding Article in our other agreements, in that besides securing an exemption from Japanese national tax, it also secures an exemption from Japanese local tax on profits derived by our shipping and aircraft concerns. If one looks closely at Article V, in form it also gives Japanese shipping and aircraft concerns a corresponding exemption from local United Kingdom tax imposed on the basis of profits, but as there are no such taxes at present this is obviously a matter of advantage to the United Kingdom.

The right hon. and learned Gentleman's second question was about the 1447 nature of the Japanese taxes. He asked whether they were analogous to the relevant taxes in the United Kingdom. Two of the taxes are analogous. One is Japanese income tax, the other is Japanese corporation tax, although they vary in their incidence and the way they are applied. But there is a third form of taxation which is not analogous, and that is the one to which I have just referred in connection with shipping and aircraft, namely, local taxes. I understand that there are various types of local tax levied by prefectures and municipalities in Japan, but I think that the important point is that only those levied on profits and income are covered by the agreement.

The right hon. and learned Gentleman asked about the cost to the Revenue of this agreement, compared with the cost to the Revenue of the normal provisions for unilateral relief under Section 348 of the Income Tax Act. He mentioned that under the unilateral provision there was a limit of, I think he said, a 50 per cent. ceiling outside the Commonwealth. I think that he will find that for the last few years there has been no such ceiling.

I am told that it is not possible to give a realistic estimate of the additional cost to the Exchequer by virtue of the change from unilateral relief to the relief under the agreement, but it is likely to be small. When I pressed those advising me for something more specific, I was told that that meant probably under £1 million. As the right hon. and learned Gentleman realises, there will be a cost also to the Japanese Exchequer—although not a corresponding cost—in respect of the relief that it provides. In general, there is a mutual advantage in having a comprehensive double taxation agreement.

The right hon. and learned Gentleman also asked about Article VI (1, a) which provides that Dividends derived from sources within the United Kingdom by a resident of Japan who is subject to Japanese tax in respect thereof shall be exempt from United Kingdom surtax. I understand that this is quite a normal provision. It sometimes appears in wording that is slightly different from this, but the provision for the exemption from Surtax on United Kingdom dividends paid to an overseas resident—in this case a Japanese resident—is normal.

1448 The right hon. and learned Member's final point concerned what he took to be the corresponding provisions of Article XII in this agreement and Article XII in the Israeli agreement, which we shall come to shortly. He thought that in the case of Japan the arrangement for rendering professional services and the profits of those services were narrower. I think that there is a misunderstanding here. If the right hon. and learned Member looks at Article X of the agreement with Japan he will see that paragraph (1) refers to Income derived by a resident of one of the Contracting States in respect of professional services or other independent activities of a similar character". The wording is almost the same as that in Article XII of the agreement with Israel. The right hon. and learned Gentleman mentioned this point to me earlier this evening, and I had hoped that I might have seen him, so that he would not have had the trouble of raising it. That is the answer to the point that was troubling him.