DOUBLE TAXATION RELIEF (MALTA) (Hansard, 20 February 1962)

§ The Economic Secretary to the Treasury (Mr. Anthony Barber)
I beg to move, That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Malta) Order, 1961, be made in the form of the draft laid before this House on 19th December. This arrangement is the first Double Taxation Agreement between the United Kingdom and Malta. We had been negotiating with Malta for a number of years, but it is only a provision in last year's Finance Act that has made it possible for us to reach an agreement. I think I need draw the attention of the House to only two provisions in the agreement which are of particular significance. The first is a feature of the agreement to which the United Kingdom attaches particular importance; like all other comprehensive double taxation agreements, the agreement includes a provision under which profits derived by a resident of one territory from operating ships or aircraft are exempt from tax in the other territory.
The second point is that included in this agreement are provisions designed to prevent the frustration of certain tax holidays which Malta gives to encourage development there. There are a number of other detailed and complex arrangements in the agreement, but I thought it right to draw the attention of the House to these two in particular and I hope that the House will approve the Motion.

§ Mr. G. R. Mitchison (Kettering)
I hope that the Economic Secretary will give us rather more information than that before the night is out. This is the second double taxation agreement following on a Section in last year's Finance Act to which the Economic Secretary referred. The first one related to Pakistan. It went through on the nod, partly because there was another one relating to Portugal shortly afterwards, and partly because there was no doubt whatever that Pakistan was the kind of case contemplated by the Government when they introduced the 340 Section. Indeed, the Pakistan agreement was mentioned and discussed at a little length when we debated the Clause, as it then was.
In that discussion the then Solicitor-General pointed out, as a leading argument for the Clause, that: The House will be able to control the negotiation of the agreements. The Solicitor-General realised at the time, as, I am sure, did everyone else in the Government, that on the face of it they needed Parliamentary control and that agreements were not to be made lightly. The right hon. and learned Gentleman went on to say that there had been discussion about the Pakistan agreement, which was then, I suppose, in course of negotiation or practically settled. He was asked what would be the cost of the Clause and he said that he could not give it. He also said, however: 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. Not a word has been said by the Economic Secretary today either as to the cost or as to any reason why he could not give it, in spite of what was said by the Solicitor-General when the Clause was introduced into the 1961 Finance Bill, as it then was.
There are other points, too. The Solicitor-General referred to provisions exempting from taxation and insisted that with provisions of this kind, the Government must be sure that they were introduced only into a proper agreement in which reasonable concessions are made from the other side. I quote only one sentence, but the right hon. and learned Gentleman said it more than once in the course of the discussion. He went on to give one very broad reason for it when he said: … all these reliefs"— that is to say, a relief by which a certain person was exempted from paying taxes— mean that there is some infringement of a principle which the House has shown itself to be jealous about, namely, that people in this 341 country should not, so far as we can see to it, enjoy income which has not borne tax anywhere. As I understand it, the effect of the present agreement is precisely that. A person who is excused tax in Malta on the ground that the enterprise is required for the development of Malta will also not pay tax in this country. That is the point which the Solicitor-General made and it is, I understand, the effect of the order. The right hon. and learned Gentleman went on to say: We are prepared to see a breach of that principle in particular cases, of which the development of under-developed countries is one, but it is not one to be used indiscriminately."—[OFFICIAL REPORT, 8th June, 1961; Vol. 641, c. 1421, 1423, 1424.] I do not accuse the Government of using the principle indiscriminately, because there was the Pakistan case, which was discussed at the time the Clause was introduced, and now follows the present case. One must, however, look at matters a little further than the Economic Secretary would, perhaps, like us to do.
I understand that Malta is an exceedingly prosperous country, no doubt as the result of considerable Government assistance from the present and previous British Governments. Indeed, when one turns to HANSARD for Friday of last week, one finds that in a Written Answer the Colonial Secretary stated that there was a development programme for the Maltese Isands and that The cost of the development programme is estimated at over £35½ million, of which the United Kingdom Government has undertaken to provide £29¼ million."—[OFFICIAL REPORT, 26th February, 1962; Vol. 653, c. 191.] If assistance is to be given to Malta, that is undoubtedly one way of providing it, and I should have thought that, on the face of it, it was a much better way than to give it in such a form that individual earners of income will escape taxation altogether. Moreover, when I turned to consider the cases which are likely to arise in Malta, and referred to the Development Plan for the Maltese Islands, 1959–64, I discovered that the major single investment is £6 million, earmarked for the conversion operation of the naval dockyard to civil use. That is a very good purpose. But then the official statement continues, saying: This operation is a striking example of the 'new look' for Malta to which this whole development programme is geared. 342 Then comes the meat of the matter: This is the object of the investment, and after protracted negotiations arrangements have been concluded with a private ship-repairing firm (C. H. Bailey Ltd.) to undertake this task. It seems clear, therefore, that the major beneficiary from this double taxation agreement is likely to be C. H. Bailey Ltd., or, at least, that that firm will be one of the benficiaries. It will be in the position of carrying out this undertaking, and, if it yields profit, of finding that that profit will not be taxed either in Malta or in this country.
Unfortunately, we have had some experience of C. H. Bailey Ltd. since then. The report to which I have referred was printed in 1959, and in the Reports of the Committee of Public Accounts printed in November, 1960, and subsequently we discover that Messrs. C. H. Bailey borrowed from the Colonial Office £1,200,000 which it said it required for working capital. It then removed £650,000 of that amount from Malta and sent it to Bermuda, where a new company called Bailey Trust (Bermuda) was set up to provide a pension and gratuity scheme for workers in the dockyard. No doubt that was an excellent purpose, but it could not properly be described as working capital.
It also took £200,000, which was paid by the Malta firm—which is some subsidiary of it in Malta— to its parent company in the United Kingdom for what were called promotion and formation expenses. The third item was a loan of £200,000 to the parent company for the provision of tugs for use in the dockyard"— paid out of public funds— The loan was to be free of interest and to be non-repayable in certain circumstances. It is no wonder that after another passage dealing with the investigation of what happened, the Committee of Public Accounts reported that it was concerned that of the loan of £1,200,000 for working capital over £1 million was applied by the company to purposes which would not have been agreed by the Colonial Office had they known of them at the time of issue, and that it was only a request for a further advance that gave rise to the Colonial Office enquiries. The Public Accounts Committee made certain criticisms of the Colonial Office which are irrelevant for the purpose of this debate.
343 The point is that C. H. Bailey Ltd., which appears to be the firm most likely to profit by this double taxation agreement, is not entitled, on that record, to any special consideration by Her Majesty's Government or the Treasury. We say to ourselves, "If this is what these double taxation agreements are to be used for they require more justification than was given at the time when the relevant Clause was introduced into the 1961 Finance Bill."
I want to be quite clear about this. I am not saying for a moment that Malta does not need assistance. I have already quoted figures that show the considerable amount of assistance that has been given to Malta. A very large sum indeed has been given for by far the greater part of the development programme spreading over five years, a capital sum which begins to compare with concessions to Surtax payers and things of that sort, which begins to compare with that kind of unfortunate balance which from time to time appears between the debit and credit side of our accounts with foreign countries, and a sum so considerable that of course it ought to be applied with caution, and no doubt was and is.
But I am not complaining of it. What I am complaining about is that, when we get a double taxation agreement the effect of which is to supplement that concession by making concessions which will enure to the benefit of private taxpayers and, as the Solicitor-General said at the time, have the effect of relieving them altogether of tax, all we get from the Economic Secretary, with great and genuine respect to him, is about the shortest introduction of a double taxation Order I have ever heard. I hope we are going to hear from him today why it has been thought so necessary to introduce this Order, what effect it is going to have, and why it is better to do it this way, that is, to add to the encouragement given to Malta, the substantial encouragement which has been given to Malta by the money payments which I quoted just now.
I add one last point. We were told that there always had to be a quid pro quo. That was the substance of the matter. The quid pro quo in this case is said to be that people operating ships 344 and aircraft in Malta if they are United Kingdom residents will not have to pay taxes there. I wonder how much there is in that. There are a number of special arrangements about ships and aircraft with various countries. There have been such agreements from time to time for many years, but in addition to that I notice that the Maltese taxes in question are, so far as companies are concerned, only the Income Tax and that that Income Tax is at the rate of 5s. in the £.
It seems to me, therefore, that if an English resident, a company operating ships or aircraft in Malta, were to pay Maltese taxes, it would, under the next following Section of the Finance Act, be entitled under the provisions for unilateral relief, quite apart from this Agreement, to deduct the amount paid in Malta from the taxes it would have to pay in this country, and though the tax would be paid to a different person, it would be no worse off at all.
I rather fail, therefore, to see what is the advantage on our side of this concession. So far as our nationals are concerned, it does not appear that it will make any difference to them. So far as the Treasury is concerned, it appears to me that it is going to receive less taxes than it otherwise would have. But I do not care about that, and I may be wrong about the Treasury. But certainly if this is a case of giving encouragement to enterprise which derives some advantage in that way, one has to take into account the unilateral relief given to cover cases of this sort.
For all these reasons, I feel that this Order certainly needs a great deal more explanation than we have had, and that that explanation ought to include, not only the effect of this Order, but the intentions of the Government with regard to future agreements of this kind, because it seems to me that at present they have gone far beyond what was intended—not beyond the language, but beyond what was intended—by the relevant Section of last year's Finance Act.

§ Mr. John Stonehouse (Wednesbury)
My hon. and learned Friend the Member for Kettering (Mr. Mitchison) has given powerful reasons for wishing not to support this Order unless satisfactory assurances are given on various points by 345 the Economic Secretary. I hope that we shall have those assurances tonight. In particular we should like to know what will be the actual position of Messrs. C. H. Bailey, a company which has not had a wholly untarnished reputation in its dealings in Malta.
It seems to me also that the key part of the Order is paragraph 6 (2). I should like to know from the Economic Secretary exactly how it will operate. How will the Government of Malta be able to exercise any control over the taxation of companies operating in those islands if the companies are also operating in the United Kingdom? Does it not remove control from them? Will the Economic Secretary tell us what action the incoming Government of Malta can take in that respect?
The most serious point that I have to raise is the whole question of tax avoidance by companies operating in underdeveloped areas which are not completely self-ruling. We now have as an example the position in British Guiana where the flight of capital and tax avoidance by companies operating there has had the effect of provoking disorders. I am sure that no hon. Member would want a similar situation to arise in the Maltese islands. We hope they will be able to develop towards independence by peaceful means without any quarrels, disturbances or conflicts about economic questions of this character.
But why are the Government introducing the Order at this time when an election is in progress in Malta? Why could they not have waited a few days until a new Government was installed and the party winning the election had had an opportunity of going over these most important points, which will affect the future of the islands very much more than they affect us? Frankly, I see no reason against deferring the Order another week or so to enable such consultations to take place.
I should like an assurance from the Economic Secretary that if the incoming Government in Malta are in disagreement with any paragraph or if there is any question about the way in which the Order will be interpreted after it is passed, they will have an opportunity to put forward their point of view and have an amending Order brought in to 346 deal with it. I hope we can have such an assurance, or we may have to cast our votes against the Order being passed in the form in which it is now presented to us.

§ Mr. Barber
The hon. and learned Member for Kettering (Mr. Mitchison) asked halfway through his observations what the general intention of the Government was about future double taxation agreements.
I think it fair to say that since the end of the war it has been the objective of successive Governments to conclude as many double taxation agreements as possible, always provided, of course, that we were able to agree reasonably satisfactory terms with the other country. When one is considering the advantages and disadvantages to the United Kingdom and the other country of a double taxation agreement, it is relevant to bear in mind that the agreements sometimes come about as the result of considerable and prolonged negotiation and, consequently, one has to strike a balance. It may well be that in certain respects a particular provision in a double taxation agreement may be one that we would not have liked, if we could have avoided it. But, nevertheless, there has to be some quid pro quo.
The hon. and learned Gentleman referred to what my right hon. and learned Friend the erstwhile Solicitor-General said when in the course of last year's Finance Bill debates he dealt with the provisions for giving tax relief in this country in respect of taxes spared by a foreign country with whom we had concluded a double taxation agreement. I remember well what was said at that time, and I only wish that it were possible to give the House some meaningful figure of the cost which would be involved. But the fact is that it is simply not possible to give a precise estimate of the cost to the United Kingdom Exchequer of the tax sparing provisions of this agreement with Malta.
In fairness to my right hon. and learned Friend the then Solicitor-General, who always chose his words most carefully, he did say, and the hon. and learned Gentleman quoted him, that it "may" be possible to give an estimate of the cost. I am speaking from recollection, but I think that he 347 made the point in answer to a question by the hon. and learned Gentleman.

§ Mr. Mitchison
Yes.

§ Mr. Barber
Regarding the likely cost of agreements which would or might be made under the Clause we were then debating, and again speaking from recollection, I think that my right hon. and learned Friend said that he could not answer that because the agreement had not at that stage been concluded, but he would do his best to see whether some estimate could be given at a later stage. I can tell the House that it is not expected that the net cost of this agreement is likely to be substantial.
I think it relevant for the House to bear in mind that in the absence of a double taxation agreement with any particular country, the United Kingdom, under the unilateral provisions to which the hon. and learned Gentleman referred does normally give full credit for overseas taxes.

§ Mr. Mitchison
Nevertheless, the hon. Gentleman would agree that the present Order costs something, even allowing for that.

§ Mr. Barber
I think that it is likely that it will cost something, although even on that point we cannot be sure, because, as the hon. and learned Gentleman fairly pointed out, although the tax-sparing provisions of the agreement will cost something to the United Kingdom Exchequer, there are certain items on the other side of the balance sheet. He mentioned perhaps the most important, and that is the provision in the agreement whereby British shipping and transport concerns are exempt from tax in the other country, that is to say in Malta. That, of course, has not been the case hitherto. Thus there will undoubtedly be some saving to the United Kingdom Exchequer on that account. But I think it fair to say, as did the hon. and learned Gentleman that this will involve some net cost to the United Kingdom Exchequer.
With regard to the economic position of Malta, nobody I think would disagree when I say that, despite the prosperity to which the hon. and learned Gentleman referred, Malta is still in need of considerable development. The hon. and learned Gentleman referred to the fact 348 that assistance had been provided by the United Kingdom and then pointed out that here we were trying to do something additional which would be a burden on the Exchequer. But surely exactly the same considerations apply to the agreement which we made not so long ago with Pakistan.

§ Mr. Mitchison
Surely the point here is that if this amount of money, whatever it is, had been given by way of direct assistance it would have benefited Malta. As it is, it benefits C. H. Bailey and others.

§ Mr. Barber
I was coming to the question of C. H. Bailey, because the hon. and learned Gentleman, who is normally very careful about the assertions he makes in the House, seemed to be proceeding on the assumption—and I have absolutely no information about this—that C. H. Bailey is to benefit from these provisions. As the hon. and learned Gentleman knows, even if I did know—which I do not—I could not give the House any information about a particular company or individual.
I hope that the hon. and learned Gentleman has looked at Emergency Ordinance No. XXI of 1959. I received it only a few moments ago. Part IV, which deals with relief from Income Tax, and in which the provisions are set out for giving a tax holiday in certain circumstances, says that provision may be made for a tax holiday: Where it appears to the Governor, after consultation with the Board,"— that is the Industrial Development Board— that the income derived by an industrialist … should be exempted … from the payment of income tax … subject to such conditions and the giving of such security as the Governor thinks fit. I must stress that I have no knowledge at all of the position of C. H. Bailey. Even if I had, I could not disclose it, but I think that it is fair to say that these tax-sparing provisions are applied only in certain circumstances and not automatically.
The hon. Member for Wednesbury (Mr. Stonehouse) asked me a couple of questions. The first was on paragraph 6 (2) of the Agreement. I cannot see any difficulty arising there. The purpose of this sub-paragraph is to ensure 349 that United Kingdom companies which derive income from sources in Malta are protected against any form of undistributed Profits Tax which Malta might charge on this income in addition to the normal tax. I cannot see that this will involve any difficulty in practice. It may be that I did not understand the hon. Gentleman, but I think I followed him, and I cannot see any difficulty arising there.
The main point that he seemed to be making, and it is an important one, was really on the question of timing. This is a fair question, and in effect he asked whether the Government had some ulterior motive in concluding this Agreement at this time in relation to the elections. I can only tell the hon. Gentleman that we have been trying to reach a double taxation agreement with the Maltese for, I think, about ten years.

§ Mr. Tom Driberg (Barking)
With whom?

§ Mr. Barber
With whatever the constitutional party or authority is in Malta. I do not know what it is called.

§ Mr. Driberg
Does the hon. Gentleman really not know that Malta has been under direct colonial rule for several years? There is no party in power, and there will not be until after the elections.

§ Mr. Barber
If the hon. Gentleman looks into this he will find, as I have no doubt I would do if I had the opportunity of doing so, that constitutionally this is perfectly in order.
There was some suggestion that this was in some way being rushed through before the elections. This is not so. It is simply that we have been trying for at least ten years to reach an agreement, because these agreements may be concluded not only with a country which is independent and represented at the United Nations, but with any country which levies taxation of its own, because wherever there is a territory which levies taxation of its own, the question of double taxation arise. It is this and all that follows from it, that we are trying to avoid, and have successfully avoided.

§ Mr. Stonehouse
Will the hon. Gentleman answer a question? He has spoken about consultation with the Maltese. Is he not aware that the only consultation 350 which has taken place in the last few years has been consultation between one hand of Her Majesty's Government and the other hand of Her Majesty's Government? How does that involve the Maltese?

§ Mr. Barber
Because the Maltese levy taxes and the taxes can be levied, for example, against a resident of the United Kingdom who carries on certain activities in Malta, or a resident of Malta who carries on certain activities in this country. Unless there are provisions whereby relief can be given inequity can occur. It is true that without this double taxation agreement the normal unilateral provisions would apply, but I think it is generally accepted nowadays that a double taxation agreement is far superior to the unilateral provisions so long as one can reach reasonable terms on all the issues involved.
Whatever the constitutional position may be, the fact is that the territory of Malta levies taxes quite distinct from those levied in this country. Both taxes can apply to the same person in respect of the same transaction. Consequently it is necessary that some provision should be made to avoid this double taxation.

§ Mr. Tom Driberg (Barking)
I am sorry if my intervention embarrassed the Economic Secretary. Obviously he was not very fully apprised of the circumstances in the Maltese islands, where an election has been taking place in the last few days.
I think that part of the misapprehension was caused by the words he chose to use. He said that these agreements always followed prolonged negotiations with the other country concerned. He also said that "the Maltese do this and that "and" the Maltese levy taxation". He kept on using the words," the Maltese", whereas in fact, as I expect by now he will have been told by the Parliamentary Private Secretary or someone, the Maltese are not in power in Malta, although they may be after today or tomorrow. When he says "the Maltese", he means the Colonial Office and the Governor. There has been direct colonial rule in Malta for the last three-and-a-half or four years. That is just a small correction.

§ Mr. Mark Woodnutt (Isle of Wight)
I am sure that the hon. Member for Barking (Mr. Driberg) will agree that, although Malta has been under Colonial Office administration since 1958, there were some six years before then when these negotiations were going on. During the last four years there have been four Maltese representatives of the Colonial Government, apart from the Governor and three permanent officials of the Treasury.

§ Mr. Driberg
If we failed to reach agreement with a genuinely Maltese Government for six years, an elected Government, surely there is all the stronger reason for not rushing through this particular Order on the very eve of a newly-elected Maltese Government taing office. The hon. Member has made a very strong point in our favour. The elected Maltese Government refused to, or could not, agree to the terms of a double taxation order similar to this one. That strengthens our criticism of the Order. My hon. Friend the Member for Wednesbury (Mr. Stonehouse) pointed out that it is being rushed through while the votes are still being counted, as it were, in Malta.
There is a simple question I want to ask the Economic Secretary. I hope he will be able to answer this one; I am sure he will. In the Schedule to the Order, under paragraph I (1) it is said: The taxes which are the subject of this Arrangement are:—

(a) In the United Kingdom (and hereinafter referred to as "United Kingdom tax").

(b) In the Island of Malta (and hereinafter referred to as "Malta tax"):

The income tax (including surtax). Could he tell me, purely for information, if there is any Surtax in Malta? I rather doubt it somehow. I do not think the Archbishop allows it. If there is not any Surtax in Malta, ought we to have meaningless words in an Order presented for approval by this House?

§ Mr. Bruce Millan (Glasgow, Craigton)
The point which has been made about entering into and ratifying the agreement at this time is a substantial point, and I draw the attention of the House to paragraph 16 of the Schedule in which we read, 352 This Arrangement shall continue in effect indefinitely but either of the Governments may, on or before the 30th June in any calendar year after the year 1964, give notice of termination to the other Government … There is a legitimate point that if for any reason the newly-elected Government of Malta found that this kind of agreement was unsatisfactory, it would not be possible for them to terminate it earlier than 1964.
We require a little more convincing argument from the Economic Secretary about the timing of the Order. It may well be true that there have been negotiations and discussions for about ten years, but, as the hon. Member appreciates—and as he said when introducing the Order—a new element was introduced into the situation in the 1961 Finance Act in respect of taxation holidays. I should have thought that that new element in the situation was sufficiently radical to make a good deal of the previous negotiations rather out of date. I therefore think that the real negotiations for this agreement could have taken place only during the last year, and during the last year, as my hon. Friends have pointed out, there was government in Malta directly through the Colonial Office. I hope that the Economic Secretary will tell us a little more about the timing of the Order.

§ Mr. Barber
It is difficult to add to what I have said about timing. I have been frank with the House in saying that over the years we have been trying to reach agreement, sometimes with an authority operating under the Colonial Office and at other times, if the information given by hon. Members is correct, with an elected Maltese Government, but until this agreement we have been unsuccessful.
Dealing with the point made by the hon. Member for Barking (Mr. Driberg), the fact that we failed to reach an agreement with what he called the elected Maltese Government was, as I understand it, in the main due to the fact that at that time there was no provision in the Income Tax Acts which would enable us to give credit for taxes spared under a tax holiday system. This has been the principal stumbling block which has prevented us from reaching earlier agreement with—I previously said 353 the Maltese, but perhaps I should say "the authority for the time being responsible for the imposition of taxes".
The hon. Member for Barking also raised a very proper point about Maltese Surtax. He thought that he had caught me out, and I am bound to say that for one moment I thought he had, but I am happy to tell the House that Surtax in Malta is charged on individuals with total incomes exceeding £2,500 at progressive rates ranging from 2s. in the £ on the first £500 of the excess over £2,500 to 5s. in the £ on all incomes in excess of £4,000.

§ Mr. Mitchison
That will not hurt C. H. Bailey (Malta) Ltd. All I have said about those gentlemen was quoted from official publications to which the Economic Secretary has even readier access than I have. The only point on which he beat me was in getting a copy of the Maltese Ordinance.

§ Mr. Deputy-Speaker (Sir William Anstruther-Gray)
Order. I hope that the hon. and learned Gentleman is not making a second speech.

§ Mr. Mitchison
With respect, I should have asked leave of the House. I think that the Economic Secretary made three separate speeches without asking the leave of the House.

§ Mr. Deputy-Speaker
That is conventional.

§ Mr. Mitchison
I am a great respector of the conventions and if I have broken one I must apologise and ask the leave of the House to add one sentence. I had intended to ask leave to withdraw, but I must say to the Economic Secretary that I found the explanation not only rather reluctant but rather thin when it came and we must see what happens when the Question is put to the House.

§ Mr. William Ross (Kilmarnock)
Did my hon. and learned Friend the Member for Kettering (Mr. Mitchison) say he was going to ask leave to withdraw? What is he going to withdraw? This is an affirmative Motion.

§ Mr. Mitchison
That means only that I must apologise again.