DOUBLE TAXATION RELIEF (SOUTH AFRICA) (Hansard, 25 July 1962)

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

As the hon. Member for Islington, East (Mr. Fletcher) has explained, this Agreement arises from the fact that South Africa has left the Commonwealth. In many respects it is similar to other Agreements which we have previously negotiated. Article XX, to which the hon. Gentleman referred, is one of the most important articles in the Agreement. Perhaps I may take it, as it were, line by line, and explain exactly how it works. Paragraph (1) is concerned with the provision of relief for a resident in the United Kingdom in respect of South African tax which is paid on South African shares. Paragraph (2) deals with the converse case where United Kingdom Income Tax is suffered by a resident of South Africa in respect of income derived from United Kingdom sources and provides for relief from South African tax, which is given by way of credit.

1689 Paragraph (1) begins in this way: Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom". This proviso refers simply to the Sixteenth Schedule of the Income Tax Act, 1952, which sets out the way any credit which is due is to be calculated.

Paragraph (1) continues: South African tax payable, whether directly or by deduction"— I think that we all understand the two ways in which the tax is levied— in respect of income from sources within South Africa shall be allowed as a credit against any United Kingdom tax payable in respect of that income. This means that credit will be given in the United Kingdom in respect of South African tax which is paid in connection with the dividend; in other words, South African tax which is levied either by deduction or which is assessed directly and which is directly concerned with the dividend itself, as opposed to what is known as underlying tax, which is tax payable in respect of the profits of a company which is not directly related to the payment of a dividend.

The relief for underlying tax is provided for in the second part of paragraph (1), which reads: Where such income is an ordinary dividend paid by a company which is a resident of South Africa, the credit shall take into account (in addition to any South African tax appropriate to the dividend) the South African tax payable by the company in respect of its profits". In other words, if the South African company has paid tax in respect of its profits and later pays a dividend to a United Kingdom shareholder, the United Kingdom shareholder will get relief, not only in respect of the tax paid directly because he has received a dividend, but he will also receive relief in respect of the tax paid by the company, paid perhaps regardless of the fact that a dividend is being paid.

Then there is provision to deal with participating preference shares and, 1690 broadly speaking, that provision is simply to the effect that, where there is a participating preference share and, in addition to that fixed rate of interest, a share of profits is paid, any additional interest in respect of the share of profits is to be treated in the same way as a dividend paid on an ordinary share.

In paragraph (2), which deals with the converse case where United Kingdom tax is payable in respect of a dividend, provision is made for relief from South African tax. I should mention in passing that, as I understand it, at present South Africa does not levy tax on a dividend accruing to a resident in South Africa from a source outside South Africa. Consequently, at present this paragraph will not be of any great value, but it could be of value in the future because, if South Africa were to change her law and levy tax in respect of income accruing from a source outside South Africa, relief would be given, and would have to be given, by virtue of this paragraph.

The only other point that perhaps I should mention is the proviso at the end of the paragraph, which refers to what is known as "third country" tax; in other words, to the case where the United Kingdom company has already had relief from United Kingdom tax in respect of tax paid in a third country. The proviso simply says that if South Africa has to give relief from tax in respect of the tax paid on a United Kingdom dividend, that South African relief is to be limited by reference to the net United Kingdom rate borne by the company. I think that that is a perfectly reasonable way of proceeding. I imagine that the hon. Gentleman does not wish me to refer to the third paragraph which, although it all comes under Article 20, really refers to another matter.