HC Deb 01 April 1965 vol 709 cc1984-94

10.0 p.m.

The Financial Secretary to the Treasury (Mr. Niall MacDermot)

I beg to move, That an humble Address be presented to Her Majesty, praying that on the ratification by the Government of the Federal Republic of Germany of the Convention set out in the Schedule to an Order entitled the Double Taxation Relief (Taxes on Income) (Federal Republic of Germany) Order, 1965, a draft of which was laid before this House on 11th March, an Order may be made in the form of that draft. This Motion relates to a Double Taxation Convention with the Federal Republic of Germany with respect—

Mr. Speaker

Order. We cannot hear about our Income Tax.

Mr. MacDermot

When you can hear, Mr. Speaker, you will be glad to know that it relates to a Double Taxation Convention with the Federal Republic of Germany with respect to taxes on income. This Convention was sinned in Bonn on 26th November last and was laid before the House on 11th March of this year. This new Convention replaces the existing one between the two countries which was signed on 18th August, 1954.

The new Convention was negotiated at the request of the German authorities, since some of the provisions of the former Convention were no longer entirely in keeping with developments in the German tax system. The principal change effected by the Convention arises out of a German tax known as the "Nachsteuer". Hon. Members will realise that as a result of the long period of Government by the party opposite the Germans have got rather ahead of us in the modernisation of their taxation system. They have, and have had for some time, a corporation tax, the rate of which is 51 percent. on undistributed profits and 15 percent. on distributed profits.

Where a subsidiary company pays dividends to a parent company—and for this purpose a parent company is one having a shareholding of 25 percent. or more in the subsidiary—and where that dividend is retained by the parent company, this "Nachsteuer" is applied so as to impose the balance of that corporation tax; in other words, the remaining 36 percent. on the parent company.

This tax cannot be levied on dividends payable to a parent company outside the Federal Republic, including in the United Kingdom. The Government of the Federal Republic argued that, in order to redress the balance, the limit for the German tax on dividends to a United Kingdom parent company in the circumstances should be able to be increased from 15 percent. to 25 percent. In the circumstances, it was difficult for this country to oppose the German Government's arguments.

Article VI(2) therefore of the Convention will permit the German Government to do this. That is undoubtedly the major change brought about by the new convention. For the rest, the new Convention makes only minor changes in the arrangements laid down in the former Convention, but this opportunity has been taken, in so far as it is possible, to bring the provisions of the Convention into line with the model articles of the Fiscal Committee of the O.E.C.D. Under that Convention of 1963, to which both we and the German Government are parties, we are under an obligation, in any new Convention we make, to adopt the form of that model Convention. In fact, I think that not all the provisions of this new Convention were formulated at the time that agreement was reached with the German Government on the various points in our new agreement. But in many respects we have the advantage of being able to follow the guidance of this model Convention. Hon. Members interested in the subject will agree that the Fiscal Committee of the O.E.C.D. has done a very good job in formulating this new model Convention.

As a result of the revision, the new Convention is more extensive in scope than the previous one. In particular, it brings within its scope the new German taxes for which we have no comparable tax. They are referred to in Article I(1)(a). They have a Vermogensteuer, which is described in the Convention as a capital tax. I think that it is of a nature more usually referred to in this country as a wealth tax. It is a 1 percent. wealth tax. In addition, they have a somewhat complicated tax, the Gewerbesteuer, which is partly a tax on income, partly a tax on capital and partly a payroll tax. In any event, under the new Convention, the Germans have agreed to conform to the rules limiting the amount of tax chargeable on United Kingdom enterprises. These provisions are wholly to our advantage.

Negotiations for this Convention were somewhat protracted. It was a very complicated matter, and, although it was signed in November 1964, hon. Members will notice from, I think, Article 23, that most of the provisions in relation to tax will take effect as from, approximately, the year 1960. There is, however, a provision inserted in paragraph 4 of that Article virtually to eliminate any adverse effect upon any taxpayer of the retrospective nature of the provisions. In other words, he is entitled to take advantage of whichever is the more advantageous to him, either the new agreement or the old agreement in respect of the tax years before the year of ratification of the convention.

That, very broadly, is the effect of that provision. I shall not seek to outline in any more detail the provisions of the draft Convention. I hope to be able to answer any points which hon. Members may raise.

10.9 p.m.

Mr. William Clark (Nottingham, South)

I am sure the House is grateful to the Financial Secretary. As he says, the Convention is fairly complicated. It has taken a long time to negotiate, and we appreciate the reasons for that. He said that the two extra taxes which the Germans have inserted are the capital tax and the trade tax. I think the Financial Secretary said that Germany was forward looking, that it is changing the structure of its taxation and that it has anticipated in this Convention many of the modern faults in taxation.

One thing which strikes me is the fact that, two or three days before the Budget, we are signing a Convention in which there is no mention of our proposed capital gains tax or our proposed corporation tax. I should have thought—and, as the Financial Secretary will appreciate—this goes right through the Convention—that this is a gross omission.

I find Article III(5) difficult to understand. As I read it, the inference is that one could have double taxation on the same income, and I hope that the hon. and learned Gentleman will be able to say something about that. As to Article IV(a), the Financial Secretary spoke about 15 percent., and so on, but here, again, I must return to my original point that nothing is said about the 35 percent.—presumably—corporation tax we are to impose next week.

I think that Article VIII(1) needs some explanation. I do not wish to bore the House, but this is a short paragraph and it reads: Gains from the sale, transfer or exchange of capital assets derived from sources within one of the territories"— that is, either Germany or the United Kingdom: by a resident of the other territory shall be subjected to tax only in that other territory. I should have thought that to be quite conclusive and categoric, but if one seeks to tie it up with the Chancellor of the Exchequer's Written Answer in December last year, one finds that the right hon. Gentleman, talking about capital gains tax, which is directly affected by this Article, said: Persons, including companies, who are resident in the United Kingdom will be liable to tax on all realised gains wherever the underlying assets are situated."—[OFFICIAL REPORT, 8th December, 1964; Vol. 703, c. 166.] One cannot have it both ways. We are signing a Convention excluding the capital gain from liability, yet the Chancellor in December last said that it does not matter where the assets are, one will be taxed.

Surely, that will give to the Germans some advantage from which residents in this country are not also to benefit. I appreciate that the definition of "capital" is slightly different and that Article XII(2) talks of "immovable property", but even taking out immovable property there are still all the other assets where there may be a capital gain. I should like the Financial Secretary, somehow, to reconcile Article VIII with the Chancellor's statement of 8th December.

In Article XVIII(2) there is a reference to ordinary dividend paid by a company resident in the Federal Republic. My reading is that it applies to payments from Germany, but I should like to know whether the converse will apply to companies in this country.

Again, Article XXIII shows the glaring omission in the Convention of not mentioning the capital gains tax or the proposed corporation tax—

Mr. MacDermot

Before the hon. Gentleman leaves Article XVIII, I am afraid that I have not quite got his point there.

Mr. Clark

I fully appreciate that I may be misreading paragraph (2) of the Article, where it says: Where such income is an ordinary dividend paid by a company resident in the Federal Republic… and so on. I will not read the whole of the paragraph, which is long. My reading of it is that this provision applies to payments from Germany. Will the converse apply or will it not?

I turn now to the Explanatory Note, which again talks about the maximum rate of German tax of 25 percent. I should probably have given the hon. and learned Gentleman notice of this point, but I should like to know what the effect of a corporation tax of 35 percent. will be in the context of this Convention.

The Financial Secretary has explained the recommendations of the O.E.C.D. Perhaps at some time he will let us have a copy of them, or place one in the Library. I should have thought that the Convention will be out of date even before it is signed. If it is effective from now, what will happen after 6th April? The Convention cannot be broken at the earliest until 1968. What will happen if between now and 1968, forgetting Budget Day next week, our whole tax structure changes? At the moment the inference is that there will be a major change in our tax structure, particularly with the corporation tax. If our tax structure is to be radically altered, can the Financial Secretary definitely say that we shall not have to re-negotiate not only this Convention but many others?

I can understand the reason for the Convention. The previous one was out of step with developments in the German tax system. I understand that our present tax structure is roughly the same as the new German system. Fifteen percent. is charged on German distributed profits, as against 51 percent. on undistributed profits. The attitude this country is taking is a flat rate 35 percent. corporation tax which will affect the payment of dividends. The Chancellor is on record as saying that the Corporation tax will mean that companies in this country will have to plough back, or it will pay them to plough back, their profits. If they plough back their profits, their tax liability under a 35 percent. corporation tax will be decreased. Under the German tax system, progressive as it is, as the Finance Secretary said when he introduced the Convention, 15 percent. will be charged on distributed profits and 51 percent. on undistributed profits. This surely is an invitation to any company in Germany to pay the maximum dividends. I personally think that this is right.

I should no doubt be out of order if I pursued the question of the desirability of paying out dividends at a high rate or at a low rate. It is worth making the valid and important point for this country that the Government are saying, "We are changing the Convention simply because the Germans have a more modern approach to tax". Yet there is still this vast difference between tax on distributed profits and tax on undistributed profits. The Neumark Committee recommended to all the E.E.C. countries that they should adopt the German system. What will happen? Our present system is more or less in line with the new German system. Why is it that probably next week we shall take a step back—

Mr. Deputy-Speaker (Dr. Horace King)

Order. I have listened to the hon. Gentleman with care. He has been absolutely in order until this last question. The question, however, cannot be answered.

Mr. Clark

I take that point, Mr. Deputy-Speaker. I apologise. I am sure that the House will understand that when discussing new taxes one is rather inclined to run away. It is valid to point out that we are signing a Convention to fit in with a new German tax structure. The hon. and learned Gentleman said that there has been much delay in reaching agreement on the Convention because of the complicated negotiations. Why cannot we delay a little longer? What is the urgency for the Convention?

I obtained from the Vote Office a copy of the Convention. It is printed in both languages. Is this an innovation? Are we to have all Conventions printed in two languages? Is this another indication of the fact that, despite what the Government say, they will go into the Common Market eventually and they are trying to improve the linguistic abilities of residents here?

10.21 p.m.

Mr. MacDermot

With leave, I will reply to the debate and answer the hon. Member's last question first. There is nothing new about having the Convention in both languages. This is common practice. What is new is that the Government should take the trouble to make the text in both languages available in the Vote Office. This is the first time that it has been done. It was a point which was raised once under the previous Government and we thought that some hon. Members might be interested to see the full text in both languages, which are also the official languages.

Mr. William Clark

May I remind the hon. and learned Gentleman that Cmd. 9570 issued in 1955 is also in both languages?

Mr. MacDermot

I am glad to hear it. A draft Order before the Order itself is made is different and this is the first time that the text of the draft has been available in both languages.

The main purport of the hon. Member's argument, apart from some specific questions, was to suggest that we did wrong to sign the Convention last November rather than seek to protract and delay the matter still further to wait until our new taxes come into force and see whether the new Convention was necessary. It will be realised from the date that the Chancellor of the Exchequer had announced his decision to introduce the corporation and capital gains taxes before the Convention was signed. Therefore it would have been perfectly open to the Federal Republic, if it so wished, to ask for a delay in signing the Convention.

The German authorities did not. They wanted to see this brought into force as soon as possible particularly because the main advantage under the new Convention, which I have explained, is that which accrues to the German Government under Article VT(2). It does not come into effect until the new Convention comes into effect and therefore any further delay would have been directly against their interests. For that reason, and because the matter had been protracted and the whole of the negotiations had been virtually concluded under the previous Government, we felt that it would have been wrong for us to ask the Germans even to consider any further delay. This was really a commitment which we had inherited.

To turn to the specific questions, the first was on Article III(5) which the hon. Member feared could result, in some circumstances, in double taxation. The general purport of Article III is to deal with trading income, that is to say industrial or commercial profits. As a general rule these are taxable only in the country of residence of the trader, except where those profits are attributable to what is called a permanent establishment in the other country, that is a fixed place of business where he carries on his business in whole or in part.

The effect of Article III(5) is to make clear that the Article does not restrict in the case of either country taxation of dividends and rents arising from immovable property, as it is called—realty we would call it in our legal system—by the country in which the land is situated. The effect, therefore, is that trading incomes or dividends from immovable property will fall to be dealt with under Article XII of the Convention, and the effect of that Article—this is what ensures that there will not be double taxation—is that the German Government agree for their part not to tax such income arising from land in the United Kingdom, and we for our part, under our different system, agree to give credit for any German tax on such income arising from land in Germany.

I was asked questions about Article VIII(1) which deals generally with the capitals gains tax, and I leave my comments on that until I deal with both the capitals gains and corporation taxes at the end of my remarks.

On Article XVIII(2) I was asked whether the converse would apply in relation to payments from the United Kingdom to Germany. Article XVIII is the one which deals with the way in which relief will be given when income continues to be taxable in both countries. The short answer is that there is a different system adopted, in general, by each country. Our system, as in the example I have just given to the House, is to give credit for the German tax when we tax any income derived from a German source. The German system, where a German resident receives income from United Kingdom sources, is that Germany will exclude that income from the basis upon which the German tax is imposed.

That is the general principle, but there are two exceptions to this rule under the Convention, and they are both, I think, new provisions. The first arises in the case of a dividend received by a German resident from a United Kingdom company other than a payment by a subsidiary to a parent. The Germans will charge the dividend but will give a credit equal to 18 percent. of the net amount of the dividend. The second exception applies to the rather unusual case of an individual resident in Germany who receives remuneration or a pension from the United Kingdom Government or from a local authority in the United Kingdom which is not exempt from tax in Germany (because he is a German national without being also a United Kingdom national). In these circumstances, Germany will charge the tax but will give a credit for the United Kingdom tax which is payable, in other words, adopt our system.

The hon. Gentleman asked me about the O.E.C.D. Convention. I can supply him with a copy if he wishes. There is a copy available in the Library as well.

I was asked what would be the effect after 6th April and after the introduction of our new corporation and capital gains taxes. In our view, the corporation tax will be a tax which is substantially similar within the meaning of Article I of the Convention to the existing profits and income taxes and, consequently, that tax will be subject to the terms of the Convention. I do not think that there will be any doubt about that.

As regards the capital gains tax, the question whether our capital gains tax can be regarded as substantially similar under that Article so that the Convention would apply will depend upon the precise form of the tax. Hon. Members will appreciate that I am not at liberty to say any more about that tonight.

The hon. Member asked whether there would be any need for us to seek to renegotiate the agreement before its expiration in the year 1968–69. Again, I cannot say whether it will be necessary. I must ask the House to wait to see what the detailed provisions are in the Finance Bill. If, however, there is any need to seek to renegotiate these agreements, I hope that we may look for the same sympathy from the German Federal Government as we have sought to show in dealing with their request concerning this Convention. In any event, as the hon. Member said, any problems that may arise in this connection should be problems with which they will be, if anything, more familiar than ourselves, since these new taxes which we are introducing will bring our tax system into closer approximation with theirs. I hope that I have dealt with all the points that the hon. Member raised.

Question put and agreed to.

Resolved, That an humble Address be presented to Her Majesty, praying that on the ratification by the Government of the Federal Republic of Germany of the Convention set out in the Schedule to an Order entitled the Double Taxation Relief (Taxes on Income) (Federal Republic of Germany) Order, 1965, a draft of which was laid before this House on 11th March, an Order may be made in the form of that draft.

To be presented by Privy Counsellors or Members of Her Majesty's Household.