§ The Chancellor of the Exchequer (Mr. James Callaghan)Under the present system, Income Tax at the standard rate is deducted from all dividends paid to non-residents; but we have had no separate dividend tax. We have, therefore, never had to consider hitherto the question what tax rates would be appropriate for dividends going abroad.
My proposals for dealing with this matter are as follows. In cases where the dividend goes to a country with which we have no double taxation agreement, I propose that the standard rate of Income Tax should continue to be deducted as it is now. In cases where we do have agreements, some limit the 268 rates of tax which may be deducted from dividends paid from a company in one country to shareholders in the other: others completely prohibit the imposition of any tax on dividends.
We shall, of course, honour these agreements. But we shall seek to renegotiate any agreement which we think unreasonably restricts our right to deduct tax from dividends going to overseas shareholders. This issue is especially important as far as the United States and ourselves are concerned; and we have already had some preliminary talks. These will be continued without delay.
This group of changes will correct a feature of our tax system which is working against our long-term interests and weakening our position and our ability to help others. But even after these changes have been made we can expect still to be net exporters of capital on a substantial scale. In future, those who invest overseas will need to assess more closely the return on their capital compared with the return they get on capital invested at home. The transitional relief I am proposing will give those who are in need of it a cushioning period in which to make such a reassessment.
I am very mindful of the interests of those who have for long been dependent for development capital and otherwise on us. I do not expect that the impact of the measures we are taking on the developing countries, towards whom we have special responsibilities, will be adverse to any significant degree. But I shall be watching this aspect of the question—[HON. MEMBERS: "Oh."] This is quite true. Hon. Gentlemen opposite should study where the great volume of investment capital overseas goes. I shall be watching this aspect of the question with great care and will be ready to consider whether any new action on my part is needed, for example, in the field of aid to the developing countries.
I must not leave this subject without expressing my gratitude to the representative bodies of all kinds who took up my invitation of last December to send me their comments. I have carefully studied them; and both the Inland Revenue and I have been glad to receive many deputations. I have not, I fear, been able to accept all the suggestions that have been made; but the representations greatly assisted me in reaching my conclusions.
269 I also wish to express my thanks to another body the Board of Inland Revenue and all the members of the Department. I deeply appreciate the work they have done in analysing the issues and helping to prepare the legislation for these massive tax reforms. And this is not the end of the story so far as they are concerned. Just as we taxpayers will need to accept the changes in the tax system, so will the taxes staff who, after all, have to operate them.
I cannot, within the limits of a Budget speech that would be tolerable to the Committee, deal with all the details of my proposals for the two new taxes. I must ask hon. Members to await the publication of the Finance Bill. But I have in mind to publish, at the same time, or as soon after as possible, two White Papers which will explain as simply as possible the effects of the various Clauses in the Bill which deal with the two new taxes.