DOUBLE TAXATION RELIEF (JAMAICA) (Hansard, 1 July 1965)

§ Mr. William Clark (Nottingham, South)

I do not think that it would be the wish of the House that we should pass this Order without some discussion. The agreement was signed oh 2nd April. On 6th April the Budget was introduced. As I understand it, the Order gives relief for double taxation, particularly in regard to what are termed the tax sparing reliefs of Jamaica. In Jamaica, there are certain tax laws which mean that when running certain industries or ventures one can obtain relief from notional taxes.

There are many Acts of the Jamaica Legislature, such as the Industrial Incentive Act, the Pioneer Incentive Act, the Hotel Act, the Export Act, the Petroleum Act and the Motion Picture Act, which have been introduced to encourage development there. Under all those Acts there is tax relief for development. It means that capital expenditure in those industries can be written off within one year. In addition, many of the industries enjoy what we are pleased to think of as a tax-free holiday, which ranges from seven to ten years depending on the industry. Sometimes it is a tax-free holiday for the first four years and then there is a tapering off until the expiration of ten years.

It is essential to see what the effect of this taxation is in Jamaica, and particularly on the taxpayer in this country. Let us take a notional profit of £100 and assume that in Jamaica the tax due would be £40. But because of the Jamaican tax sparing reliefs the £40 is not payable. So a person who develops there and makes a profit of £100 enjoys a profit of £100 without taxation. Under our legislation, it means that anyone who invested in Jamaica and made this £100 would, for the purpose of our taxation, have been thought to have paid £40 notional Jamaican tax.

966 Now, however, we have Clause 60 of the Finance Bill—which is not yet law—which will bring in Corporation Tax into all double taxation agreements and this is particularly serious for Jamaica. Here we have the situation of an overseas country which wants to develop and encourage investment and gives a relief of £40 or whatever it may be in £100 but when the income gets to this country Corporation Tax, if it operates at 35 per cent. or 40 per cent. will be payable on it. Consequently there can be no benefit to any United Kingdom citizen under the Finance Bill if Corporation Tax is payable on overseas profits.

More seriously, there cannot be any advantage to Jamaica. The Jamaicans have organised their tax laws so as to encourage people to invest in their country. That is all right, provided one is in Jamaica, but if a British citizen invests in Jamaica then the benefit he gets from the tax laws of Jamaica will be cancelled by Corporation Tax. This must distort the tax structure as between Jamaica and this country.

Article 3(3) of the Schedule mentions … the industrial or commercial profits which it might be expected to derive from its activities in that other territory … When it refers to commercial profits in that context, how does this tie up with the regulations regarding close companies here? Many charges which are legitimate commercial charges in Jamaica are not legitimate here under the proposals for the Corporation Tax on close companies. Similarly, Article 6(2) of the Schedule refers to dividends, stating that … that other territory shall not impose any form of taxation on dividends paid by the company to persons not resident in that other territory … How does this tie up with our interpretation of close companies under the proposed Corporation Tax? There is also a reference to special relationships between the payer and the recipient. How does this tie up with our interpretation of participators in our Corporation Tax?

These are all germane points to the signing of an agreement on 2nd April, four days before the Budget which, I believe, nullifies that agreement. The Explanatory Note says: Where income continues to be taxable in both countries, full credit is to be given by 967 the country of taxpayer's residence for the tax payable in the country of origin of the income. How is that tied up with the statement of the Chancellor of the Exchequer on 6th April, four days after signing the agreement, but 20 days before it was laid before the House, that the return we receive from our long-term investment overseas is, in fact, a moderate one and is, on average, considerably less, from the point of view of the national economy, than the return from home investments. This is because income earned abroad bears tax in the country of origin so that the benefit to the United Kingdom is measured by what is left. Quite obviously, the agreement assists Jamaica, and the idea of assisting Jamaica was to attract investors from this country as far as the fiscal implications were concerned. Yet the Chancellor, four days later and before this Order is passed, made the statement I have read and, further on, he says: The introduction of the new Corporation Tax will, in any case, greatly change the tax background against which these corporations operate and will much reduce the benefits now derived from this scheme."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 263–7.] That may be all right in isolation, but if we are signing an agreement with Jamaica, or any other country for that matter, and the overseas territory gives a tax advantage to investors from this country, how can we, on the one hand, sign an agreement with the overseas country and, on the other, four days later, say what the Chancellor said?

There are minor points, with which I will not weary the House at this hour, about which we are not happy. One is the reference to 12½ per cent. tax on interest. This seems an extraordinary thing for the Government to have agreed.

If, in conjunction with our Jamaican friends, the Government think that 12½ per cent. tax on interest is right, how can they impose in this country a Corporation Tax of either 35 or 40 per cent? I would be most grateful if the Financial Secretary would answer the four or five questions which I have posed to him.

The Explanatory Note says that the agreement brings us more into line with O.E.C.D. As the House knows, O.E.C.D. has a taxation committee which has made various recommendations to its member countries. With the imposition of Corporation 968 Tax, no Government, by any stretch of the imagination, can suggest that this agreement brings us more into line with O.E.C.D.

I am sure that the Financial Secretary will agree that when the Corporation Tax is on the Statute Book, all our double taxation agreements must be renegotiated. It is on record that the Chancellor and the Financial Secretary have said so. It seems wholly unnecessary to bring in an Order such as this and spend time discussing something which every hon. Member knows cannot last for very long, because, as soon as the Corporation Tax comes in, the whole thing will have to be renegotiated and we shall no doubt have to debate other agreements, not only with Jamaica but with all other countries with whom we now have such arrangements.

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

Before coming to the detailed questions of the hon. Member for Nottingham, South (Mr. William Clark), perhaps I can clear away one basic misconception. All his remarks have been addressed to the House on the assumption that by the time this agreement comes into force we shall have in operation in this country our new Corporation Tax system. That is not so. Although signed on 2nd April, this year, this agreement had been almost completely negotiated during the period of office of the previous Government. It will operate for two tax years before the Corporation Tax comes into force, namely, the years 1964–65 and 1965–66.

Even if all the hon. Gentleman's fears were well founded, there would still be no justification for turning round to the Jamaicans and saying that we were not proposing to complete an agreement which had been negotiated as a result of a request by the Jamaican Government and which will be of considerable importance to them for those two tax years before we have Corporation Tax. That is sufficient answer to the hon. Gentleman's basic question about why we have troubled to complete and sign the agreement at all.

As the hon. Gentleman said, the major feature of the agreement, which is of great importance to the economy of Jamaica, is that Jamaica will receive 969 the benefit of its tax-sparing provisions. What this means is that where a country abroad has a higher rate of company tax than we have and provides special tax reliefs intended to act as an inducement in investment in that country, the object of those provisions would be wholly vitiated if, as a result of double taxation arrangements, the only effect was that the relief of tax granted went to swell the Exchequer of this country, in the case of investment from this country in Jamaica. The purpose of the provisions in Article 18 is to ensure that the special reliefs granted by Jamaica to encourage development there will be able to be effective.

Another important change, as the hon. Gentleman pointed out, from the agreement which this agreement replaces is the provision dealing with the taxation of interest, which is dealt with in Article 7. That provides that the rate of tax which may be imposed by the country of source upon certain interest payments going to a resident of the other country is not normally to exceed 12½ per cent. This rate is higher than the ceiling imposed in some of our other agreements and exceeds the limit of 10 per cent. recommended by the O.E.C.D. Fiscal Committee. But this is the same rate which, in practice, is at present levied in Jamaica on interest paid to non-residents. The inclusion of a lower rate would have been a severe blow to the Jamaican tax yield and so we thought that it right to agree to this provision. Incidentally, it has the effect that the Jamaicans would not be able to raise that rate upon United Kingdom residents.

Turning to the specific articles which the hon. Member asked me about in connection with close companies, the first one was Article 3(3). This deals with the profits which are to be attributed, for tax purposes, to a permanent establishment. Taking his example of a United Kingdom company here, trading in Jamaica through a permanent establishment—which means that it has a branch there, rather than a subsidiary company—the purpose of the provision is merely to provide agreement as to the way in which the Jamaicans, in those circumstances, would be able to assess the true income which was derived by the United Kingdom company from its branch in Jamaica.

970 Quite clearly, it would be open to a company so to arrange its affairs as to transfer profits earned in Jamaica to the parent in this country so as not to show profits earned in Jamaica. This provision—which is quite a normal and common-form provision in double taxation agreements; it is in the one which has been reaffirmed by the O.E.C.D. Fiscal Committee—lays it down that in those circumstances it is open to the country where the permanent establishment exists to say, "We do not accept the accounts as you have prepared them and we propose to look at these transactions as they would be if this branch had, in fact, been a separate institution which was trading at arm's length with the parent company, and in that way to assess the true profits." It is for the protection of the revenue of the country in which the branch is operating. That provision will remain exactly the same under the Corporation Tax system.

Article 6 deals with dividends. It reproduces the corresponding provision under the existing arrangement with Jamaia, and provides that where the residents of one territory receive dividends from a company resident in the other they are normally to be exempt from any tax levied on dividends by the other territory in addition to tax on the profits of the company. In other words, it is a provision for an exemption from withholding tax. This is something which is established under the existing provisions.

Article 7(4) deals again with one of these arm's length provisions, and provides that where the interest which is payable appears to be excessive, due to a special relationship between the borrower and the lender, the relief granted shall be related to the interest which would be payable on an arm's length basis.

The hon. Member invited me to speculate as to what the position might be in the future when the Corporation Tax system is introduced. As my right hon. Friend pointed out, we may seek to renegotiate some of these agreements. No decision has been taken on that matter in relation to the present agreement, and we are not concerned with it; what we are concerned with here is whether or not to approve this agreement, relating as it does now to the tax provisions under our 971 existing law, which will operate for two years before the Corporation Tax comes into force.

The House will agree that this is something that we are clearly in honour bound to do, and we would be acting in a way very detrimental to the interests of Jamaica if we were not to agree to do that.

The hon. Member asked me a general question about the application of the O.E.C.D. provisions. The Fiscal Committee of the O.E.C.D. has done some very useful work in drawing up, in effect, model provisions for double taxation agreements. It is clearly desirable that between different countries these agreements should follow a pattern, as far as possible, and there is a wide measure of agreement as to the sort of provisions which ought to be written in. By agreement with Jamaica we have taken the occasion of this agreement to introduce several new articles and to redraft others in a form which either follows exactly or follows closely the pattern laid down in the O.E.C.D. provisions.

With that explanation, I hope that the House will think it right to accept the Motion.