§ 10.42 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 the Double Taxation Relief (Taxes on Income) (Canada) Order 1966 be made in the form of the Draft laid before this House on 25th January.I fear that after the last debate the subject matter of this Order may seem a little dry. It seeks approval of a double taxation agreement which has recently been concluded with the Canadian Government. The occasion for concluding this agreement is that the previous comprehensive agreement, which dates from 1946, was terminated by the Canadian Government and ceased to have effect as regards United Kingdom Income Tax from April, 1965. The new agreement is to take effect from the date on which the old one ceased to operate, so that continuity will be preserved.
This agreement is of an interim nature pending consideration by Canada of the report of its Royal Commission on Taxation, and also the weighing up of the consequences of the major tax changes contained in last year's Finance Act in this country. Accordingly, the agreement is of strictly limited scope. It covers only certain subjects—industrial and commercial profits, shipping and air transport profits, copyright royalties and pensions.
Certain trading profits not arising through a permanent establishment and also shipping and air transport profits and copyright royalties derived from one country by a recipient of the other country, subject to certain conditions, will be taxed only in the country of the recipient's residence.
These provisions are substantially similar to those which appeared in the old agreement. The main difference which is effected by the new agreement relates to the treatment of Government pensions. The old agreement distinguished between Government and non-Government pensions. The general rule was that Government pensions were taxed only by the paying Government, while non-Government pensions were taxed only by the country of residence of the recipient.
1062 This distinction is removed in the new Agreement, which provides that both types of pension are normally to be taxed in the country of residence of the recipient. There are provisions to see that existing Government pensioners are not placed in a worse position than they have been in up to now, and so they and their surviving spouses are to continue to be treated on the former basis unless the new basis is more favourable to them.
The rest of the provisions are in common form, such as is found in most double taxation relief agreements.
§ 10.45 p.m.
§ Mr. William Clark (Nottingham, South)
I am sure that the House will agree that this is an extremely important agreement. The hon. and learned Gentleman more or less read out the Explanatory Note, but the House is entitled to more information. This is an agreement with North America, where we have an important dollar trade, and with sterling's present position our dollar trade is that much more important.
I want to make a general point concerning the circumstances surrounding all double taxation agreements. It will be agreed that far too often these agreements come before the House without any indication of the surrounding circumstances concerning the countries involved. How does this agreement compare with the one which, I presume, has almost been signed with the United States? The agreement with the United States has been referred to in our financial journals, but up to now the House has no idea what is contained in it. This is a matter which the House should take extremely seriously.
How is it that financial journals in this country can obtain details of agreements which, presumably, have not yet been signed, while Members of Parliament are not in a position to know what is in them? Will the hon. and learned Gentleman say something about the United States agreement? Does he not think that it would be a good idea that all double taxation agreements should be accompanied with more of the surrounding circumstances, so that we could know details of the trade between the two countries?
It would have been interesting if the House could have known how many Canadian enterprises exist in the United 1063 Kingdom, and how many United Kingdom enterprises there are in Canada. Only in this way can we judge whether a double taxation agreement is favourable to us. We should also like to know how much capital is involved between the two countries. Will this country lose taxation revenue because of the disparity between the capital in this country and the capital in Canada?
It will be within the knowledge of the House that Canada is an extremely important market to us. In 1964, Canada had a favourable balance of payments of about £259 million with this country. This is a relevant fact to take into account. Further, there is the question of interest on profits. How much is repatriated from Canada to the United Kingdom and vice versa? The Treasury must have this information.
My second general point concerns the fact that this is only an interim Measure, dependent on the findings of the Commission set up by the Canadian Government. Has the Financial Secretary any idea of when this Commission will report and when we can expect a final double taxation agreement between the United Kingdom and Canada?
In Article I, the Order gives the various taxes which are affected by the agreement in this country and Canada. It mentions taxes on profits in this country, but is silent on one notable point. There is no specific mention of the Capital Gains Tax. Why is it that there is mention of Income Tax, Surtax, Corporation Tax, and so on, but no mention of Capital Gains Tax? The Financial Secretary said that this agreement was necessitated by the fact that the old agreement had expired on 31st March, 1965. It will be remembered that, in 1965, there was a reform of our own taxation system. Why is there no mention in the new agreement of Capital Gains Tax?
What is one to assume from that? Surely a Canadian subsidiary or a Canadian enterprise in this country will make capital gains. What is the position? Will they be taxed or will they not?
I am sure that the Financial Secretary with his legal knowledge, will appreciate that Article II is a very important 1064 one. It makes new definitions of individuals having residence in both countries. Three examples are…a permanent home available to him…,…his personal and economic relations…and…his habitual abode…".These three expressions have not occurred before in our tax law. It would be helpful if the Treasury could give some guidance on the principles which they will follow in interpreting them.
The Financial Secretary will appreciate that, in our Income Tax law, there are various expressions whose interpretation has been accepted in the courts of law, but this Order introduces three new expressions. Of course, no matter what the Treasury in this country says about interpretation of these expressions, Canada might interpret them differently. What then? I should like the Financial Secretary to answer these points.
It will be noted that it is only where an individual is a national of both countries or of neither that Canada and this country can agree on the interpretation. But we in this country are in an extremely nice position. What about other Commonwealth citizens? Are they nationals under the Order? What about a Rhodesian? Is he a national under the Order? This is something which the Financial Secretary should explain.
Article II (g, iii) has another definition of effective management. This tries to determine where the operation of the business is, whether in Canada or in this country. The expression "effective management" is used. Usually, the expression in tax law is "central control and management". The new expression displaces case law. This will bedevil case law in this country.
There is an extraordinary situation in paragraph (j)(iii)(ee). It appears that if one maintains an advertising office in either territory it is not regarded as a permanent establishment and is exempt from the taxation of the country in which it is situated. Is this what the Government mean? Why do they exempt advertising offices? Surely the Government are fully conscious of the value of advertising and public relations officers. International advertising, to say nothing of national advertising, is large business. Yet 1065 according to this paragraph an advertising office is not considered to be a permanent establishment.
Similarly, scientific research establishments are not considered to be permanent establishments. If any profits are made by the advertising office or the scientific research office they are exempt from taxation in the country where they are established. Presumably the reference to the exemption of "collecting information" lets out foreign newspapers.
Article III(4) deals with the computation of profits. The paragraph is novel in double-taxation agreements because it reads:In determining the industrial or commercial profits…there shall be allowed as deduction all expenses…including executive and general administrative expenses…This is extremely difficult to interpret. Does it include service contracts for the giving of technical information? Does it include the salaries of overseas directors? Surely this must be a loophole in charging to profits. What about the entertainment done by the main company? Surely this must be a general administrative expense. Would the Financial Secretary give us his views on this subject and also tell us about the position of close companies in this country? If it is right under the Order—as presumably it is—to allow for executive and general administrative expenses in the computation of profits, how does this affect close companies and such provisions as directors' salaries, loan charges and distributions by close companies? Are Canadian subsidiaries in this country to be exempt?
There is a further anomaly in Article III(6), which states thatthe term ' industrial or commercial profits' does not include income in the form of…personal services.Does this exempt entertainers in this country? The earning of dollars by Canadian entertainers in this country is an extremely important matter. This may be a loophole in the Order.
As the Financial Secretary said, there is a change in Article VII in regard to pensions paid by the Canadian Government to United Kingdom residents or pensions paid by Her Majesty's Government to Canadian residents. Has the Treasury worked out how much this will cost the British Exchequer? Previously, Canada taxed all Canadian pensions paid to 1066 United Kingdom residents. I am sure that the Financial Secretary will agree that anybody who was in the position of receiving a pension from the Canadian Government, subject to Canadian taxation was enjoying a lower rate of taxation than a person receiving a pension from Her Majesty's Government and receiving it in Canada.
I do not know whether this is deliberate, but there is no mention of Government employees in embassies. Perhaps I have misread the Order, but it would seem that such employees have been forgotten in the pension provision.
It has always been a facet of our tax law that residents in this country have 183 days or more in the year when they are regarded as being resident here. There is no mention of this in the Order. Neither is there any mention of a reduced withholding rate on dividends. While from the point of view of the United Kingdom it will be a withholding rate of only 15 per cent., what will the withholding rate be the other way round? There is no mention of teachers, professors and others who may come to this country or who may go from this country to Canada. What will be their taxation position?
If a Canadian company grants a licence to a United Kingdom company—I am not now referring to a permanent establishment here—for the manufacture of goods, what will happen to the royalties on that licence? Will they or will they not be subject to Income Tax, Corporation Tax, and so on?
To sum up, the Order is only an interim measure. When will it be finalised? The new definitions will need to be coaxed into our taxation case law. I cannot understand the coyness of Her Majesty's Government about the Capital Gains Tax. There appear to be loopholes in the arrangements from the point of view of advertising companies and entertainers and insufficient thought seems to have been given to the Corporation Tax aspect. I hope that the Financial Secretary will answer these questions either now or as soon as possible, because they are of extreme importance to the professional men who must see that the Order is complied with.
§ 11.4 p.m.
§ Mr. MacDermot
With leave of the House, I will answer some of the plethora 1067 of questions which the hon. Member for Nottingham, South (Mr. William Clark) directed towards me.
The hon. Member will, of course, appreciate that many of them were of a highly technical nature, so that if I do not answer some of them—and I will not be able to answer them all—I will, if he will let me know which further questions he wants answered, give him all the assistance I can later. He will be aware that, in matters of this kind, it is difficult for one to answer some of the more highly technical questions immediately, from this Box, without prior notice having been given that they would be asked.
The hon. Gentleman wanted to know, by way of background, how this agreement compares with what he called the double taxation relief agreement with the United States. He complained that he did not have more knowledge about what that contained. I take it that he was referring to the recent protocol initialled between the Government of the United States and Her Majesty's Government with a view to maintaining the existing comprehensive double taxation agreement with the United States. This agreement has not been signed, but as soon as that is done an Order will, of course, be laid before the House in the ordinary way, and there will then be an opportunity to debate it.
Meanwhile, the hon. Gentleman himself referred to reports in the Press which are based on hand-out information given in the normal way by the Inland Revenue, and if it will assist him to have further particulars I will gladly see that he is supplied with a copy. In the meantime, this summarises in general the terms of the provisional agreement that has been reached, and a full Order will be laid before the House as soon as the final agreement is signed—
§ Mr. William Clark
Surely it is not now the practice of the Inland Revenue to start negotiating agreements and, as it gets agreement on one particular point, to give a hand-out to the Press? Would it not be much better if the House of Commons were informed?
§ Mr. MacDermot
The House of Commons cannot be informed until the Order is laid before it in the ordinary way, and, as there was interest in this agreement, 1068 no doubt announcements had been made in America in the ordinary way and particulars were issued to the Press. I shall be glad to give the hon. Gentleman any further information he may like to have, but I think that he will find it very accurately set out in the financial Press.
As to how this agreement compares with the American one, the answer is that it does not compare at all, because one is an amendment of the comprehensive agreement covering all forms of double taxation relief, whereas this is only an interim agreement covering certain limited and specific items. For that reason, I suggest, with respect, that it is not very relevant in this context to seek to go into the whole surrounding circumstances of what our trade is with Canada, how much capital is concerned, and so on, as this is only a limited agreement covering the period until the new comprehensive agreement is concluded.
The hon. Gentleman asked when the Canadian Royal Commission is expected to report. It is not for me to answer that question, but I understand that it is not likely to be before the summer, and it is not expected before the next Budget of the Canadian Government. He asked why this agreement does not extend to Capital Gains Tax. It is for the same reason, that this is a limited agreement confined to certain specific fields, and it covers the field of Income Tax. For this purpose, the Corporation Tax is embraced within the scope of Income Tax, it being, in effect, Income Tax paid by the companies—
§ Mr. William Clark
But the hon. and learned Gentleman will agree that Capital Gains Tax is Income Tax, provided it is a short one, and there is no reason why Corporation Tax should be included if Capital Gains Tax is not.
§ Mr. MacDermot
If it is a short one, it is Income Tax, and, therefore, it is regarded as Income Tax, but the reason why the Capital Gains Tax generally is not dealt with is that this is not, and does not purport to be, the new comprehensive agreement which will be negotiated as soon as the Canadian Government are in a position to start negotiations.
The hon. Member asked a great many questions about various items in this 1069 agreement. As I am sure he is aware, there is keen interest in the matter, but a great deal of the form of this agreement, and many of the terms themselves are based on the recommendations of the Advisory Committee of the O.E.C.D., as have been other double taxation agreements which we have presented to the House in the last year or so.
As to what the meanings of those terms are, in so far as they may not be already generally accepted and understood, as I think most of them will be, we will, of course, if any difficulty arises, consult the Canadian Government, but I think that the legal position is covered in the agreement itself by Article II(2), which provides:In the application of the provisions of this Agreement by one of the Contracting Governments any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting Government relating to the taxes which are the subject of this Agreement.Therefore, ultimately, in so far as it dealt with our taxes, it would be a matter which would fall to be determined, if need be, by the judicial interpretation of our courts.
The hon. Gentleman then asked me a question specifically in relation to expenses of advertising offices. The point about this part of the definition of a permanent establishment is that profits have to be attributed to it before tax can be charged, and one cannot attribute profits to an office which in effect does nothing but advertise.
The hon. Gentleman asked what would be the cost of these provisions, and he also asked what would be the rates of withholding taxation. Again, pending the conclusion of a comprehensive agreement, what happens is that each country will deduct taxes at its own internal rate. The effect, therefore, for the time being will be, as long as this interim agreement continues, that the Canadian Government will in general deduct withholding tax at the rate of 15 per cent., and in some cases I think it is reduced to 10 per cent.—in cases where there is a substantial Canadian 1070 shareholding in the business—and we will deduct our withholding tax at the standard rate of Income Tax which is 41¼per cent.
On balance, we think that as far as the financial effect of the agreement on the United Kingdom is concerned, we should at the very least break even as a result of this agreement. Canada is not only giving up tax on Government pensions but on industrial and commercial profits, including shipping profits earned outside permanent establishments.
The hon. Gentleman asked a question about executive expenses. I think it was in relation to Article III (4). He asked what was the meaning of these terms. I am not going to seek to give any definitive interpretation of the phrase in the Article, but the point here is that the expenses have to be those which would be deductible if the permanent establishment was an independent enterprise, which, I think, is a reasonable enough provision.
Then the hon. Gentleman asked, in relation to paragraph (6) of this Article, whether the phrase "remuneration for…personal services" would include entertainment. I would only comment that I should have thought it unlikely, but that is a matter on which he is capable of bringing a different though probably a more expert professional judgment to bear than I am.
As I said, if there are any specific questions to which I have not been able to reply and to which he would particularly like an answer, if he will let me know I shall be glad to do what I can to assist him. I hope that otherwise I have replied sufficiently to his more general questions.
§ Question put and agreed to.
That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Canada) Order 1966 be made in the form of the Draft laid before this House on 25th January.
§ To be presented by Privy Councillors or Members of Her Majesty's Household.