HC Deb 29 July 1966 vol 732 cc2155-62

Motion made, and Question proposed,

That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (New Zealand) Order 1966 be made in the form of the draft laid before this House on 13th July.—[Mr. MacDermot.]

3.30 p.m.

Mr. Patrick Jenkin (Wanstead and Woodford)

I think it right to say a few words on the second of the principal renegotiated agreements made following the introduction of the tax changes in the Finance Bill last year.

When we discussed the American Convention, just over a month ago, I was very critical of the agreement that had been reached on the ground that it was to the disadvantage of both the United Kingdom Revenue and United Kingdom investors. It appears, as was almost inevitable, that the New Zealand Order has the same effect.

Dividends from a New Zealand company remitted to a United Kingdom shareholder will suffer tax at the rate of 9s. 6d. in the £ in New Zealand, or 47–1, per cent., plus a 15 per cent. withholding tax, a total of 621 per cent. If one looks at it the other way round, dividends arising from a company in the United Kingdom and being paid to a New Zealand shareholder will pay 40 per cent. Corporation Tax plus a 15 per cent. withholding tax, a total of 55 per cent., which is substantially less than the revenue that will be gained by the New Zealand Inland Revenue in the converse situation.

This appears to arise inevitably, as did the American one, from the pattern of Corporation Tax introduced by the Government last year. In the case of New Zealand, I imagine that the loss to our balance of payments will be very marginal compared with the American situation, where it amounted to about £10 million, the figure given by the Financial Secretary on that occasion. But when this is added up over the 60 or 70 agreements that will have to be renegotiated and that will find themselves in these terms, one must recognise that one of the byproducts of the change to Corporation Tax last year in the form in which the Government introduced it, as one article said in relation to the American one, as that it is as if we were taking gold bars from the Bank of England and shipping them overseas and putting them in the deposits of overseas countries.

I want to raise one or two minor points on the Order. Article XIX(2) provides that a company in New Zealand may be subject to an extra 5 per cent. tax. This is, in form, reciprocal, but it is, I understand, to comply with the existing pattern of New Zealand legislation. I should be grateful for an assurance that there is no suggestion that the United Kingdom Revenue will apply a comparable procedure for New Zealand companies trading in this country. Similarly, is the 10 per cent. withholding tax on royalties one which will be applied by the United Kingdom Revenue to royalties arising in this country payable to a New Zealand owner?

In other words, will the United Kingdom Revenue introduce a provision to deduct a 10 per cent. tax on the royalities paid overseas? There appears to be power to introduce such a provision under the general regulations, but since this would be something new we should be told the Revenue's intention in this matter.

There are several points about the drafting of the Order which concern me. Some rather odd phrases are used, one of which appears in Article VI (5,a), which picks up items deemed to be a distributions. These items were contained in paragraph 1(1,c) of Schedule 11 of the Finance Act, 1965 dealing with … redeemable share capital or security issued by the company otherwise than wholly for a new consideration … The Financial Secretary will recall that that part of Schedule 11 is in the course of being amended by this year's Finance Bill to clarify its meaning. However, the Amendment has not been incorporated in Article VI of the Convention. Can we have an assurance that the Convention will be interpreted as though this 1966 Amendment had been made? It has been made clear that the Amendment has been introduced into this year's Finance Bill to clarify and not to change the actual meaning of the provision. Presumably the Convention can be interpreted by the taxation authorities on both sides as though that Amendment had been made. I trust that the hon. and learned Gentleman will clarify the position. Would he also say why it is thought that this one exception should be made in connection with what are distributions under the terms of Schedule 11? It seems an odd exception to make since there seems no reason why it and no others should have been made.

Another drafting point occurs in relation to Article XIX (2), in which we read this peculiar phrase: The taxation on a permanent establishment … Article II gives the definition of the phrase "permanent establishment" as especially including … a place of management … a branch … an office … a factory … a workshop … It therefore seems odd to talk about taxation on "a permanent establishment". The natural meaning of the phrase would be in respect of a property tax, rates, and so on, as being a tax on an establishment. However, from reading the rest of Article XIX (2) it appears that that is not the intention, but that the paragraph is getting at profits arising from the activities carried on at a permanent establishment. If that is what it means, the word "on" would seem an odd way of summing up the matter.

The Financial Secretary will recall that on 24th June last, when discussing the American Convention, he told the House that arrangements were under discussion between the Inland Revenue and various interested bodies, and he said that it would be workable and would not impose any burdens on companies—the point being that companies will have, in respect of dividends paid to overseas residents, to deduct tax not at the standard rate of Income Tax, but at a 15 per cent. withholding tax. I understand that those discussions are confined to the American position, where the amount of dividends is vastly larger than those payable to any other country—in fact, to the rest of the world combined.

Exactly the same situation will arise in relation to dividends paid to residents in other territories, and unless satisfactory arrangements are worked out, companies will find themselves faced with difficult administrative problems of deciding what rate as there may be different rates—of withholding tax should be deducted from dividends paid overseas, and that will depend on the residence of the overseas shareholder. Arrangements for this purpose should be worked out, so far as they can be, by the Revenue authorities here with the interested parties to cover not only the American situation, but these other countries as well.

I would add that if it is the intention under Article VII of this Order to deduct the 10 per cent. tax from royalties paid in this country to a New Zealand resident exactly the same consideration will apply in those cases. Someone will have to give a certificate to the United Kingdom Government authorising them to deduct only the 10 per cent. tax and not the other way, and also indicating that it should be deducted and the royalty not paid gross. I hope that the Financial Secretary will be able to deal with these rather detailed points.

For the rest, the Order appears to reflect very closely the model Order drawn up under the auspices of the O.E.C.D. which is trying to bring a wider measure of standardisation into this difficult branch of fiscal law. To that extent, the Order may represent in this consideration an improvement on the one before, and if the hon. and learned Gentleman can answer one or two of my queries I see no reason why we should not allow the Order to go through.

3.41 p.m.

Mr. Graham Page (Crosby)

When is it intended to bring the Order into operation, and how is the public to be informed that it is coming into operation? This is one of the problems that frequently arise on double taxation Orders because they depend on the coming into operation of the agreement on which they are based, but it rises in a peculiar way in connection with this Order.

Article XXIII states: This Agreement shall come into force on the date when the last of all such things shall have been done in the United Kingdom and New Zealand as are necessary to give the Agreement the force of law in the United Kingdom and New Zealand respectively …

This date cannot possibly be known to the normal citizen in this country, and he will have to be informed of it in some way. The Order contains no indication of when it is to come into operation or how the date is to be notified to the public.

In fact, the Explanatory Note is more confusing than explanatory. Its very last paragraph states: The Agreement is to take effect in the United Kingdom for corporation tax and capital gains tax for all years and for income tax, profits tax and surtax from the dates on which the previous Agreement ceased to have effect.

That paragraph does not seem to cover other matters included in the Order.

I suppose that the Order will have a note at the top saying that it will come into operation on such-and-such a date, or perhaps the Financial Secretary will tell us that the date will be announced in the London Gazette. Nevertheless, when dealing with this draft Order we should know when it is to come into operation and how the public is to be informed of that date.

3.43 p.m.

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

The answer to the last question put by the hon. Member for Crosby (Mr. Graham Page) is that the Order comes into operation when Her Majesty makes the Order in Council. The New Zealanders have already completed all their formalities, so that it only remains for us to complete the final stage. When the Order has been made in Council it is published as a Statutory Instrument, and that gives the date and that is when it comes into effect.

The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) raised again a number of rather wider questions which we discussed at some length when we debated the United States Order. I will not seek to repeat the replies I gave to his general argument, other than pointing out that there are offsetting factors here, including the factor that we welcome inward investment into this country, and the low rate of our Corporation Tax may be an inducement to inward investment. As I said, do not propose to go into those matters in detail.

I am glad that I have this opportunity of saying how much we welcome the conclusion of this agreement. The negotiations were the result of a notice given by the New Zealanders because they have introduced a big change in their tax system, just as we have done, by which they also have separated company from personal taxation. So, as it were, they have anticipated the request which we would have to make otherwise as a result of our tax changes. As in the case of all agreements of this kind, there has been give-and-take on both sides.

Turning to the specific questions which the hon. Member asked, first in relation to Article 19, I certainly give the assurance for which he asked. We have no intention of applying a comparable tax to the 5 per cent. tax which the New Zealanders have and which, as the hon. Member rightly said, is referred to in this article, although in form it is made to apply both ways.

The next question he asked was about the 10 per cent. withholding tax on royalties and if this was to be applied to royalties going to a New Zealand resident. The answer is that such royalties will suffer tax here in the first instance at the standard rate and then relief down to the 10 per cent. rate will normally be given by repayment. That is the procedure by which it will be done.

The hon. Member asked questions on Article 6. The first is why this exception to be included in paragraph 5(a) excludes in effect one of the definitions of distribution in the Schedule to last year's Finance Act from dividends here. The answer is that redeemable share capital issued other than for value is excluded from the definition because no tax is deducted on the issue of such a share. Therefore, it was thought inappropriate to give a non-resident a tax refund in relation to his share capital.

The hon. Member asked what would be the effect on this of the Amendment we introduced this year into the Schedule in our Finance Bill by adding the word "any" before "security". The hon. Member contends, and I do not dispute, that the purpose of that Amendment was primarily clarifying and was not intended to alter the sense. Of course, when it passes into law it is a matter for the courts ultimately to construe whether it does, in fact, alter the sense or whether it is merely declaratory and clarifying.

If it is merely declaratory and clarifying it cannot make any alteration. If it makes any alteration in the context we are considering here, the alteration would operate here to the disfavour of the taxpayer because the taxpayer would be seeking to establish that it was a dividend within the definition because he would then benefit. Therefore, the wider the exception the greater risk he will suffer. All I can say is that if such issues were raised we would not seek to construe this in any way to the disadvantage of the taxpayer. I think that that is probably the most satisfactory assurance that I can give to the hon. Gentleman on that point.

The hon. Gentleman then raised the point of the wording of Article XIX(2). I say at once that there is force in the criticism Which he levels against the wording. By way of explanation all that I can say is that we have followed, as everyone agrees it is right to do, the O.E.C.D. model. When one gets a model agreement negotiated between many different countries and translated into different languages, all lawyers know that the result is that legal precision sometimes suffers in the translation. I think that that is probably what has happened here.

Quite clearly, the sense of the words is as the hon. Member has pointed out. If we were drafting this for our own purposes, I do not think that a British draftsman would have adopted those words.

Mr. Patrick Jenkin

The model is intended to determine the pattern of taxation, and I should have thought that it was doubtful practice that the actual words used in the model should be imported if, in the interpretation of English law, those words would not be clear and would be incapable of ordinary interpretation by the courts.

Mr. MacDermot

If we thought that there was any real risk of confusion and ambiguity, we would not follow the wording blindly. However, in general, we do stick to the wording of the model agreement. The general international agreement is that the various countries of O.E.C.D. should do so. In this case, no harm is done.

The hon. Gentleman asked me a question about machinery for the deduction of tax al the 15 per cent. rate rather than the standard rate. He is quite right in thinking that the particular scheme under discussion with the Stock Exchange relates only to payments under the American Agreement, which concerns a very much greater number of payments. All that I can say is that no question has yet arisen of introducing such a scheme in the case of other countries and other Agreements, and it may be that it will not arise. It is only if there is a fairly substantial number of dividends passing to a particular country that the companies would favour the introduction of a scheme of this kind. The answer is that we should wait and see how it works out. I hope that with his explanation the House will think it right to pass the Order.

Question put and agreed to.


That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (New Zealand) Order 1966 be made in the form of the draft laid before this House on 13th July.

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