HC Deb 21 June 1966 vol 730 cc509-22
Mr. Patrick Jenkin

I beg to move Amendment No. 248, in page 31, line 42, to leave out "1966" and to insert "1971".

We come now to what is not technically the next part of the Bill but a section of it dealing with an entirely different subject, the problem of double tax relief. There are several Clauses here which lead on from the major changes made in the law last year, partly as a result of the Corporation Tax and partly as a result of other measures taken expressly to discourage overseas investment, or, perhaps, to put it in a way more acceptable to the Chancellor, to ensure that the return to the country was more closely in relation to the return to the investor.

The Corporation Tax itself, of course, reduced the amount of tax against which double tax relief could take effect, being at 40 per cent, as compared with 56¼ per cent, before. That by itself reduced the value of the double taxation relief apart from the provisions which were made for temporary overspill. It is not generally recognised, except by those people who have to study these matters professionally, or in their business, that the Government made other changes which were quite independent of the introduction of Corporation Tax relating in particular to the extent to which United Kingdom taxpayers could claim for what is called underlying tax paid by busi- nesses in the overseas country. They have always been entitled to claim double tax relief on tax paid expressly in respect of dividends from overseas and there have been more limited reliefs for the underlying tax extended to the reliefs which have hitherto existed and which were clearly stated by the Financial Secretary at col. 573 on 16th June, 1965

I will not go into detail on the three categories of case where relief for underlying tax applies except to say that no double tax agreement has ever refused relief for underlying tax in respect of any shareholders.

The second category is where there has been a unilateral relief which would operate in favour of any shareholder who had invested in a Commonwealth country and whether by agreement or unilateral relief there has always been relief in respect of direct investment. In relation to this second point Section 64 of the Finance Act of last year contained a somewhat strange provision which was commented on in debate at the time. It gave, as it were, advance notice in statutory form that Commonwealth relief would be withdrawn some time in the future. Under Clause 28 that notice is being implemented and the Commonwealth relief is going; that is to say, the relief under a unilateral double tax relief provisions for underlying tax will not now apply after 5th April, 1966.

The purpose of the Amendment is to substitute the year 1966 by the year 1971. The affect of the change in the law would mean that the only circumstances in which an investor in a Commonwealth country could get relief on underlying tax was if he held 25 per cent. or more of the investment. That was where, in the course of the Bill last year, the Government introduced an Amendment to reduce that figure to 10 per cent. But the point still remains that it will only be effective in respect of direct investment where the United Kingdom investor has 10 per cent, of the investment that there will be any relief for the underlying tax.

The change is being made almost at the first opportunity since the notice was given last year. The Government seem to be falling over themselves in their haste to limit this double taxation relief. The advance notice is being acted upon as soon as it can be and the consequent disadvantages for the British investor in these overseas Commonwealth territories is to take effect forthwith. The basic reason for limiting the relief is to try to stem the amount of investment and to improve its quality. This was the point made over and over again by British investors in these overseas countries.

2.45 a.m.

The criticism that was offered over and over again from this side was that it was not necessary to make all existing investment overseas less attractive for existing investors in order to discourage new investment going in. If the purpose is to discourage new investment, the rule should be amended to affect that new investment. It was not necessary to make all the existing investment, amounting to many hundreds, indeed thousands, of millions of £s of valuable assets— £7,000 million of the £11,000 million of which the Prime Minister boasted in New York last year—less attractive. The purpose behind the Amendment is to hammer home that argument which was put from these benches.

Any increase in the double taxation of income is a retrograde step. The position from which one starts, the sort of primordial slime in this field of double taxation, is where both countries take their full meed of tax from the income that arises, but over the years the countries have succeeded in dragging themselves out of that highly unsatisfactory position, which militates keenly against any effective investment overseas, and increasingly double taxation relief has been granted on a basis latterly of the O.E.C.D. precedents. What this country has done is now reversing that process, giving rise to increased double taxation of investment where it is made by a resident of one country in the territory of another country. That is a retrograde step.

It seems to me to be important that the very large companies with the substantial investments, particularly in things like the mining and oil industries and other primary industries of that nature, should have much longer to adapt themselves to the new environment in which they will be operating as a result of the change in the law. This is bound to have a major impact upon the whole financial structure of these companies, many of which have existed since the last century on the basis of the law as it has existed hitherto.

One consequence of this change in the law is that there has been a sharp increase in the number of important companies which have wanted to transfer their residence overseas. Already, one reads in the Press that relations are strained between our Government and the Governments of a number of overseas Commonwealth territories because the Treasury refuses point blank to consent to these important companies transferring their residence into the countries in which their main operations lie. This is bound to intensify. By withdrawing this underlying relief for investment in Commonwealth countries this year rather than in four or five years' time, that unfortunate result is being intensified.

One has also to recognise that in the Budget the Chancellor made his announcement about the voluntary restraints on investment in certain overseas Commonwealth countries. These were to be operated voluntarily through the Bank of England, and, of course, there are no compulsory provisions. This, however, by acting more directly on new investment without in any way affecting the attractiveness of existing investment, would seem to be much more related to the very serious short-term problem with which the Chancellor is faced. It is difficult to understand why he feels it necessary so soon after giving notice last year to withdraw this relief, to the hardship of investors who have invested in the past on the basis of an entirely different taxation system.

I believe that something must be done, and done swiftly, to improve relations between this country and the countries overseas in which these investments are made. It would go a long way to meet the objections of those countries if the withdrawal of this relief were postponed, as we propose in the Amendment, from 1966 to 1971. It would give longer to the companies to adjust. It would in no sense encourage new investment, because the knowledge that the relief was to be withdrawn in 1971 would mean that the companies or individuals contemplating investment would know what the position was to be, and they would not invest money on the footing that they would get a return in the next two or three years. If they were to, there would be no objection, because they would be within the terms of the Chancellor's discretionary limitations.

I strongly urge on the Government that they should postpone the operation of Clause 64 from 1966 to 1971, which the Amendment is designed to achieve.

Mr. Peyton

In supporting the eloquent plea made by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin), I do not believe that there is much chance of the Government acceding to his very reasonable request.

Reflection upon this year's Finance Bill and last year's leads one to the belief that, whatever may have been the muddle, confusion and uncertainty with which the Government framed their proposals, the underlying purpose has been clear at all times. It is that they wish to knock on the head overseas investment. As to the folly of that, at this time of night I do not wish to expand, except to say that history will reveal that it was the highest act of folly perpetrated by a very foolish Administration.

My hon. Friend has referred to the speech made by the Prime Minister to the Economic Club in New York, when he boasted of the fact that we had £11,000 million worth of overseas assets. Coupling together the provisions of the Corporation Tax and the denial of relief from double taxation, and the double taxation agreements which have consequently and subsequently been worked out with individual countries in almost indecent haste, one can see the really sinister design of the Government.

The Government are out at all costs to achieve a temporary amelioration of the balance of payments—[Laughter.] I do not know why hon. Gentlemen below the Gangway opposite find that so funny. I only wish that I could laugh, too. I can assure them that, if they wish to participate in the discussion, I shall be only too glad to give way. On the other hand, if they see it as a subject for mirth, I cannot think that it will have any result other than prolonging the proceedings.

I believe that the Government have embarked upon a real rake's progress, which involves selling the pictures, pawning the silver, and the rest. Over the next three or four years they will be able to show proudly to the country a temporary amelioration in the balance of payments because they have squeezed overseas investments. They will have done it at the expense of operations which are of immense importance and consequence to the country. Some of our mining operations and our oil companies, the activities of which have made an enormous contribution in the past, are going to be squeezed.

No doubt the Government will boast proudly that they have secured a temporary improvement in our balance of payments. What they will not admit, and explain to a public that does not want to be brought face to face with hard facts, is how they have done it; that they have sold for short-term purposes the assets which have been built up by long labour in the past and which have added almost immeasurably to the power and prosperity of the country as a whole.

One of the most damning counts in the indictment which history will lay against them will be that feature of their policy.

Mr. MacDermot

The only comment I would make on the speech we have just heard from the hon. Member for Yeovil (Mr. Peyton) is that I conceive that nothing we may say from these benches will dissuade him from the world of mythology in which he has wrapped himself.

The hon. Gentleman repeats the time-honoured phrase that the Government are trying to knock overseas investment on the head. What we are seeking to do, and have been seeking to do since we have been in office, is to restrain overseas investment to a level which this country can afford.

One of the factors—and it is only one—that has contributed to our balance of payments difficulties, three recurring crises in one decade, is that consistently we have invested overseas far beyond what we have been earning on both our visible and invisible current trade.

This is one of things that has to be changed as part of the total measures necessary to get us back into balance. The Chancellor has repeatedly made clear that he is not seeking to stop overseas investment and that we should continue to be net investors overseas, but that we should restrain it within the limits we can afford, and one of the measures is the subject matter of this Amendment.

Mr. Peyton

If that is the case, can the hon. Gentleman explain why the Government, by their policy, are choosing to strike at investment which has already been made?

Mr. MacDermot

That is exactly what I was coming to. I repeatedly find that it is a mistake to give way, because hon. Members ask me to say what I was about to say, namely, to explain to the hon. Member who moved the Amendment why we are proposing to withdraw this unilateral relief now enjoyed by portfolio investors in Commonwealth countries.

The reason is that to continue this unilateral relief would be quite inconsistent with the principles of the major tax change introduced last year, the separation of company and personal taxation. If we continued to grant this unilateral relief to particular classes of overseas investors, we would be giving them an advantage which is denied to the investor in a United Kingdom company at home who now gets no credit on his personal liability to tax on the dividends of the company.

It has been said over and over again in our debates, and it was decided last year, that although we should give notice in that Act in the most formal manner possible, namely, in the Statute itself, of our intention to withdraw the unilateral relief, we should defer the operation of it to a date to be determined by Parliament at a future time. We are now asking that it should be determined as from now. What is proposed in the Amendment is that we should defer that for a further five years, and I seek to explain why we think that is wrong.

It was made clear that one of the main reasons why we could not decide then the date for the withdrawal was that it was necessary to make substantial progress in renegotiating our double taxation agreements with other countries, particularly countries outside the Commonwealth, under which we were bound to give this relief. And as long as that continued it would obviously appear to be an unfair discrimination against investors in the Commonwealth to withdraw the unilateral relief from them.

3.0 a.m.

The position now is that we have made very substantial progress in the renegotiation of these agreements. By far the most important one, which involves over half the flow of dividends to this country from non-Commonwealth countries, is the United States agreement. The protocol has been signed, the agreement has been laid before the House, and we shall have an opportunity to discuss it on, I think, Thursday night. This agreement provides for the withdrawal of this relief.

Similarly, the protocol to the Swedish agreement which achieves this result was recently approved by the House. The new agreement signed with New Zealand on 13th June has the same effect, and the Inland Revenue is making progress on the matter with a number of other countries as well.

In those circumstances, my right hon. Friend considered that the time had come when it was proper to withdraw the relief for investors within the Commonwealth, and, of course, we had to have regard to our balance of payments position in taking that decision. There is a considerable amount of money at stake. It is about £20 million a year, and if the Amendment were accepted the cost over the next five years would be about £100 million.

There is another aspect to this, which is that if, in these circumstances, we were to postpone the withdrawal of this relief for another five years, it would greatly weaken our bargaining position with other countries in relation to the renegotiation of the double taxation agreements which still have to be negotiated, because they would feel that if we were taking a decision to postpone this for five years, we were weakening in our resolution, and they would be less inclined to accept our proposals.

For those reasons I must urge the Committee to reject the Amendment. I think that with this Amendment we are discussing Amendment No. 249, but I think that it is consequential, because if the Committee accept our advice there will be no justification for it.

Amendment negatived.

Mr. Patrick Jenkin

I beg to move Amendment No. 191, in page 32, line 13, after "paid" to insert: Provided that where the whole of the overseas tax charged on the dividend represents tax which the company or the recipient would have borne if the dividend had not been paid, credit under paragraph 1 of Part 1 of the said Schedule 17 shall be allowed for one-half of that tax. This is another point which arises under the double taxation provisions. Subsection (2) deals with the taxes which will be able to be relieved by the double taxation reliefs, and they fall into three categories, A, B, and C. Category A refers to what can briefly be called withholding taxes. If the dividends in question were not paid, no tax would arise. Manifestly, this does not include the taxes about which we were talking on the last Amendment, the underlying taxes which are paid whether a dividend is declared or not.

Category B relates to the underlying tax where 25 per cent., or a quarter, of the shares are owned by British investors, or in other cases one-tenth. One-tenth is Commonwealth, and one-quarter is other countries. Finally, category C is certain insurance companies with which we are not concerned.

The Amendment is concerned solely with the question of the withholding tax. I am sure that the Committee realises that foreign countries can operate a variety of different systems of corporate taxation. Two systems are important, and they can be described briefly as the one that we used to have, and the one that we now have. The one that we now have is a Corporation Tax coupled with a withholding tax. We do not call it a withholding tax, but Schedule F Income Tax. It is, in effect, a withholding tax.

The other is that the company pays income tax or company tax, or whatever it is called and the dividend is passed on and a substantial Credit is given to the shareholder for the tax which has been paid by the company. In the system which we used to operate, the company deducted and retained the tax on the dividend, in a sense recouping to itself the tax which it had paid in respect of that share of the profits which had been distributed.

Under sub-paragraph 2(a), if the tax which the foreign country deducts is a genuine withholding tax, either of the sort which we operate here, or of the sorts which arise under the agreements, or a 15 per cent, withholding tax, it clearly qualifies. But if the country operates the form of corporate taxation which gives a credit to the shareholder, that tax is not one which is payable only if the dividend is declared and paid. It is paid by the company in any event. If there is no dividend, there are no circumstances which give rise to the credit.

In those circumstances, it seems wrong that the investor in a country which operates that system should not be entitled to relief for at least some part of the tax which has been paid by the overseas company. Clearly, some part of it must be attributable to the tax on the dividend. We suggest in the Amendment that the proportion should be one half. I do not nail my flag to that mast and do not necessarily say that one half is the right proportion. The right proportion may be something less, but that some concession should be made, that some part of the tax which has been paid by the company and for which credit has been given to the domestic shareholder in the country should qualify for double tax relief, seems to be clear beyond peradventure.

It cannot be right that the extent of the double tax relief enjoyed by an investor in this country in respect of an investment overseas should vary so enormously in amount, depending on the system of corporate taxation which the overseas country operates. That is the purpose of the Amendment. As I said, I am not wedded to the particular proportion which we have chosen, but that something needs to be done, some concession made, is clear. I hope that my case is clear, and the Financial Secretary will be able to go some way to meet us on this.

Mr. MacDermot

There is some substance in the hon. Member's point, but the solution proposed in the Amendment is not the right one. I take the point that when we are dealing with unilateral relief, which is granted at the moment there is a distinction between that relief when the other country has some form of Corporation Tax, so that there is a separate withholding tax against which relief can be granted, and what we regard as an underlying tax, our old system. In the latter case, they would not qualify for relief.

Obviously, there may be such varieties of circumstances and rates of tax that any attempt to take a proportion—a half or any other—of the profits would result in an anomalous situation. The right way of dealing with this would be to withdraw the unilateral relief. But, of course, we shall be negotiating double taxation agreements in nearly all cases with the countries concerned. The substance of the hon. Member's argument is something which may well have to be considered in arriving at an overall settlement in those agreements as to what is right and fair.

I can give the assurance that, in the sense that it affects both the overseas countries and our investors in those countries, our negotiators will adopt a reasonably flexible approach to the question. With that assurance, perhaps the hon. Member will agree that that is a more satisfactory procedure than fixing an arbitrary percentage.

Mr. Patrick Jenkin

I am sure that the Financial Secretary recognises that if we extend double tax conventions beyond the 74 which now exist to cover the countries which hitherto have relied on unilateral relief, this is bound to be a long process. The Financial Secretary indicated that three agreements had been re-negotiated of the 74 which exist. There are more than 100 independent members of the United Nations, which, presumably, eventually would have to be covered by double tax conventions. It would take years and if he does not accept an Amendment on these lines or with a similar effect, until the new agreements are negotiated, investors in territories which operate the pre-Corporation Tax system we had in the United Kingdom will get no relief for taxes paid by companies overseas.

This is unsatisfactory and unfair. Now that relief is withdrawn, as we were discussing earlier, it cannot be right that there should be wide discrimination be tween investors in the different countries, depending on the variety of taxation those countries operate. I should have thought that here was a case for doing something. The figures that he mentioned would, presumably, be a tiny fraction lost in revenue terms to the United Kingdom Treasury. If some concession were made on those lines, it would be a small sum, but it might mean a great deal to investors in the country concerned.

I ask the Financial Secretary to look at this again before the Report stage. He concedes there is a point of substance, but refuses to do anything at all about it, and it is unsatisfactory.

Amendment negatived.

Question proposed, That the Clause stand part of the Bill.

Mr. Patrick Jenkin

I will try to keep my point as short as possible. Subsection (2,6) of the Clause is the one-tenth 25 per cent, point.

I indicated in the earlier Amendment that the pattern which the Government adopted last time was that this moving away was from the 25 per cent, concept for direct investment and, in the case of Commonwealth countries, to 10 per cent. That was widely welcomed as a realistic basis for many partnership companies who particularly operate mining concessions and many overseas installations.

It now appears from the Swedish Convention which the Financial Secretary mentioned, and the United States Convention, that in the new pattern of double taxation relief that is developing, one tenth will be written into conventions. The position will be that over the whole Commonwealth, whether or not there is a convention, the figure will be 10 per cent., with the remaining non-Commonwealth countries with which there are conventions at 10 per cent. There will be a few stragglers. In non-Commonwealth countries, with which no convention has been operated, that figure will still be 25 per cent.

The question arises: is it worth while trying to retain the 25 per cent, for those few cases? So long as there was that difference between Commonwealth and non-Commonwealth countries, one could say that we were trying to help developing Commonwealth countries. But so long as they cannot say they are trying to operate that principle of discrimination the logic has disappeared and one is left with a few isolated cases where 25 per cent, is the rule.

3.15 a.m.

The question which the Government might consider between now and the Finance Bill next year is whether it is right to try to retain that 25 per cent, and whether, on this new pattern—by which only direct investments will qualify for the underlying relief—it should not now be 10 per cent, in all cases. The difference is between the figure of 10 per cent, and 25 per cent, in relation to what constitutes a direct portfolio investment. I should have thought that there was a case here, particularly now that we are trying to move closer to Europe and since it may be some time before all the conventions have been drawn up under the new basis, for taking this step.

I trust that the Government will consider the matter in the coming year.

Mr. MacDermot

This is an important point and I remind the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) that we are here discussing unilateral relief. There is a real distinction to be drawn between a relief granted unilaterally and one which is the result of negotiation, with give and take on both sides, where we give up something and get other benefits in exchange.

At a time when we are renegotiating agreements—and we have a lot of these negotiations ahead of us—it is not a wise move to lower our sights, as it were, by lowering our unilaterally granted reliefs. The reduction from 25 per cent, test to the 10 per cent, test last year—I remember it well, particularly when answering questions about overseas mining companies in the Commonwealth—was an expressed exception granted to help those countries. They found themselves in difficulties because of the introduction of the Corporation Tax system. It was an exception to something which had been long established.

I do not say that there will never come a day, when we have renegotiated these new agreements, when what is left of the unilateral system may not be ad- justed to a level different from the prevailing one, but I do not think that this is the moment to seek to make such an adjustment.

Question put and agreed to.

Clause ordered to stand part of the Bill