DOUBLE TAXATION RELIEF (AGREEMENT WITH U.S.A.)

HC Deb 23 June 1966 vol 730 cc1057-96

10.15 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, on the ratification by the Government of the United States of America of the Supplementary Protocol set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (U.S.A.) Order 1966, a draft of which was laid before this House on 2nd May, an Order be made in the form of that Draft The House is being asked to approve tonight the terms of the Protocol to the Double Taxation Convention between the United Kingdom and the United States which was signed on 17th March last. I think that the House will agree that this is the most important of the new agreements to be negotiated following the introduction of our new taxes, the Capital Gains Tax and the Corporation Tax, last year.

The text of this agreement was published as a White Paper on 22nd March. Some time before that, in view of the widespread public interest in the terms of the agreement, my right hon. Friend took the unusual step of making a Press release announcing the main lines upon which substantial agreement had then been reached, even though the Protocol had not at that time been signed. This was not in any way intended as a mark of disrespect to the House, for it was not possible at that stage to lay the agreement as it had not been signed, and there was widespread interest and concern to know what the terms were. It was for that reason that my right hon. Friend took that course.

I propose just to seek to outline very briefly the main provisions in the Protocol and then await any questions, comments and arguments which may be addressed to me upon it and, if I have the leave of the House to speak again, to reply to the debate.

The original Convention with the United States laid down that the United States tax on dividends, which is a 30 per cent. tax for United States shareholders, when paid by United States corporations to United Kingdom shareholders was not to exceed 5 per cent. in the case of pay- ments by subsidiaries to parent companies and 15 per cent. in other cases; conversely, that the United Kingdom was not to charge Surtax on dividends paid by United Kingdom companies to residents in the United States. Because of the nature of our previous tax system, there was no other limitation on the right to tax dividends and, of course, we did not seek to do so because we had no separate dividend tax.

In addition, the United Kingdom gave to all United Kingdom shareholders relief not only in respect of the United States withholding tax, but also in respect of the underlying tax, their Corporation Tax, upon the profits out of which the dividends were paid. Quite clearly, these provisions could not stand once we had introduced the Corporation Tax system and had gone over to and adopted the system which the United States and many other industrial countries have.

Under the Convention as it stood, the result would have been that the United States would be restricted to the 15 per cent. and 5 per cent. withholding tax on their dividends, while the United Kingdom would have been free to levy the full standard rate of Income Tax on United Kingdom dividends flowing to the United States on top of the Corporation Tax. Clearly, that would be quite unacceptable to the Americans and, there being a full understanding of the matter, the United States gave formal notice last summer, as they were entitled to do, terminating the provision to limiting their withholding tax on dividends. In consequence, it fell to Her Majesty's Government to negotiate a new Protocol revising the provision relating to the withholding tax.

In short, what the new Protocol provides is that the rate of withholding tax that each country can levy on dividends flowing to the other is limited to 15 per cent., both for portfolio investment and for direct or trade investment. The rate will apply to the United States tax from 1st January of this year and to the United Kingdom Income Tax for the year of assessment 1966–67 onwards.

Each country will give relief for the other country's underlying tax in respect only of dividends from trade investments, which are defined for this purpose as being dividends paid by a company to another company which controls at least 10 per cent. of the voting power in the paying company. I will just mention one or two of the other principal amendments which are related to the change in our tax system.

First, there are the somewhat complicated provisions relating to interest and royalties. In general the position will continue to be that they will be chargeable to tax only in the country where the recipient is resident and that those payments will be deductible in computing the payer's liability. But certain kinds of interest and royalties, which are treated under United Kingdom law as distributions, a matter that we have been discussing on the Finance Bill in relation to Schedule 11 of last year's Finance Act, will not be deductible in computing the payer's Corporation Tax, and the recipient will then bear United Kingdom tax on the payments of 15 per cent., as if they were dividends.

On the other hand, the Protocol overrides last year's Finance Act provision that interest paid by United Kingdom subsidiaries to United States parents, or royalties paid by a close company to a participator, are to be treated as distributions, with the exception that this does not apply, broadly speaking, where the recipient is a company under United Kingdom control. As a result of our introduction of Capital Gains Tax, it follows that the provisions in the previous Convention relating to the United States capital gains tax will now be reciprocal and apply to our Capital Gains Tax.

Mr. Stratton Mills (Belfast, North)

Has there been a change in the position compared with the 1946 agreement relating to royalties?

Mr. MacDermot

I have been seeking to outline briefly what the changes have been. I prefaced my remarks by saying that I was seeking to outline what were the other main alterations resulting from the tax changes which we made last year.

The reactions to the publication of this Protocol have been widespread. There has been considerable Press comment, some of it critical and some favourable. The Times, not the New York Times, of 6th January, said that … the new Convention has, in the context of the Chancellor's overall strategy, been remarkably well devised. I am sure that that is a comment which will commend itself to the whole House.

10.25 p.m.

Mr. Patrick Jenkin (Wanstead and Woodford)

The Financial Secretary sought to find Press support for his Order. The support was rather thin, because, as he will know, this Protocol has been roundly condemned by virtually every commentator in this country.

It is right that we should devote some time to an examination of the Protocol and some of the consequences which flow from it. Right hon. and hon. Members who see the Financial Secretary and myself once again facing each other across the Table after three days' consideration of the Finance Bill must think that we have a peculiar fascination for matters of this sort. [An HON. MEMBER: "Shift work."] On the night shift and, indeed, on the morning and afternoon shift. Whether this qualifies us for double Selective Employment Tax, I do not know.

The Order is important by any standards. More than half of the overseas income which comes to this country qualifying for double taxation relief comes from the United States. This is the first comprehensive amendment of an existing double taxation Convention under the new dispensation introduced in last year's Finance Act. It will set a pattern for the future—there is little doubt about that—and, therefore, this will have a profound influence on the 60 or 70 other Conventions which will require to be amended.

The main point which I wish to make is that the Order represents a thoroughly dismal bargain which the Government have struck with the American Government. It is dismal from the point of view of the United Kingdom investor in America and of the United Kingdom revenue. Even though the hon. and learned Gentleman may not care much for the former, surely he should care about the latter.

The reasons for the main changes, which the Financial Secretary outlined, stem entirely from the introduction of Corporation Tax last year—the segregation of company tax from dividend tax, the dividend tax representing in the language of double taxation law something in the nature of a withholding tax but at a rate so high as to be totally unacceptable to any of our trading partners overseas. A rate of 4l¼ per cent. is not a withholding tax which anyone could contemplate. In the United States, the rate for internal withholding tax is 30 per cent., and, by treaty, that is reduced by 15 per cent., which is a much more usual pattern.

The Financial Secretary was right in saying that an Order along these lines was an inevitable consequence of the changes introduced last year. Many of the debates in the House and in the Committee on last year's Bill were directed to the points covered in this Order. We could not possibly expect—it would have been idle to expect—the Government to have been able to negotiate anything substantially different from what we are considering tonight. But it is important briefly to look at the history of the matter because it has some bearing on the merits of the Government's case.

The Chancellor of the Exchequer, in his Budget statement of April, 1965, foreshadowed that his changes in the tax system would require renegotiation of the treaties. Referring to the existing agreements, he said: 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."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 268.] Obviously, the main point—I am sure that the House appreciates this—is that the United Kingdom underlying tax would be only 40 per cent., or conceivably then 35 per cent., whereas the United States rate is 48 per cent.—substantially higher. Any arrangement which did not take account of the difference between those rates of underlying tax was bound to represent a loss to the United Kingdom taxpayer and to the Revenue.

At this stage, there entered on the scene a very formidable character. I refer to the United States Assistant Treasury Secretary, Mr. Stanley S. Surrey. On 25th June, Mr. Surrey met the Chairman of the Board of Inland Revenue, but apparently these discussions did not get very far, because five days later, as the Financial Secretary said, the American Government terminated the dividend provision, Article VI of the former Convention, as they were perfectly entitled to do under paragraph (3) of that Article. The effect, of course, on investors in this country was to withdraw the 15 per cent. rate of withholding tax and to substitute the 30 per cent., and in those circumstances the Government felt that they needed to press on with their negotiations.

Then, on the 2nd August, the hon. Member for Faversham (Mr. Boston) put a Question to the Chancellor, to which he received a Written Answer. At column 247 he asked the Chancellor what United Kingdom tax will be borne after 5th April next by overseas residents on dividends from the United Kingdom. The Chancellor then made a short statement. We shall observe existing double taxation agreements, pending renegotiation where this is desirable. To deal with the case where a double taxation agreement is silent about the liability to Income Tax on dividends going overseas"— and, if I may pause there, this would by then be the American case if the treaty had not been renegotiated by 1st January— I propose to introduce legislation in next year's Finance Bill to say that, pending renegotiation of these agreements, the liability of the overseas shareholders concerned shall not exceed the rate of tax which the other country could impose in the converse case under the agreement."—[OFFICIAL REPORT, 2nd August, 1965, Vol. 717, c. 247–8.] That is the so-called mirror image relief, as it has come to be known.

The House will recollect—that is, those who were here at 3.30 a.m. on Wednesday, 22nd June, last—that we then considered Clause 29 of the Finance Bill, and the Schedule which went with it, where this mirror relief was spelled out in the case of a number of Conventions specified in the Schedule. It raised difficult questions to which I shall come back later, and I hope that the Financial Secretary may be able to deal with that. But for the moment I will press on with the history of the matter.

Then on Wednesday, 5th January, came the Inland Revenue announcement, and let me say at once that I do not criticise that at all as a matter of procedure. The Financial Secretary was absolutely right. Interest in these negotiations was intense, speculation was rife, and it was quite right that as soon as the main outlines of this agreement were known they should have been published. I do not at all endorse the criticism which was made in some quarters, that the matter should have waited until the order could have been published in its full form. I do not think that would have been right.

A new agreement had been reached in outline. It embodied the withdrawal of relief on portfolio investment and fixed a figure of 10 per cent. for relief on direct investment. That abolished a quite useful little provision in the previous agreement, that if a company held 95 per cent. of the equity the withholding tax was only at 5 per cent. It so happens that, with Income Tax at the rate of 8s. 3d. and Profits Tax at 15 per cent., that did not make any difference, because the American tax was still marginally higher than the U.K. tax and, therefore, the credit was fully exhausted.

But, nevertheless, at slightly lower levels of U.K. tax, it did represent a useful addition and, of course, it did contain the main provision of 15 per cent. withholding tax on both. There was a reciprocal arrangement for withholding tax both on American investment and on British investment, and this is the real nub of the case. That was the real issue around which the battle raged—and make no mistake it was a battle, and, make no mistake, that battle was lost.

In September, 1965, there was an article in the Accountant headed "Tax Treaties—Another British Triumph?", and after the announcement in the Press to which I have referred the Economist published an article under the heading "America Wins". The fact of the matter is that the Government, having introduced the new taxes in the 1965 Finance Bill, and having made the announcements which they did about the withholding of relief on underlying tax, and so on, found themselves going into these negotiations with this formidable banker, Mr. Surrey, with really no bargaining power at all.

Their only hope was to try to persuade the U.S. Revenue to allow the United Kingdom to have a higher rate of with- holding tax than the 15 per cent., in order to offset the difference between the 40 per cent. Corporation Tax and the 48 per cent. United States tax on the underlying tax on the company. This was always a forlorn hope. The O.E.C.D. Model Convention recommended a reciprocal 15 per cent. rate of withholding tax. It was obviously mirror relief to which the Chancellor had referred earlier in his reply.

Mr. Surrey himself, who was described in one article as a "very tough nut indeed", has very strong views—strong views, I may say, which ought to have been well known to Her Majesty's Government as soon as they came into office and were contemplating these tax changes. They ought to have known what they were up against. He has never made any secret of his views. He is regarded as a very considerable world authority in this field of double taxation, and he has enforced his views in a number of different directions notably in the reform of the United States internal revenue code in 1962.

In September, 1964, Mr. Surrey read a paper to the Tax Executives Institute of Montreal entitled "The U.S. tax system and the international tax relationships". His own philosophy and the philosophy of the Government which he represented in these negotiations was plainly set out, and I should like to quote it, because this is the real point. There could have been no excuse for the Government not knowing what the American Government's point was.

Mr. Surrey said, in Montreal: Whatever the cause of the issue, the United States has found itself in the position of being asked to agree to a treaty provision under which our withholding rate on dividends to a particular country would be less than the rate levied by that country on dividends moving to the United States. We have in these cases—in order to protect our investors from an increased level of foreign taxation and to protect the United States from revenue loss under the foreign tax credit—taken the firm position"— and these are the crucial words— that international withholding rates should be reciprocal and hence we cannot agree to an upward adjustment by other countries to accommodate to their internal tax policies. In the face of that absolutely categorical statement of what American policy was—and anybody knowing Mr. Surrey's reputation could have had little doubt that they would be unlikely to be shifted from it—must have realised, as they were introducing the new system of Corporation Tax early in 1965, that the chances of negotiating anything satisfactory with the Americans on the basis of our tax was going to be precisely nil. There was no chance whatever. So, indeed, it has turned out.

In the Economist article to which I referred a moment ago we find this following: Last autumn it became clear that the renegotiation of the double taxation treaty with the United States had turned into a tug of war between Washington and Whitehall. The game is now over. Agreement in principle has been reached. America has won. This has been stated by virtually every commentator who has written about this, and it is right that I should explain on the figures why this principle was transcendentally clear. It is clear from both aspects to which I have referred—from the point of view of the United Kingdom investor and the net income after withholding tax, and also from the point of view of the yield to the United Kingdom revenue.

I should like to quote the figures. Take a United Kingdom company investing in the United States, and assume net profit before tax in the United States of 100. United States tax is 48, leaving gross distribution of 52. Withholding tax at 15 per cent. is 7.8. Net dividend received in the United Kingdom is 44.2. United Kingdom tax on 100 is 56.25, against which one sets the American tax which has been paid of 55.80, leaving a tiny fraction of United Kingdom tax payable, but the important point is that net dividend after both taxes is 43.75. This is on the old system.

Curiously, in the case of a United States company investing in the United Kingdom on the old system, we get exactly the same figure. Assume net profits before tax to be 100. United Kingdom tax before profits is 56.25. Gross distribution representing the net dividend received in the United States is 43.75—exactly the same.

Now let us consider the new position, with a U.K. company investing in the United States, again assuming profits of 100. The figures are: United States tax, 48; gross distribution, 52; withholding tax, 15 per cent., 7.8; net dividend, 44.2. United Kingdom Corporation Tax on the 100–40, less the credit, 55.8, and there is the measure of the difference between the sums which were allowed for credit before and now, resulting in a nil U.K. tax and the dividend after both taxes 44.2. I concede that for the transitional period there is some measure for overspill, but the Convention is intended to last for some time, long after the overspill provisions have been exhausted.

We then come—and this is the point—to a United States company investing in this country. Under the new treaty, with profits of 100, U.K. Corporation Tax, 40, leaving 60. U.K. Income Tax withheld at 15 per cent., the new 15 per cent. withholding tax, 9, leaving a net dividend in the United States of 51. Therefore, under the old system, the British company investing in the United States received 49.4 of the American company's profits, and the American company in the United Kingdom received 43.75. Now, the United Kingdom company's figure is 44.2, and the American company's is 51.

Under the old dispensation there was a balance favourable to this country, a balance favourable to the British investor, of 5.65. Under the new dispensation, the balance is unfavourable to this country—6.8 per cent. There is thus a swing of about 12 points, and this is why I say that from the point of view of the investor it represents a very dismal bargain indeed.

Turning to the yield to the U.K. revenue, under the old system, with a U.K. company investing in the United States, the yield to the American revenue was 48 underlying tax, 7.8 withholding tax, making 55.8. For an American company investing in the United Kingdom, under the old dispensation the tax yield to the U.K. revenue was 56.25, almost identical figures. Under the new system, the yield to the American revenue is the same, 55.8, but the yield to the United Kingdom revenue for investment by an American company in Britain is only 40 per cent. Corporation Tax and the 9 points withholding tax (the 15 per cent. withholding tax) and the result is 49 compared with nearly 56. Whereas, under the old dispensation, the yield was virtually identical, now the yield is different by about 7 points.

This is why the Economist, in weighing up the consequences of this Order, wrote that it represented a tax present to the Americans and thus a transfer of current dollars from the Bank of England to the Federal Reserve. I am glad that the First Secretary has come into the Chamber, because I think that he will be interested in the Order when I tell him that in the words of the Economist this represents a transfer of current dollars from the Bank of England to the Federal Reserve. As a result of this Order, Britain is making a direct present to the American Federal Reserve. It is the same as if we had a gold mine in this country and were digging up the gold and sending it overseas and piling it up in Fort Knox; and just about as effective and futile as that.

The first question which I should like the Financial Secretary to answer is: what is the Government's estimate of the loss to the reserves as a result of this Order? What will be the effect on the balance of payments of the differential tax system—I would be grateful if the hon. and learned Gentleman could confine himself to that aspect of it—now embodied in the Order? It reaches serious dimensions, running into millions of pounds a year. The House and the country are entitled to know what it is.

I turn to the Protocol itself. The Financial Secretary will remember that when we debated the Double Taxation Relief (Taxes on Income) (Sweden) Order, 1966, he said: I am always fascinated by these discussions on Double Taxation Relief Orders"— It is a good thing that somebody is— because I am never asked any questions which in any way relate to the contents of the Orders. No doubt this is because of their extremely lucid language."—[OFFICIAL REPORT, 26th May, 1966; Vol 729, c. 881.] I assure him that he will not be disappointed this time, because I have a number of questions for him.

The first relates to what is known in tax parlance as the "force of attraction", that is to say the concept that if one has a permanent establishment in one territory, although one is a resident of the other, and one also has investments in that territory, the income from the investments must be treated together with the profits from the permanent establishment provided that they are sufficiently closely linked.

We seem to have in this Order an entirely new phrase which I have not come across before. The phrase, "effectively connected with", is used in Articles 4 and 5. This is entirely different from the phrase in the old Order. Are there any precedents for that phrase, either in Orders affecting English tax or in any others, and, if so, how will it be interpreted? How will the interpretation differ from the fairly well-established interpretation under the existing Convention?

The Order contains a number of other phrases having a roughly comparable meaning. Article (3) in paragraph (1) of the new Article III refers to profits directly or indirectly attributable to the permanent establishment What is the difference between "effectively connected with" and "directly or indirectly attributable" to the permanent establishment? In Article 3, in paragraph (3) of the new Article III dealing with expenses, a third expression, "reasonably connected with", is used. There must be some reason for this different language, and the House would find it very helpful if the Financial Secretary gave some indication of that difference in meaning.

I now take up the question of royalties, which my hon. Friend the Member for Belfast, North (Mr. Stratton Mills) put to the Financial Secretary. It is not clear from the terms of the Order what is the change that is to take place. The Finance Act, 1965, provided for the deduction of tax from royalties paid overseas. Yet it appears from the Order that the royalties are to be taxed in the country of the recipient and to be treated as an expense incurred in the country where they are paid.

What is the position under the Convention? I do not understand it. The liability is clear in the terms which I have just stated, but is the royalty to be paid gross or under deduction of tax, with some form of repayment claimed? It will be a very retrograde step if it is the latter. In the past it has been possible, where royalties have been paid by a British company to an American company, to get a dispensation to pay them gross, and this has been extremely useful from both ends.

The question of payment of dividends was the subject of a Question, again with a Written Answer, which was asked by the hon. Member for Hitchin (Mrs. Shirley Williams). On 12th November, the hon. Lady asked the Chancellor of the Exchequer what rate of tax should be deducted by United Kingdom companies from dividends paid after 5th April next to shareholders not resident in the United Kingdom". The Question obviously had behind it the suggestion that there would be different rates in different countries. The Chancellor replied: Income Tax should be deducted from such dividends at the full standard rate. Any relief which may be due to a non-resident shareholder by virtue of provisions contained in a double taxation agreement will be given by repayment"—[OFFICIAL REPORT, 12th November, 1965; Vol. 720, c. 13–14.] For people who are interested in the flow of international investment, that was a matter of some dismay. They had hoped that dividends would be paid under deduction only of the withholding tax. In the case of United Kingdom companies, it was greeted with relief because their imagination boggled at the idea of having to do countless different calculations relating to shareholders who were resident overseas, possibly deducting withholding taxes at different rates and, worst of all, having to keep up with the changes of residence of all their overseas-resident shareholders.

In Article 4 of the Order, however, we have the figure of 15 per cent. with reciprocity on both sides, and it appears from the Convention that, apart from anything that the Chancellor has said, it is the intention that the tax should be deducted at the withholding rate only. The Government should not be under any illusion about the problem that this will create for companies with any substantial number of overseas shareholders. In one newspaper it was suggested that this would result in registrars qualifying for salaries equivalent to that of the chairman of the company because of the complications with which they must deal.

Mr. Harold Lever (Manchester Cheetham)

But American companies do this all the time.

Mr. Jenkin

That is a matter with which, no doubt, the hon. Member will deal.

Representations have been made to me from a number of sources. The way that British companies have organised their offices hitherto has been with deduction of tax at a standard rate for everybody. This now represents a considerable upheaval. On the other hand, if it is still the intention that all these claims should be met by repayment claims and that tax should be deducted at the standard rate, again the problem looks like being intense. An article in the Accountant contained the following sentence: The Inland Revenue staff handling the claims will presumably be housed in tents in Hyde Park", so great would be the administrative problem which the Inland Revenue would face in those circumstances. I understand that talks are taking place with various institutions and representative bodies to try to find a way round what, on the face of it, appears to be an appalling dilemma. Will this be a dreadful administrative problem for the companies, or will it be yet another major administrative problem for the Inland Revenue? The House will be grateful to hear something about this from the Financial Secretary.

I come, finally, to a curious Article, Article 13, which contains a new Article XIX A, which, I understand, is intended to cover the position of any tax which may have been overdeducted in the interim period. The first sentence states: Each of the Contracting Parties will endeavour to collect on behalf of the other Contracting Party, such amounts as may be necessary to ensure that relief granted by the present Convention from taxation imposed by such other Contracting Party does not enure to the benefit of persons not entitled thereto. That appears to be an astonishing vague and sweeping proposition. The House will be grateful if the Financial Secretary will explain how the problem arises and exactly how that obligation therein contained will work. Will there be any retrospective assessments to recoup the tax that, apparently, should not have been allowed? On whom will those retrospective assessments be made?

Those are my detailed points. I hope that they will satisfy the obvious hunger expressed by the Financial Secretary the last time we discussed these matters.

What really matters is the overall economic result. The purpose of double taxation relief is to ease the flow of international investment. Great strides have been made in this direction in the last 20 to 25 years. Anything which increases the double taxation of income which arises in one country and is remitted to another must represent a retrograde step. It means that incomes are being taxed twice—first, in the country where the tax arises and, secondly, in the country where the tax is remitted.

If the obvious effects of the shift in emphasis that I described a few moments ago is that British investment in America will be much less attractive—and the Chancellor has made no secret of the fact that that is one of the major purposes of this Order—American investment in Britain will become a good deal more attractive. My mind harks back to the numerous occasions when hon. and right hon. Gentlemen opposite, when in opposition, used to react violently to any suggestion of further American investment in this country. I remember the Rootes-Chrysler affair, and the fuss made about it, and the way in which some of my right hon. Friends at the Dispatch Box had to defend that example of American investment in this country. The present Prime Minister tried to draw a distinction between what he called new investment, bringing new "know-how" to Britain and, on the other hand, a mere take-over.

The Financial Secretary appreciates that there is absolutely nothing in this Convention which draws any distinction whatever between the two forms of investment. One can confidently expect new companies to set up with new "know-how," particularly in development districts, and we welcome this as a development but do we want to encourage a new flow of take-over bids for British companies? There is nothing in the Convention that draws any distinction between the two forms of investment.

There is no compensatory increase for the attraction of investment in the United States by British companies, and the re- sult will be that investment will be encouraged one way. That is not in the interest of a healthy world balance of trade, or a movement of capital, and it is not in the long-term interests of this country. The Order represents yet one more shabby sell-out by the Government under pressure, just like the export rebate for E.F.T.A. and the F111A fighters from America. Now there is this Double Taxation Relief Order. The Government are bad negotiators. They have struck, and will no doubt continue to go on striking, a series of bad bargains.

10.58 p.m.

Mr. Harold Lever (Manchester, Cheetham)

I do not know whether I require the leave of the House to speak again, Mr. Speaker, since I made an observation during the speech of the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin).

Mr. Speaker

The hon. Member has not exhausted his right to speak by doing so.

Mr. Lever

I am obliged, Mr. Speaker. I have always been in some doubt about how I stood in a case of that kind.

We have made a double taxation treaty which has been subjected to some oratory and some admirably detailed criticism by the hon. Member for Wanstead and Woodford. It is the duty of an Opposition to oppose, but it is not their duty always to carp. I wonder whether the two functions may not sometimes be misunderstood by those who criticise from the benches opposite.

I want to refer to the general proposition. The hon. Member said, rightly, that this Convention was absolutely inevitable after the enactment of the Corporation Tax last year. But he did not descend to details and tell us why it became absolutely inevitable. It did so because it was known to us that the American Government would not allow a greater withholding tax in a tax treaty with Britain than the American Government themselves exacted from dividends received by British subjects, and it followed that if we were to have parity with the Americans in investment across the two frontiers the only way to achieve it was to institute a Corporation Tax system, and have a 40 per cent. flat Corporation Tax and thereafter a 15 per cent. withholding tax.

The hon. Member for Wanstead and Woodford is making gestures. I will give way if he has something audible to say in reply to the simple proposition I am making. The fact remains that once a Corporation Tax was brought into being in this country—and the hon. Gentleman conceded this—it was inevitable that we could not have got a better bargain than we got, except by raising the Corporation Tax to the level of the American Corporation Tax. I see the hon. Gentleman waving his arms in the air and grimacing. I take it, however, since he does not intervene, that he does not dissent from the accuracy of my argument.

The hon. Member for Wanstead and Woodford warned us, so he said, that something like this would happen. But warnings are not enough. Apparently the only way we could be saved from this disastrous victory which the Americans scored over us—which is the way the hon. Gentleman looks at it—would have been for us not to have had a Corporation Tax at all. [HON. MEMBERS: "Hear, hear."] What does that mean? Hon. Gentlemen opposite are making noises. I have offered to give way to any one of them who is prepared to proclaim, on behalf of the Opposition, that it is the policy of the Opposition that there should be no Corporation Tax.

Mr. Speaker

Order. If an hon. Member responded to that challenge he would be out of order.

Mr. Lever

With respect, Mr. Speaker, I should have thought that this was relevant to the argument that one way we could have got a better bargain would have been for us not to have a Corporation Tax at all.

But after all, is the British taxation system to revolve around the question of whether some marginal tax advantage or disadvantage exists for us in relation at the American tax system on our investments? In any case, of the number of stupid things the Opposition have done since we came to power, hon Gentlemen opposite have not so far gone so far as to say that we should change the whole system to gain an advantage, a highly marginal advantage, over the Americans.

Hon. Gentlemen opposite are, therefore, committed to the Corporation Tax and they have not promised us relief from this mischief, if mischief it be. They have not said that they will reverse what my right hon. Friends have so "incompetently, stupidly, and neglectfully negotiated." Of course, the only way to get round this difficulty would be for us to put the Corporation Tax up to 50 per cent., the rate which the Americans enjoy. I want to hear from the Opposition. Will they reverse this so-called bad bargain, increase Corporation Tax to 50 per cent. and so secure a draw with the Americans?

Mr. Speaker

Order. We cannot debate either whether the Corporation Tax should or should not exist, or should be increased to the amount mentioned by the hon. Member.

Mr. Lever

With respect, Mr. Speaker, I would not be arguing this point if it were not directly relevant to the only argument which has been adduced from the benches opposite tonight, which is that the Government have driven a bad bargain.

The hon. Member for Wanstead and Woodford said that it was absolutely inevitable that my right hon. Friends would have to drive this bargain if we had a Corporation Tax at 40 per cent. I am pointing out that the only way by which we could have driven a better bargain would have been for us to have had a 50 per cent. Corporation Tax. I am, therefore, asking the Opposition whether they would rather we had a better bargain with the Americans, but with the Corporation Tax at 50 per cent. I assure hon. Gentlemen opposite that we do not have an unreluctant Chancellor of the Exchequer. If they insist that we need to increase the Corporation Tax to 50 per cent. I dare say that my right hon. Friend would be open to representations from such quarters as hon. Gentlemen opposite.

We must remember what has been said about this bargain, which hon. Gentlemen opposite claim is to be deplored, by the learned Press and economists of all kinds, not Hungarian in this case. What exactly is the defeat we have suffered, the humiliation, drain of dollars and presentation of gold to the Americans? What is it that should make us adjust our Corporation Tax rate from 40 per cent. to 50 per cent.?

Mr. Srratton Mills

Is the hon. Gentleman aware that there is another form of Corporation Tax in use in certain other countries which allows a number of setoffs as against dividends?

Mr. Lever

But the fact remains that with Corporation Tax as we have it, the only reason why the Americans got a better bargain than we got, taxwise, is because our rate is 40 per cent. That is the argument of hon. Gentlemen opposite. It follows that the only remedy would be to increase it to 50 per cent. I am in favour of low taxation, but the inference of what has been said from the benches opposite is that the Opposition stand for victory and a 50 per cent. Corporation Tax. I view this with some alarm, bearing in mind my personal tax liabilities. I am very relieved that the Chancellor is not in the Chamber to hear such propositions.

Mr. John Peyton (Yeovil)

If we are debating the merits of one American tax against one British tax, the debate might be widened. Would it not be fair for the hon. Gentleman to put his question slightly differently, instead of putting one rate of one tax in one country against the other? I would swap the whole American system for the whole of ours.

Mr. Lever

If I pursued that, not only should I be out of order but it would be irrelevant to this argument.

I am not saying that the British tax system is better than the American tax system or worse. I am saying that the Opposition Front Bench spokesman said, and rightly said, in effect, that once we have a Corporation Tax, once we have it at 40 per cent., and once the Americans are absolutely determined that they will not negotiate a treaty which gives us the right to withhold more than 15 per cent., which is all that they withhold, all this has the stated effect on the amount of tax we can get from an American investor. It inevitably follows that the only remedy is to abolish the Corporation Tax or increase it to 50 per cent. Either of those choices would be a great victory and would result in the relief of all those losses of which we have heard so much tonight. Neither makes sense.

I will put forward only one thought in the hope that my right hon. Friend the Chancellor will not be tempted to increase the Corporation Tax to 50 per cent. and turn a defeat into a victory satisfactory to the Tory Party. I am rather relieved by what is thought to be a bad bargain. I hope that not only shall we not have a 50 per cent. Corporation Tax—

Mr. Speaker

Order. The hon. Gentleman is a Chairman of Committees and knows what is in order. He cannot discuss any further whether the Corporation Tax should be increased.

Mr. Lever

I bow to your Ruling, Mr. Speaker. I assure you, Sir, that I was not consciously out of order. I remain respectfully, but obviously, in view of your Ruling, wrongly, convinced that what I was saying was relevant to what we are discussing tonight. This is a very complex matter. I shall not press my argument. I assure you that there was not any conscious intention on my part to trespass on the rules of order.

One of the consequences of the bargain which has been struck is, as the hon. Member for Wanstead and Woodford rightly said, that it encourages American investment in this country. The hon. Gentleman has not dared to come out openly and say that he is opposed to the concept of encouraging American investment in this country. I should have thought that it was a splendid thing. What the hon. Gentleman is trying to do is obliquely, without sneering, to hint at a sneer at what has been done.

The hon. Gentleman stated that when the Labour Party was in opposition some of the less responsible of us, or some Members who have views differing from my own, opposed American investment in this country. I want to know whether the hon. Gentleman opposes it. Opposition Members can afford to be a little more reckless than when they are in government. It has been said that power corrupts. With the Tory Party it is absence of power that corrupts. It is then that Tory Members lose their sense of responsibility. Do they suggest that it is a bad thing that one result of the treaty is that we encourage American investment in this country? Why has the hon. Gentleman picked holes in a perfectly reasonable treaty? Indeed, it was the only treaty we could negotiate. It was this one or no treaty, as the hon. Gentleman himself admitted. This is a treaty which encourages American investment, with all the capital and "know-how" which will result from that. Why does the hon. Gentleman oppose this process?

Far from digging a hole in the balance of payments, this will do the balance of payments a power of good. I believe in investment in this country by American firms. It brings capital and "know-how" to this country. It should be welcomed by all forward-looking people. A glance round at American companies that are already in this country shows how much we have gained from American investment in this country. It far outweighs, through the creation of wealth, employment and technical knowledge, the dividends going back to the United States. Their attitude makes me think that lack of power has corrupted the Opposition.

Now I come to the position of the British investor. He is no worse off than before so far as the American Government are concerned. He is no worse off because, by act of policy, the Chancellor has decided, in view of the balance of payments position, that it is necessary to have an additional tax payable and does not give the relief he might have given for the American tax which has been deducted.

The main thing is that, from the balance of payments point of view, we get out of America precisely what we got before the treaty was negotiated and what we have always got and about which no one complained. Any additional tax the British investor in America pays is British and not American tax. I would be out of order if I enlarged on that matter of policy.

What is in order and relevant is whether the Americans take any more from the British investor than they have always done. The answer to that is, "No." Discussion of what I believe to be the finest investment we have ever made—the dollar portfolio investment in America—at least in the post-war period, is a matter for another occasion, and there are differences of opinion on that between the Government and myself.

As for this treaty, I am glad that the Chancellor concluded that the sooner this meaningless, useless friction was ended the better and that the only treaty that could be signed was signed. I am sure that many advantages will flow from it to the country as a whole.

11.12 p.m.

Mr. Peter Bessell (Bodmin)

In accordance with custom I must declare that I have business interests in the United States. I was glad that the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) agreed with the Financial Secretary to the Treasury that it was necessary to make a preliminary announcement before the Order was laid before the House in view of the speculation both on this side of the Atlantic and in America on the terms of the treaty and the effects this was having upon Anglo-American relations in terms of financial agreements and business investment.

The history of this matter has been stated fully by the hon. Member for Wanstead and Woodford and there would be no point in my covering the same ground which he covered admirably. There will be a considerable amount of criticism, as there has already been, from financial newspapers and other interests of the terms of the treaty. But that criticism comes in the main from people who do not like the idea that the American investor gets an advantage which, apparently, the British investor does not.

I do not think that any of the criticism which has been levelled against the agreement has any other basis. I take the view expressed by the hon. Memberfor Manchester, Cheetham (Mr. Harold Lever)—that the main effect of this treaty will be to encourage further American investment here. I have always believed, as he does, that this is good for Britain both in the long term and the short term.

It is good in the short term because it provides dollar investment at a time when we need dollars and it is good in the long term because of the technical advantages which are obtained, the additional forms of employment which are provided and the fact that it enables this country to maintain a level of technical advance comparable to that of the United States.

Indeed, I was surprised, as was the hon. Member for Cheetham, that the hon. Member for Wanstead and Woodford should have sought to make capital out of the issue of the Chrysler-Rootes agreement, which his own Government and party supported to the full and which, indeed, was opposed by some members of the present Government.

But if the Labour Party is learning as time goes by, we should applaud this. We should not decry it or try to make political capital out of it if it has reached the conclusion which I presume the hon. Gentleman has reached, that American investment in this country is good. I think that we should like to hear from the hon. Gentleman on this, as the hon. Member for Cheetham said. I repeat that if the Labour Party has reached the conclusion that American investment in this country is valuable, we should applaud the fact. I shall be glad to hear from the hon. Gentleman whether he now takes that view or whether, from the Opposition benches, he feels that it is a bad thing.

Mr. Patrick Jenkin

I do not know whether, before the debate, the hon. Gentleman read, as I have done, the exchanges that took place in the House when my right hon. Friend the Member for Barnet (Mr. Maudling) made a short statement announcing the Government's attitude to the deal. If he has, he will know that there was expressed on behalf of the Conservative Party complete satisfaction that, with the safeguards which the Bank of England had, that was a bargain which was wholly in the interests of this country. My right hon. Friend was attacked by any number of Labour Members. They did not agree with the hon. Member for Manchester, Cheetham (Mr. Harold Lever).

Mr. Bessell

Of course I have read the exchanges that took place, not immediately before this debate but at the time, because I had a great personal interest in them. This does not in any way lessen my point, and the hon. Gentleman has not answered my question, which was whether the Conservative Party is now saying that we do not want American investment in this country or whether it is saying that it still maintains the position which it adopted when in Government, which I think was a very responsible position. I hope that the Conservatives have not become as irresponsible as the hon. Member for Cheetham has suggested.

We could debate the agreement at great length, but it would be pointless to do so. As the hon. Member for Wanstead and Woodford has said, and as the Financial Secretary has implied, the agreement was inevitable from the moment that the 1965 Finance Act went on the Statute Book. We knew then. I well recall the long debates that we had on this subject in Committee last year. We always knew that any agreement that was reached would be on these lines.

It was a pity that there was speculation towards the end of last year both here and in Washington to the effect that it might be a very different agreement from the one which has now appeared. I do not like certain aspects of it. I am a little alarmed about the position of patent holders, for instance, who obtain royalties from the United States. The position for them is certainly less advantageous than it was under the 1946 agreement. I am concerned that there should be any agreement which gives a favourable position to the American investor by comparison with the British investor's position in the United States.

The main points are, first, that the agreement in this form was inevitable, and, therefore, I do not think that there is a great deal of point in debating it at length, and, secondly, that the tendency will be to encourage American investment in this country at a time when I believe this should go forward unimpaired and unhampered. It is rather curious that the United States should have accepted an agreement of this kind at this time.

It has been said that this is a "sellout" by the British Government to the United States. In view of the attitude of the United States Treasury to overseas investment at the moment, in view of the ways in which it is attempting to discourage that kind of investment here and elsewhere, it might even be said that the British Government have scored a minor triumph in obtaining an agreement of this sort which will encourage Americans to invest here instead of discouraging them, which I am sure would be the wish of the U.S. Treasury.

I do not think that there is any more that need be said on the matter. On behalf of my party, I give a limited but nevertheless real welcome to the agreement.

11.20 p.m.

Mr. J. Bruce-Gardyne (South Angus)

The agreement has been described by the hon. Member for Manchester, Cheetham (Mr. Harold Lever) as having marginal disadvantages. The hon. Member for Bodmin (Mr. Bessell) referred to it as a minor triumph. In March, my right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser) suggested to the Chancellor that the net cost of the agreement across the exchanges would be £10 million, and the Chancellor seemed unable to deny that figure. This is the first time that an agreement which will cost us £10 million has been described as a minor triumph.

The hon. Members for Cheetham and Bodmin have said that the agreement was inevitable. I agree that my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) was prepared, with considerable reservations, to accept an element of inevitability about it. Personally, I should have preferred that the changes of taxation which have made it inevitable had not been made.

In any case, I wonder whether the agreement was quite as inevitable as we have been led to understand. It was no doubt inevitable if we accept that the United States Government were entitled to say that they were not prepared to make any agreement in which the withholding of tax on the other side was higher than the American withholding. This statement was made by Mr. Surrey, and it is a statement which the hon. Member for Bodmin has assumed that we must accept.

Mr. Harold Lever

It is not fair to criticise the Government for treating American policy as inevitable when the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) said that it was plain to everybody that in no circumstances would the American Government break from their universal rule not to allow a greater withholding of tax to any country than the American withholding tax from that country.

Mr. Bruce-Gardyne

It does not seem to me that the British Government tried very hard. We must investigate the motives which lie behind this extraordinary agreement. My hon. Friend the Member for Wanstead and Woodford described it as a dismal agreement. My first feeling on reading the terms of the agreement was that the fact that the Government had negotiated such an agreement was in some way connected with the abject dependence on the financial support of the United States Government to which the British Government have been reduced. On the whole, I reject this explanation.

I agree with the hon. Member for Bodmin. This agreement seems to fly in the face of the American Government's desire to improve the American balance of private capital movement. But I do not agree that the fact that it flies in the face of this aspect of American policy is necessarily a triumph for the British Government.

Mr. Bessell

Would the hon. Gentleman answer my question: is he and is the Conservative Party in favour of or opposed to American investment in this country? This is the crux of the matter. His hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) did not give me a straight answer.

Mr. Bruce-Gardyne

If the hon. Member will allow me to make my own speech, I will come to that point in a moment.

What other explanation is there for this agreement? I cannot help feeling it might have something to do with a calculation in the National Plan, that the net outflow of capital of £137 million in 1965 should be transformed to a net inflow of £75 million by 1970. There is a most interesting and percipient article in the Financial Times this morning by Mr. Samuel Brittan which referred to this. In it, Mr. Brittan said that to achieve the £75 million inflow solely by cutting British investment abroad would involve reducing the gross outflow to £100 million or one-third of the average of recent years. Such a reduction is inconceivable without doing permanent damage to Britain's commercial interests and export prospects. I would not necessarily acquit Her Majesty's Government of doing such damage. However, Mr. Brittan says that a big rise in inward flow of investment will, in practice, be necessary if anything like a net inflow of £75 million is to be achieved by 1970. It seems quite clear that this is the motivation behind this agreement. It may be part of the motivation behind the taxation change in last year's Finance Act.

But I suggest two grave objections to this course of action. First, it amounts to mortgaging the future because the Chancellor of the Exchequer is too feeble to tackle the present. Investment in Britain has to be serviced. My hon. Friend the Member for Wanstead and Woodford drew attention to this consequence of the agreement, that it was bound to encourage United States takeovers of British firms and industry. The Chancellor may have had it in mind to encourage, say, a take-over of B.M.C. to help finance the first tranche of repayment of the I.M.F. loans next year. This is a very short-sighted policy because the encouragement of large-scale American take-over bids will ensure that in years to come, when the Chancellor is no more than an unhappy memory, our current account balance will be floating into the "red" as the interest payments build up.

The second objection to this odd bargain is even more serious. This country already contains the largest concentration of American investment in Western Europe. In Scotland, particularly, many of the most advanced manufacturing sectors are almost monopolised by American firms and we have reason to be grateful to them. They have introduced employment opportunities and new skills and management techniques which were badly needed, but I suggest that this process can be carried too far and in certain industries, it may already have gone far enough.

I draw the attention of the Financial Secretary to an article in Business Week of 7th May, 1966, in which it was said: In fact, the new Headquarters companies of U.S. companies in Europe may go a long way toward permitting more use of Americans in top management abroad. They will provide U.S. parent companies with a new base in Europe to which they can send U.S. managers, without altering the local image of their individual subsidiaries. This is the process that we shall see and in so far as it is encouraged by this agreement it will only encourage the brain drain of management and technological abilities across the United States by encouraging Americanisation of management. Again, I suggest to the Financial Secretary—and this is a point which I do not believe he should take so humorously—

Mr. MacDermot

If the hon. Gentleman is complaining about my laughter, I was merely reflecting upon the remarks which he has just made. Surely, if Americans are to invest capital in this country, the first thing that they will see to is that there is efficient management here managing the use of that capital.

Mr. Bruce-Gardyne

I am sorry, but in that case the Financial Secretary cannot have listened to the quotation which I made. The point of the quotation was that there will, inevitably, be a tendency for American management to be put in, for very understandable reasons, in the case of industries which have been taken over under terms and circumstances which have been encouraged by this agreement.

I was about to say that there is also the Canadian example to beware of. Admittedly, we are still a very long way from anything like the percentage of American ownership of British industry which Canada has experienced. But I would remind the Financial Secretary that in 1962 the Canadian dollar was devalued very largely as a result of the movement of funds by Canadian subsidiaries to American firms south across the border. That was a movement on a huge scale, which the Canadian Government were totally unable to control. This, I should have thought, was a risk which the Financial Secretary might be wise to ponder over.

Last, but not least, there is the impact of this agreement on our hopes of entry into the Common Market, and I suggest that these cannot be entirely neglected. The position in the Common Market, as I am sure the Financial Secretary knows, is that one of the Governments, the French Government, is already determined to control the level of American investment. The industries of Italy and Germany are increasingly anxious to achieve a measure of control, and I suggest that the tide is tending towards a position where the Governments inside the Common Market will want to coordinate the control of the flow of investment from the United States; and, of course, this agreement flies precisely in the opposite direction.

I believe that the Government's hopes of entry into the Common Market are pretty well in the coffin already. I do not suggest that this is a very large nail in the coffin, but this is a nail, and this is a culminating reason for objecting to the circumstances of this agreement.

11.32 p.m.

Mr. John Nott (St. Ives)

I agree with very little of what the Financial Secretary and the hon. Gentleman the Member for Manchester, Cheetham (Mr. Harold Lever) normally have to say. But I have no objections whatsoever to this Order, and in this respect I find myself in a minority of one on this side of the House.

I follow completely the arguments of the hon. Gentleman opposite which—if I may have my own private and personal opinions on these matters—I felt were probably in order, because the points which he made were very pertinent to the matter which we have been discussing tonight.

Either we have to say that we disagree entirely with the Corporation Tax system, and I disagree with it completely—I have no previous record in the House which can tell against me in that respect; I think that the Corporation Tax system is an absolute disaster, and will be shown to be increasingly so in future years—or we have to say, as the hon. Gentlemen have said, that Corporation Tax should be levied at a rate of 50 per cent. or 48 per cent., at a comparable rate to that in the United States. These are the only two logical alternatives which can be adopted on this side if we object to this Order.

So far as American investment in this country is concerned, I have to disagree with my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne). I am wholly in favour of the maximum amount of American investment in this country. The more capital we have coming into this country from every country abroad, the better it must be for this country and for its efficiency.

Where I disagree with the party opposite is that in so many other fields they are discouraging investment from abroad, and there is a whole host of examples which I could give but which, obviously, I have not time to give tonight. That is my criticism of the party opposite. In other fields, it is preventing American investment and overseas investment in this country.

I am happy with this Order because I believe that by leaving the withholding tax at 15 per cent. it will act as a real incentive to American companies to invest here. Chrysler-Rootes has been mentioned already. That was a wholly logical and reasonable action to have taken place. Hon. Members on this side of the House were perfectly right to support it. Hon. Members opposite were perfectly wrong to come out against it. I should like to see more and more effort made on the part of the Government to encourage American investment in this country and I consider that this Order does just that.

However, on the other side of the coin—the question of the withholding tax which British investors have to pay when investing in the United States—I can see the argument that has been advanced by my hon. Friends that British investors are at a disadvantage compared to their American cousins. Frankly, I must say that in the current economic circumstances of the country this is something which, in the short term, I do not deplore. It seems to me that if we are running a very substantial deficit on our capital account, the country must be prepared to accept short-term—I emphasise "short-term"—checks against overseas investment by this country in the United States.

Of course, the dollar premium, if I may quote an example, is far and away a greater disincentive to British investment in the United States than this can ever be. The dollar premium is now going up and up, and I wholly disagree with the policies of the Government which has led the dollar premium to rise in this way because among people overseas the dollar premium is thought to be the price which the United Kingdom resident will pay to get out of sterling. I have heard it denied by the Chancellor that this is the case, but the fact is that people overseas say that if the United Kingdom resident will pay 20 per cent. to get out of sterling and into dollars that is evidence of the way in which sterling is over-valued at the present time. I think it is reasonable in the short term that the United Kingdom investor should have to bear a penalty for holding investments abroad.

I would make this one request. I have no knowledge of the negotiations which led up to this Order, but there must be some way in which we must persuade the American Government that when our short-term position is corrected, when the balance of payments is corrected, the disadvantage to United Kingdom investors is reasserted, and United Kingdom residents are put back in a position which is no less favourable than American investment in this country.

I would enter that plea, that when our position improves, a comparable position can be arrived at for both countries. But at present I feel that this Order is perfectly reasonable. I am not against it, and in that respect I cannot support what has been said on this side of the House tonight.

11.38 p.m.

Mr. Stratton Mills (Belfast, North)

My hon. Friend the Member for St. Ives (Mr. Nott) referred, I think rightly, to the incentives to United States investment to which this Order will undoubtedly lead. It will make the United Kingdom a magnet attracting a lot more American investment; and certainly, representing a constituency in Northern Ireland, I can say what tremendous benefits they have brought in the postwar decade which are wholly to be welcomed. Also, coming into an area such as Northern Ireland, they act as pace setters and have a considerable beneficial effect on the other industrialists and industries in that community.

It would be foolish to imagine that one of the Government's main purposes in arranging this agreement is to attract American investment. This agreement is the result of the attitude adopted by Mr. Surrey, who has been Assistant Secretary at the Treasury in Washington, and the attraction of American investment has turned out to be very much of a side product.

My hon. Friend the Member for Wan-stead and Woodford (Mr. Patrick Jenkin) said that this agreement became inevitable once the Finance Act, 1965, came into force, introducing, as it did, Corporation Tax. The hon. Member for Manchester, Cheetham (Mr. Harold Lever) asked whether we were to move from 40 per cent. Corporation Tax to 48 per cent. Corporation Tax, but I suggest that there are certain other possibilities open to us. There is the possibility which the hon. Gentleman posed, of not having Corporation Tax at all. There is the possibility, which I suggested in an intervention during the hon. Gentleman's speech, of adopting the French and German systems, where there is a high rate of Corporation Tax and dividends are paid is an allowance, or a partial allowance, against Corporation Tax.

There is the third possibility of adopting the American system of a high rate of Corporation Tax, and a very much lower rate of personal taxes.

Mr. Speaker

Order. These are the possibilities which we cannot discuss in detail here. We can discuss them at some other time, but not on this Order.

Mr. Stratton Mills

Mr. Speaker, I appreciate that you have ruled other than a passing reference to these matters out of order, and I shall not pursue that point any further.

Are the Government satisfied with this agreement? They have signed it, and the hon. and learned Gentleman has commended it to the House, but are the Government satisfied with this agreement?

Secondly, in the negotiations which took place between the various officials, did the Treasury ask for a different rate of withholding tax in the United Kingdom compared with that in the United States, or did its officials say at the beginning of the negotiations, "We have read what Mr. Surrey said in Montreal in September, 1964. We know that that is his attitude, and we are happy to have the withholding rates exactly the same"? It is pertinent to our discussions to have that point cleared up.

What estimates have been made by the Government of the likely loss to the Treasury as a result of this agreement? In the House on 22nd February last the Chancellor was reluctant to put any figure on it, and when my right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser) suggested £10 million that was neither accepted nor denied. I think that it would be useful to be told what the estimate is.

I appreciate that there are many variable factors in this, and perhaps I might pose the question in another way and ask what would have been the loss to the revenue in the years 1965–66 if the agreement had been in effect? It is much easier to make an estimate on looking back a year, and I am sure that this sum must have been done by the Treasury when these negotiations were under way. I hope that the Financial Secretary will not say that it is impossible to give any kind of estimate, because I would be most reluctant to believe that our negotiators went into these discussions without being armed with a rough estimate of the cost involved.

As my hon. Friend said, 63 other agreements require to be renegotiated as a result of the Finance Act, 1965. It is clear that this agreement will set the precedent for those other negotiations. The American agreement of 1946 acted as a precedent for all the agreements that were negotiated subsequently and it is difficult to believe that the Treasury will not find itself tied to this agreement in the negotiations on the 63 other agreements.

Can the Financial Secretary say what is the likely cost to the Exchequer if the same practice of a common withholding rate is adhered to? This is a very bad agreement. It is, perhaps, an inevitable agreement, but the error was basically the error of Her Majesty's Government in the mistakes they made in the Finance Act last year.

11.46 p.m.

Mr. MacDermot

The first and major topic in this very interesting debate was whether the bargain which we struck was a reasonable and fair bargain with which we could feel satisfied. Certainly we felt satisfied, or we should not have signed it and commended it to the House. The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) called it a thoroughly dismal bargain. His case is that we should have stood out for the right to levy a higher withholding tax as a counterpart for the fact that we have a lower rate of underlying tax than has the United States. This, in essence, is the whole of his argument.

The hon. Gentleman must make a realistic approach to this problem, as must the Government, and not begin with an unreal starting point. He quoted some remarks made by Mr. Surrey, and made the very curious remark that we should have known that Mr. Surrey was a "tough nut" when we came into office and decided to make our changes.

What did the hon. Gentleman mean by that? The only meaning that I can read into it is that, because the Americans have declared that rates of withholding tax must be reciprocal in any double taxation agreement which they make, that alone should have influenced us and made us decide not to introduce Corporation Tax. I thought that the hon. Gentleman, like his party, supported the idea of the Corporation Tax. I know that the hon. Member for St. Ives (Mr. Nott) has expressed a different view, and that some other hon. Members opposite have made it clear that they do not support it, but I thought that there was broad agreement on it.

If it is right that we should adopt the Corporation Tax system, then, as the hon. Gentleman himself said, it is inevitable that we have to renegotiate the agreement. I am not talking now about an agreement between a developed and an underdeveloped country, but between two developed countries. The only realistic starting point is that which is generally accepted in relation to double taxation agreements, that underlying tax and withholding tax are regarded as quite separate matters. Underlying tax is regarded as a purely domestic concern of each country, and the withholding tax alone is negotiable. It is difficult to see any reason why, between two developed countries, one country should consent to impose a lower rate than the other.

Having said that on the general question of the approach and the suggestion that we are naive, irresponsible or chicken-livered negotiators, let us look further at the implication of the suggestion. If we were to succeed in striking a bargain of the kind suggested by the hon. Member, there would be serious practical inconveniences, because it would mean that the agreement would have to provide for the changing of the rates of withholding tax with fluctuations in the rates of underlying taxes to which they were related. This is not something which the trading community would welcome, because when one gets these agreements and gets an agreed rate of withholding tax, this is something which one expects to last for a substantial period.

I come now, however, to the far more cogent point that it is by no means certain that a higher rate of withholding tax would, taken in total and taken in long term, be to our advantage. I agree with the hon. Member for Wanstead and Woodford that the agreement is likely to have a profound effect upon other conventions, because the United States is the country with which we have the greatest volume of trade which is affected by these agreements and the greatest flow of dividends and it is therefore likely to influence other agreements.

If we were to have had a higher rate, there could be a number of disadvantages. First, the point has been made by a number of hon. Members, including the hon. Member for Wanstead and Woodford impliedly, that it could be self-defeating in that it would serve to discourage United States investment in this country. Secondly, United States companies would then have a strong incentive, if not be forced, to operate through branches here rather than subsidiaries, in which case there would be no payment of dividends and we would get no withholding tax.

In any event, if we take the long view and the broad view, it is surely in the interests of this country that as a matter of international practice withholding taxes should be kept low, because although in the case of the United States there is a greater flow of dividends from this country to the United States than vice versa, taking the flow in and out from this country as a whole, overall more dividends flow into than flow out of the United Kingdom. Overall, therefore, it is to our advantage if the general pattern is that the withholding taxes are low.

I turn to the question of the effects of the agreement. By way of preface, I suggest that it is misleading to speak of a tax loss resulting from the agreement. The fact is that the agreement provides for the first time for the United Kingdom to levy a withholding tax on dividends over and above the tax which is paid on a company's profits. It does not follow that the present relationship of United States and United Kingdom Corporation Tax will always remain the same.

One does not have to go back far to find a different position. As recently as 1960–61, United Kingdom Income and Profits Tax together totalled 51½ per cent. United States Corporation Tax was 52 per cent. Under our old system, however, the United States was able to tax portfolio dividends at the rate of 15 per cent. and direct investment at 5 per cent. whilst we could impose no additional charge. To go back a year earlier, in 1959–60 the United States rate was 52 per cent. and the total United Kingdom rate was 48¼ per cent. On a long-term view, therefore, there is no reason to assume that the position is any less favourable under the present position than under the old.

I turn directly to the question of the effect on our balance of payments. I agree that one immediate effect of the agreement is that the post-tax earnings of United States subsidiaries will be increased compared with their previous position.

The hon. Member made two propositions at the outset of his remarks. He said that this was a dismal bargain for the United Kingdom investor and also for the United Kingdom revenue. The figures he gave for the United Kingdom investor proved next to nothing, but I concede his point that the immediate effect is to transfer a greater proportion of the tax that is paid on the return of United States investment in this country from our Exchequer to the American Exchequer. In other words, the American Government gets a bigger slice of the tax paid on the fruits of that investment than it used to.

Taken all in all, in the whole context of the agreement, that in itself need not necessarily be something which should plunge us into gloom, because there are compensating factors, a number of which have already been referred to. Let us remember, first, that a substantial proportion of the earnings of United States subsidiaries in this country are reinvested. This is one of the advantages that we have achieved, and which we deliberately intended to achieve, by striking a low rate of Corporation Tax—for which some hon. Members opposite criticise us.

The point made by many hon. Members is that a greater post-tax return is bound to encourage a greater flow of United States investment into this country and, equally, to direct a greater part of whatever flow is coming from America to Europe into this country rather than into Continental countries. This is a matter on which nearly every hon. Member who spoke was agreed. My hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) was, and then we had a very constructive speech from the hon. Member for Bodmin (Mr. Bessell).

The hon. Member for South Angus (Mr. Bruce-Gardyne) agreed that it was likely to have this effect, but he bemoaned it. He said that this agreement appeared to fly in the face of United States policy of restricting capital outflow. He seemed to want us to join with General de Gaulle in trying to restrict United States investment in Europe, including this country.

It is interesting to detect the different overtones that emerge when we discuss matters of this kind, and to note some of the sentiments and attitudes that are normally associated with Little Englanders being voiced by people who who are keen advocates of our joining the European Common Market because they think that this attitude will somehow make us more acceptable to those whom they wish to join in Europe.

A third compensating factor, from the point of view of our balance of payments, is the brake upon United Kingdom investment in the United States, so that the flow of new money from the United Kingdom is reduced. Again, it is interesting to hear hon. Members opposite extolling the virtues of overseas investment by the United Kingdom, something which they say the wicked Labour Government are, and ought not to be, restricting, whatever the effect on our balance of payments. But as soon as anybody suggests that any action of ours might help to encourage American investment in this country it is said that we are selling this country down the lane to America. There are extraordinary inconsistencies in the arguments to which we have listened from hon. Members opposite tonight.

I was asked to quantify the effect of the agreement. It is impossible to do this in respect of the net effect on the balance of payments which may result in time. Depending how the pattern of new investment alters in relation to different post-tax yields of investment in each country, the net effect might not in the end be very much. I have answered a number of specific questions and—

Mr. Stratton Mills rose——

Mr. MacDermot

—I will answer the other questions I was asked, before giving away and being asked some more.

The hon. Member for Wanstead and Woodford asked a technical question about the meaning of the phrase "'effectively connected with' which relates to the 'force of attraction'". This term, which bemused the hon. Gentleman, is drawn from the model O.E.C.D. Convention and, as I have said in previous debates about double taxation agreements, it is our intention to follow the wording of these Conventions where we can and wherever they are suitable. This term has been used in a number of agreements. It applies to dividends which form part of the income of a permanent establishment.

The hon. Gentleman also asked me about the phrase, "directly or indirectly attributable to". That describes the measure of profits on which a permanent establishment may be taxed. The phrase "reasonably connected" indicates the expenses which are to be taken into account in computing the profits of a permanent establishment. If the hon. Gentleman reflects on these phrases in relation to the subject matter under discussion, he will see that they are aptly chosen to deal with the situation, and that nothing is to be gained by trying to find distinctions between the precise meaning of each phrase.

I was then asked about royalties; about the present position and whether they are paid gross or under deduction with subsequent relief payments. The answer is to be found in the Double Taxation Relief (Taxes on Incomes) General Regulations, 1966. They provide for them to be paid without deduction of United Kingdom tax where exemption is due to non-residents by virtue of a double taxation agreement.

The hon. Member for Wanstead and Woodford then asked about the arrangements which have been referred to for payments under deduction. I cannot assist him further at this stage, except to remind him that in the present Finance Bill we recently approved in Committee a Clause which gives power to make regulations. We are discussing this with various interested bodies and we hope to produce schemes which will be workable and which will not impose any impossible burdens on companies. I am speaking from recollection, but the intention is that they should be only voluntary and that they should not be imposed on companies against their will. We have machinery to devise—with the assistance of certain banks and agencies in the City—schemes for firms which want to take part in them to make the payments under deduction. I cannot assist further at present with the details.

The hon. Gentleman then asked about Article 19(a) dealing with collection. The effect of this Article is that it can help in arranging to give relief from tax at source on United Kingdom dividends. If a relief is given by mistake—for example, to a resident of a third country using an American nominee—the United States will then endeavour to collect the tax which we ought to have had. No retrospective element arises. It will merely be the collection of a tax which was due all along and which was not originally deducted because of some misinformation given, intentionally or otherwise, to the Revenue.

I was asked by the hon Member for Belfast, North (Mr. Stratton Mills) what the cost would be to the Exchequer, in our estimate, as a result of the new agreement. One can only make any estimate on the basis of certain assumptions. The figure would depend upon the dividend policies of the companies concerned. On the assumption that portfolio divi- dends are maintained at the same gross amount and that subsidiaries pay to their United States parent companies sufficient dividends to maintain the net receipts of the parent companies, it is estimated that the reduction in tax receipts in respect of company income distributed to United States residents will be of the order of £6 million. It is right to point out that the reduction would have been greater if it had not been for the abolition of investment allowances. One ought, therefore, to take into account the annual cost of investment grants to subsidiaries of United States parent companies. This is estimated to be £23 million, making the total cost to the Exchequer £29 million.

Against this, there will be savings to the Exchequer in relation to the tax charged on United Kingdom residents drawing income from the United States. The income derived by United Kingdom parents from American subsidiaries after taking into account the Income Tax on the parent companies' own distributions will suffer more from United Kingdom tax than before, and the Exchequer gain from this is estimated to be £10 million. The withdrawal of underlying tax from portfolio investment will save another £8 million. The net figure at the end of these rather complicated calculations is about £11 million, on those assumptions.

I have endeavoured to answer the questions put to me. I hope that the House will now feel able to approve the Order.

Question put and agreed to.

Resolved, That an humble Address be presented to Her Majesty, praying that, on the ratification by the Government of the United States of America of the Supplementary Protocol set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (U.S.A.) Order 1966, a draft of which was laid before this House on 2nd May, an Order be made in the form of that Draft.

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