DOUBLE TAXATION RELIEF (AGREEMENT WITH SWEDEN) (Hansard, 26 May 1966)

§ Mr. Patrick Jenkin (Wanstead and Woodford)

After the discussion on cereals and eggs, I feel that I am the coffee, but it is not quite breakfast time, and I promise to be brief.

It is worth looking for a moment at this Order partly for what it does and partly for what it portends. It is, in fact, the second double taxation of income Order to be debated since last year's Finance Act when its massive changes in taxation became law. Like the first, relating to Canada, which was debated on 14th February, it also is only an interim measure and one of very limited significance. I draw the attention of the House to what it contains. It is just a small further move along the road on which Section 64 of the Finance Act, 1965, set us.

The effect of the Order is to limit the right to credit for underlying tax to cases of companies with a 10 per cent. holding in foreign capital. As a quid pro quo—and obviously in all these negotiations the other country must have something—for the extra tax levied here 881 by the Chancellor on dividends arising in Sweden, that country is now given an unrestricted right to levy tax on a dividend payable to Swedish companies by British companies. Hitherto, this right to levy tax was restricted in a number of ways by the main Convention. In other words, we have an admittedly small but further restriction on double tax relief for income passing between the two countries.

To that extent it is a retrograde step, but I recognise that it flows inevitably from the previous one we debated at great length last year and this is certainly riot the time to debate the general merits of that. This Order is very small fry. It is a very limited Order and there are much bigger fish swimming in the water and coming to the surface. On the same day on which this Order was laid before the House we had the Order relating to America, which I have no doubt will be brought forward soon after the Whitsun Recess. It is one of considerable importance. It may well set a pattern for double taxation conventions in future. It is difficult to believe that the Government would resist a proposal to have at least half a clay to debate the merits of that Order.

There are also in the pipeline Orders relating to Switzerland, New Zealand and Belginm, about which Press statements have been made, and 65 or 70 further conventions which are required to be made in the light of legislation passed last year. When one reads the list set out in an Answer to a Question by my hon. Friend the Member for Belfast, North (Mr. Stratton Mills), one realises that a truly formidable task faces the Inland Revenue in negotiating these Orders. They are important. They represent a substantial change in the pattern of international investment and the incomes that flow from international investment. I do not think that the House should let them go past without recognising what has happened.

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

I am always fascinated by these discussions on Double Taxation Relief Orders, because I am never asked any questions which in any way relate to the contents of the Orders. No doubt this is the result of the extremely lucid language in which they are composed.

882 The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) said that he thought that the Order was a further retrograde step down the paths into which the country was led in last year's Finance Bill. May I very briefly remind the hon. Member and the House in what direction this step is being taken. It is as a result of the change from our previous taxation system to the Corporation Tax system. Before the Corporation Tax, the position was that we did not draw any distinction in our taxation system between company and personal taxation. Consequently, the Income Tax which was paid by a company on its profits was treated the same as the Income Tax paid by shareholders on their dividends. The Income Tax deducted from the dividend was retained by the company as a sort of set-off against the tax which it paid on the profits.

We, in a woolly-minded way, extended this confusion of company and personal taxation to the taxation systems of other countries, with the result that we gave credit and relief for the underlying tax which had been paid in other countries when we were dealing with the taxation of dividends remitted to this country. We not only gave relief for the withholding tax paid on the dividends. We gave relief for the Corporation or other underlying tax paid in the overseas country.

Now that we have followed the example of most civilised countries by adopting the Corporation Tax system and separate company and personal taxation, it would be quite anomalous for us to continue to give relief for the overseas underlying tax on portfolio investment. To do so would be to put United Kingdom investors in overseas companies in a more favourable position than United Kingdom investors in United Kingdom companies or overseas investors in those overseas companies.

It was the withdrawal of this privileged position for overseas investors that led to so many complaints by overseas investors which were so faithfully and assiduously echoed by hon. Members opposite in the long nights of the Finance Bill. We heard a last murmur of those same complaints from the hon. Member in his remarks about a retrograde step. This is a further step in the very healthy development of our taxation system.