§ 8.54 p.m.
§ The Chief Secretary to the Treasury (Mr. John Diamond)
I beg to move,That an humble Address be presented to Her Majesty, praying that, on the ratification by the Swiss Federal Council of the Protocol set out in the Schedule to the Order in Council entitled the Double Taxation Relief (Taxes on Income) (Switzerland) Order, 1966, a draft of which was laid before this House on 18th October, an Order may be made in the form of that draft.Normally, I should not regard it as appropriate on a reasonably straightforward matter such as this to inflict on the House a speech, a short one, but nevertheless a speech, at the beginning of a short debate, but as the Protocol contains a rather special provision, I thought it would assist the House if I were to say a few words to begin with, and if I have the good fortune, Mr. Deputy Speaker, to catch your eye and am allowed to do so by the House, I shall be only too glad to speak a second time in reply to any points made by any hon. Member in the debate.
This is one of a series of agreements which have become necessary to regulate the deduction of tax on dividends flowing from one country to another as a result of the Corporation Tax. Indeed, this is by no means the first of such agreements.
It provides in that respect—and this is a normal provision—that the rate of deduction shall follow closely the recommendations of the O.E.C.D. in these matters, that is to say, the rate of tax deducted in normal circumstances from dividends flowing from one country to another should be 15 per cent. but that, in the case of a dividend paid by a subsidiary to its parent, the deduction should be at the rate of 5 per cent. For this purpose, what one regards as a parent is a company which has 25 per cent. or more of the voting power. I do not imagine that that will present any problem to the House, but there is another provision which is perhaps a little unusual and was foreshadowed in some of the debates we had on the Finance Act.
There is an anomalous situation in existence under the present double taxation convention with Switzerland. It arises because of the reference in that 1087 Convention to Profits Tax and because of the further reference in the Finance Act, 1965, indicating that, wherever a taxation agreement of this kind refers to profits tax, then it shall have application for Corporation Tax. Because of these references, the anomalous result has followed that such a company making certain interest and royalty payments prior to 6th April, 1966, would find itself receiving relief under two headings. First, it would get relief from its Income Tax assessment in the ordinary way, that being the normal provision. Secondly, it would also, because of the effects of the two provisions I have mentioned, find itself getting relief from Corporation Tax based on profits against which the interest has been set in the period prior to 6th April, 1966.
In short, it would find itself getting relief twice over. Accordingly, therefore, the Protocol makes provision for this and removes the anomaly by saying that, with regard to the period before 6th April, 1966, there shall be no relief of Corporation Tax. That is the normal provision. For example, a company paying interest during, say, the course of 1965 will find that it gets relief during late 1965 from the 1965–66 Income Tax assessment and also, were it not for the Protocol, getting further relief from Corporation Tax payable later on in respect of profits in that same period, that is to say, the calendar year 1965. If it were the calendar year 1965 in respect of which this interest was paid, it would find that the 1966–67 Corporation Tax assessment, based on the profits of the calendar year 1965, would be less than they would otherwise be and the double relief would have been granted. The point is that the Income Tax relief will already have been obtained. The Corporation Tax relief is a relief which would be obtained were this Protocol not approved—a relief which would be obtained on 1st January, 1967, when, for the first time, the reduced Corporation Tax would become payable. If that is put right—I say "put right" because it is an anomaly which, judging from previous debates, the House would wish to withdraw—by approval of the Motion, the second relief will not be obtainable.
It is true, and no one wants to burke the issue, that this provision in the 1088 Protocol does, in effect, have retrospective effect with regard to the calculation of the figure on which Corporation Tax is payable. But it does not have retrospective offect with regard to any payment and therefore no taxpayer is prejudiced, in the sense that he will be paying a figure which is no different from the figure he expected when on this year's Budget the Chancellor of the Exchequer announced, first, what the rate of Corporation Tax would be—and before that nobody could calculate this sum with any precision—and, secondly, that he was proposing to bring in an enabling provision so that this very Protocol could be given effect. That is the special circumstance to which I wished to refer and I hope that I have explained it to the satisfaction of the House.
§ 9.1 p.m.
§ Mr. Patrick Jenkin (Wanstead and Woodford)
It is interesting to find that on the seventh or eighth of these revised double taxation conventions the Government have changed the team, and I am bound to think that I might make a comparable suggestion to those of my right hon. Friends who choose the team on this side of the House. The prospect of 74 more of these double taxation agreements is not one of which I am enamoured, although I wonder how much it would be worth if I were paid on piece work.
I am grateful to the right hon. Gentleman for having given his explanation of perhaps the most important provision of the Protocol. I shall return to it later and say at this stage only that I doubt whether anyone listening to the right hon. Gentleman would have recognised what had happened in these circumstances.
The changes made by the Protocol fall into three categories. There are the changes necessitated by the major alteration in our system of company taxation. One refers particularly to Article 1, dealing with the definition of the tax to be covered, and to Article 3, dealing with the question of dividends, the withholding tax on dividends and so on. Secondly, the opportunity has been taken to make a number of minor tidying-up alterations. Thirdly, there is the retrospective withdrawal of relief relating to interest and royalties paid by a United Kingdom company to a Swiss recipient 1089 a matter with which the right hon. Gentleman dealt. I will deal with each of the three in turn.
On the first, there is no difference in this Protocol from a number of others which have already been criticised from my side of the House. However, I wonder whether the Chief Secretary would be prepared to give some estimate of what the total net loss to the United Kingdom balance of payments will be when all these double taxation conventions have been revised in the same way. The Chief Secretary will recollect that when the Financial Secretary was dealing with the United States Convention earlier this year, he estimated that its effect was a loss to the United Kingdom balance of payments of about £11 million a year. That was only one, albeit the most important, of the conventions. There are between 70 and 80 altogether and I wonder whether the right hon. Gentleman would be prepared to give some idea of what the whole exercise will cost this country.
I have one or two comments to make about the tidying-up amendments, as there are several provisions which seem to require some explanation. I draw the Chief Secretary's attention to paragraph 3 of Article 4, which substitutes a new Article XIV. This is new to me, but it may not be new in these conventions. I cannot claim to have studied them all.
This is a provision which eliminates any question of the giving of personal reliefs to a resident of one territory where his only income from the other territory in respect of which the personal reliefs arise consist of "dividends, interest or royalties". Is this a usual provision? Why should, let us say, a Swiss resident's entitlement to the due proportion under United Kingdom law of his personal reliefs in respect of any United Kingdom income which he may enjoy be taken away if that income consists solely of dividends, interests or royalties?
What is the background to this provision and is there any exact meaning to be given to the word "solely" in the third line of the paragraph? Let us say that the Swiss resident had written an article for publication in a United Kingdom journal and had been paid a fee for it, or had transacted some small piece of business from an establishment in the United Kingdom which left him with a 1090 United Kingdom source. Does that mean that, upon his possession of that one piece of income other than dividends, interest and royalties, he would immediately become entitled to personal reliefs on the basis, not only of that income, but also on any other dividends, interest and royalties which he may have had?
If this is the case, it is a somewhat strange provision, because it means that a distinction will be drawn between two Swiss taxpayers whose investment income in this country is identical except that one happens to have a very small, almost negligible piece of earned income, qualifying him for the reliefs.
The second of these minor Amendments arises under Article 8 of the Protocol which substitutes a new Paragraph 4 in Article XVIII of the existing Convention. This Article apparently limits the right of one of the territories with regard to withholding the tax on dividends. The relevant words are the last four and a half lines. I shall begin at the beginning of the paragraph which says:Nothing contained in this Article shall be construed…as restricting the deduction of United Kingdom income tax from dividends paid to a permanent establishment in the United Kingdom of a company which is a resident of Switzerland, if such dividends are not subject to United Kingdom corporation tax in the hands of the recipient.Why is this provision necessary? In what circumstances in this country could that provision have any operation, with the law on the subject of dividends as it now stands? What does the provision achieve?
The third category of changes which the Protocol makes deals with the retrospective withdrawal of relief. This is achieved by Articles 4 and 5 of the Protocol which substitutes new Articles VII and VIIA in the existing Convention. This has to be linked with the commencement provisions in Article 10 and particularly the provision to which the right hon. Gentleman referred in Paragraph 4 of Article 10. The Chief Secretary may recollect that this provision was discussed in Committee on this year's Finance Bill when the matter was raised on what was then Clause 31 of the Bill and What is now Section 33 of the Act.
The Financial Secretary on that occasion explained the purpose of the Section as an enabling Section, allowing this retrospective withdrawal to come before 1091 the House tonight, and made it clear that this was the only purpose of the Section. I believe that he said that it was the sole purpose of the Section. It was aimed at this Protocol. As he said when that Section was debated, this House would have had no right even to consider a Protocol retrospectively withdrawing relief.
I was not particularly impressed by the Chief Secretary's arguments to seek to prove to the House that this was not a retrospective withdrawal of relief. Why, otherwise, did we spend some time both in Committee and on Report introducing a special new Clause into the Finance Bill purely to give the House the right to consider a Protocol which had a retrospective withdrawal of relief? If this is not retrospective why was that Section necessary?
The Chief Secretary has explained what the purpose was and how it was that there arose what the Financial Secretary was honest enough on that occasion to call "a manifest error." As the hon. and learned Gentleman put it, in answer to my hon. Friend the Member for Finchley (Mrs. Thatcher):… someone made a mistake."—[OFFICIAL REPORT, 21st June, 1966; Vol. 730, c. 530.]Indeed, it is clear that someone made a mistake. When Section 64 of the 1965 Finance Act was passed, nobody had in mind the rather obscure provision of this one Convention with Switzerland, which made that Section, as it applied to this Convention, a nonsense.
We know that the 1965 Finance Act was rushed through the House in a manner which can only be described as disgraceful. I had reason from this Dispatch Box to criticise the Government for another error. It was to correct another relief that they had to withdraw in this year's Finance Bill the provision of Section 85 of the 1965 Act relating to the taxation of pre-Corporation Tax profits. The Chief Secretary will remember the lengthy debates on that subject.
On that occasion, I reminded the House that it was we on this side who had been criticised by the Prime Minister for what he was pleased to call our "tomfoolery", when the Bill which we were then fighting contained a number of manifest errors which the Government have since had to put right.
1092 Here is another one and one in which there is retrospective correction. Retrospective legislation, in whatever form it comes, is always regrettable, always undesirable and it always requires the strongest justification. We have not had that justification from the Chief Secretary this evening. This correction is the result of the hasty, ill-considered, hurriedly-drafted legislation, when the draftsmen were put in an impossible position by the Government, because of the way in which they handled their business.
How the professionals in the Inland Revenue must hate to bring forward a Section like Section 33 of the Act which we discussed this year and provisions such as we have in this Convention, as they reflect sadly on their professional competence. How they must hate it all the more when it involves a double taxation convention, when they have to go to their opposite numbers in another country and confess that they made what the hon. and learned Gentleman called "a manifest error."
The fault lies squarely on right hon. Gentlemen opposite who forced through this legislation in the way in which no complicated fiscal legislation ought ever to be foisted on the House. In view of this, it is right that the right hon. Gentleman should answer a number of questions relating to this particular retrospective withdrawal of relief.
First, is this the only case which we shall have under Section 33 of the 1966 Finance Act? Is this the only Convention where a mistake will be found to have occurred? The Financial Secretary on Report used these words:… all that we are seeking to do here is to take powers for the House, to enable the House to consider the provisions which, if approved, would have the effect of withdrawing certain reliefs retrospectively"—I draw the right hon. Gentleman's attention to the word "retrospectively"—and to enable them to be considered when we look at the protocol to the Swiss Agreement. That is the sole purpose for which the Clause was drawn.I should be grateful if the Chief Secretary could confirm that there will be no other Convention to which amendment must be made, making use of this retrospective provision in Section 33.
Further on, the Financial Secretary said, and this was confirmed this evening by the Chief Secretary, that this would 1093 take effect only in relation to Corporation Tax computed according to pre-6th-April-of-this-year profits, and went on to say:One rather exceptional case is covered by the protocol where the provision will also apply to payments made after 6th April."—[OFFICIAL REPORT, 13th July, 1966; Vol. 731, c. 1496.]He added that he did not think it right at that stage to weary the Committee, but that the opportunity would arise when we consider this Protocol. It is right that the Chief Secretary should make it clear how it is that this Protocol can affect payments made after 6th April this year.
The third question, on which the right hon. Gentleman has gone some way to give assurances is: can he categorically say that there will be no question under this retrospective provision of the Revenue attempting to claw back relief it may already have given? I was not impressed with the right hon. Gentleman's argument that no payment of Corporation Tax has yet been made and that, therefore, no question of retrospective legislation arises. The fact is that companies have for many months—in some cases for well over a year, and sometimes for nearly two years—already been trading under the Corporation Tax system, and they were entitled to believe that with the legislation as it stood they should have this relief as a transitional measure. If they have paid tax on that basis, therefore, will there be no question of a drawing back by the Revenue of the relief given?
Article 5 of the Protocol substitutes the new Article VII A to which I have already referred, and I would draw the right hon. Gentleman's attention to paragraph 6 of Article VII A. It deals with royalties, and states:(6) Where, owing to a special relationship between the payer and the recipient, or between bot hof them and some other person the amount of the royalties paid exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments, if treated as a dividend or distribution of a company, shall be taxed in accordance with Article VI.I am sure that when I read that passage to the Chief Secretary he, at any rate, will recall the lengthy debates we had in 1094 Committee last year and this year on the Finance Bills on the question of royalties paid by a close company to a participator.
He will remember that we on this side tried over and over again to persuade the Government that it would be right in the case of royalties, as they had already agreed with copyrights, that only so much of the royalty as exceeded the commercial rate—a rate that would have been agreed in the absence of any special relationship—should be treated as a distribution. Over and over again we tried, and over and over again we failed.
I should like to read just one passage from the right hon. Gentleman's own speech to the House on the subject. He said:It is just not possible, without having argument upon argument and going to the courts, to arrive at a regularly accepted market price for patent royalties."—[OFFICIAL REPORT, 21st June, 1966; Vol. 730, c. 392.]This is exactly what this convention will require people to do. This is exactly the distinction that paragraph 6 of the new Article VII A will oblige the Revenue to make. How does the right hon. Gentleman reconcile his speeches, his many speeches on the subject—I have only quoted one short extract—with what I read to the House earlier from this convention? Does he expect argument upon argument in order to decide what rate of royalty would have been agreed between parties in the absence of any special relationship?
How does he reconcile this with what he told the House was over a third of a century of professional experience as an accountant which led him to take that view? Does he think that somehow, as a result of further personal experience as an accountant, it will be much easier when dealing with royalties paid from one country to another—that which he said would be impossible when paid by a close company to a participator?
This is a case where the Government have a good deal of explanation to make. They have denied over and over again in this House and in Committee that this sort of calculation was possible in relation to royalties paid by close companies, and here we have virtually the identical concept in a double taxation convention between this country and 1095 Switzerland. In the one case, they told us that it could not work; in this case, they tell us that it is going to work.
I have asked the Chief Secretary a number of important questions which arise on this convention. I hope that he will have an opportunity to reply after others of my hon. Friends have spoken.
§ 9.21 p.m.
§ Mr. Douglas Dodds-Parker (Cheltenham)
I wish to support the points which have been made with great lucidity and clarity by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) drawing upon his knowledge of the detail of these Protocols and their relevance to our financial situation at home and abroad which has been debated in recent Finance Bills.
I find that my name was appended to the original Protocol signed in 1954, and I hope that the Chancellor of the Duchy of Lancaster, who signed the present one, will remember the occasion in the same way as I remember that earlier one. The right hon. Gentleman the Chief Secretary did not sign it, which is a pity in some ways because he will not go out into the world afterwards and find, as I did, that one has considerable acclaim in certain esoteric financial circles for the fact that one's name has been put on to this sort of Protocol.
One of the things that started happening in the early 1950s was that these agreements released certain financial effort to the benefit not only of this country but other countries with whom we made such agreements. As a result of the original Protocol of 1954, considerable progress was made in investment, taxation agreements and business activities between Switzerland and Britain. I believe that such agreements are vital in the modern world. They are the basis of international co-operation, especially in Europe, and the Swiss obviously are an extremely important element in that.
My hon. Friend mentioned some 70 to 80 agreements which will be coming before the House. However, I believe that with the exception of the one with the United States, none will be more important than this one with Switzerland. I remember a brilliant speech made by Mr. Frank Figgures, that distinguished 1096 Parliamentarian, and now back in the Treasury, in the summer of 1965 about the importance of investment. From my business knowledge of what happened as a result of the earlier Protocol, it seems to me that investment is often overlooked in the co-operation that goes on in the free trade areas. It is easy to talk about goods and removing tariffs, which are to be removed by the end of this year, but we neglect the importance of such financial agreements as this one which can release a great deal of energy and useful investment, providing that individuals know what their tax is going to be. So, while I am glad that our puny efforts of 1954 have been brought up-to-date by the right hon. Gentleman, I hope at the same time that they will be as beneficial as the last Protocol was.
I hope that the Government will not seek ways of blocking productive investment between Switzerland and this country. Above all, I hope that the Chief Secretary will give us a satisfactory answer about retrospection, because it is a matter which is very disturbing to business people who have made their plans on the basis of existing taxation. When they find that the tax position is changed, it raises much greater difficulties than anyone realises unless he is a highly skilled accountant like the right hon. Gentleman.
§ 9.25 p.m.
§ Mr. Diamond
May I say to the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) that I do not believe that he will have very secure ground on which to base his hope that his team will be changed. The change on this side is purely temporary, I am glad to say, to accommodate my hon. and learned Friend who, at the moment, is making a most important speech to a savings movement, which I am sure the House will forgive him for attending.
May I deal first with the important element of this Order which, as expected, has caused some anxiety. May I try to put it as fairly as I can without attempting to burk any part of it? I refer, of course, to the allegation of retrospective legislation, and the question why was it necessary to have special enabling powers, and so on, if the matter was not so important. As I am sure the hon. Gentleman appreciates, enabling powers are 1097 necessary to ensure that the provisions of the Protocol shall override the provisions of the Finance Act; otherwise the Finance Act would be supreme. We therefore give powers in the Finance Act to prevent this. That would be the case whether the overriding were to do with retrospection or not.
As to retrospection, and as to people who have to make new provision because they have been working under mistaken assumptions, I repeat what I said. We are retrospectively altering the basis on which a calculation of Corporation Tax payable on the 1st January next is made. Prior to April of this year, prior to the introduction of the Budget, nobody—no firm, no company—could have calculated its Corporation Tax liability. It could not do so for the simple reason that however carefully it went through the steps of the calculation, when it came to the final figure and said, "On £X, the Corporation Tax payable is" (and that £X will have included in certain cases an allowance which is now being withdrawn) it could not have proceeded any further because until Budget day it did not know what figure to take for the rate of Corporation Tax. Therefore, there is no company which could have made precise provision for its Corporation Tax liability until Budget day.
When Budget day came, the Chancellor filled in the gap and enabled companies to make that precise provision by saying two things: first, what the rate of Corporation Tax was to be, and, secondly that this allowance was to be withdrawn. Thus, from that moment, which had never been the case previously, a correct calculation of the tax was capable of being made, and there is no question, therefore, of anybody's calculated liability for Corporation Tax being amended. I hope that I have put the position absolutely fairly and accurately.
Of course my hon. and learned Friend said that there had been an error, and of course I took it from the House and from what had previously been said that the Opposition were at one with the Government in wishing that a double relief for the payment of interest granted in error should be withdrawn. I therefore did not labour the point about justification, for which the hon. Gentleman has asked. I am sure that there is no need to justify the simple proposition that 1098 if an error is made in a provision in a Finance Bill—an error in the sense that it was not immediately appreciated that of all the double taxation agreements there was one which had a form of words embodied in it which when related to the provision to which I have referred would have the anomalous effect of giving relief twice over—it should be put right.
That was the error that was made. It is one which anybody is capable of making, and one for which I, as Minister, accept full responsibility. It is clear that, an error having been made, and double relief flowing from it, the Opposition, just as much as the Government would want that relief to be withdrawn and the matter put right. That is the justification, which is a very reasonable one.
§ Mr. Patrick Jenkin
I do not want the right hon. Gentleman to misunderstand the case made from this side of the House. It is not that it is wrong to correct the anomaly and to put this manifest error right; we are saying that the Government misled the trading community, especially those who make substantial payments of interest and royalties to Swiss recipients. I cannot accept that it is not a valid criticism, because the rate of Corporation Tax was not fixed.
§ Mr. Diamond
I wonder how many of the people to whom the hon. Member has referred were misled into taking action of any kind different to the action that they otherwise would have taken. I cannot think of one case. There was no misleading in any real sense. Any misleading that took place was in the sense that it was said, "When the tax was announced, we believed that at that stage you will be able to claim certain amounts twice over". For those who thought that they could claim twice over—and there were not many such—they could not make the calculation. On what calculation was capable of being made they knew that the allowance would be received once and not twice over, just as it would be in the ordinary case.
To that extent, although I accept responsibility for not having observed that the words embedded in one only of all these double taxation agreements had an effect which, combined with the provisions in the Finance Bill, would result in the curious anomaly to which 1099 I have referred, I doubt whether it is the gravest error that has ever been committed or will be committed in our tax legisation. I do not want to minimise it; I am only glad that we are able to put it right before anybody has suffered any damage of any kind.
The hon. Member asked me a series of detailed questions which I shall now attempt to answer. First, he asked whether this was the only case. He quoted what my hon. and learned Friend had said. I repeat that what my hon. and learned Friend said on that occasion still stands. I have no reason to believe that his words were incorrect in any sense. The hon. Gentleman then asked whether I could give an assurance that there would be no clawing back of relief already given. I cannot think of any case where relief could have been given because, as I have indicated, reference to payment means payment due on 1st January, 1967, and it is not within my knowledge that anybody has been so idiosyncratic as to insist upon paying his Corporation Tax liability months ahead of the due date.
§ Mr. Patrick Jenkin
Will the hon. Gentleman deal with the one exceptional case to which the Financial Secretary drew attention? If he cannot indicate what this would be at this stage, perhaps it can be dealt with by correspondence. It would be useful to know what the one case is that occurred after 6th April, 1964, which could be covered by this withdrawal of relief.
§ Mr. Diamond
Offhand, I cannot think of such a case. Obviously, my hon. and learned Friend had a particular case in mind. I will gladly do what the hon. Member invites me to do and drop him a line on the matter.
He then asked me what effect the whole exercise of amending these various double taxation agreements would have on the balance of payments. He referred to an answer which my hon. and learned Friend had given earlier. That was in reference to the cost to the Exchequer and not to the balance of payments, in relation to the American agreement. I cannot make any estimate as to the cost in respect of the balance of payments of the American 1100 agreement or this agreement, or of the various agreements that will have to be brought in following the introduction of Corporation Tax, which is what the hon. Member was anxious to ascertain.
The hon. Gentleman asked me a question with regard to Article XVIII. The provision here is to make it clear that dividends paid by a United Kingdom company to a branch here of a Swiss parent company cannot be paid without deduction of any United Kingdom tax, as could dividends from a United Kingdom subsidiary company to a United Kingdom parent.
The hon. Gentleman then asked me about Article XIV, which refers to the exclusion of cases where the income consists solely of dividends, interest and royalties. This provision is intended as a means of simplifying the calculations. Interest and royalties are exempt. Dividends suffer at 15 per cent. or, if it is a subsidiary paying dividends to its parent, 5 per cent.
The hon. Gentleman also asked me about paragraph 6 of Article VII A and laid stress on this comment. I should explain that this follows the recommendation of the Fiscal Committee of the O.E.C.D. of which both the United Kingdom and Switzerland are members. If necessary, we will have the benefit of consultation with the Swiss Revenue about what is an arm's-length price.
I believe I have answered all questions, except one to which I will reply by correspondence. I note with pleasure what the hon. Member for Cheltenham (Mr. Dodds-Parker) said. In view of the explanations I have given, I hope the House will be good enough to pass the Motion.
§ Question put and agreed to.
That an humble Address be presented to Her Majesty, praying that, on the ratification by the Swiss Federal Council of the Protocol set out in the Schedule to the Order in Council entitled the Double Taxation Relief (Taxes on Income) (Switzerland) Order 1966, a draft of which was laid before this House on 18th October, an Order may be made in the form of that draft.
§ To be presented by Privy Councillors or Members of Her Majesty's Household.