Motion made and Question proposed,
That an humble Address be presented to Her Majesty, praying that, on the ratification by the Government of Denmark of the Protocol set out in the Schedule to the Order in Council entitled the Double Taxation Relief (Taxes on Income) (Denmark) Order 1966, a draft of which was laid before this House on 28th July, an Order may be made in the form of that draft.—[Mr. MacDermot.]
§ 10.25 p.m.
§ Mr. Patrick Jenkin (Wanstead and Woodford)
This Order and the similar Order relating to Norway may well be regarded as slightly less contentious than the subject of the debate just concluded. I suggest, Mr. Speaker, that it might be for the convenience of the House if, together with the Denmark Order, we consider the Norway Order covered by the second Prayer:That an humble Address be presented to Her Majesty, praying that, on the ratification by the Government of Norway of the Protocol set out in the Schedule to the Order in Council entitled the Double Taxation Relief (Taxes on Income) (Norway) Order 1966, a draft of which was laid before this House on 5th August, an Order may be made in the form of that draft.
§ The Financial Secretary to the Treasury (Mr. Niall MacDermot) indicated assent.
§ Mr. Jenkin
Yes, Mr. Speaker. The Orders are the next two in the long string of Orders which we shall be considering and which the Government are negotiating with overseas Governments as a consequence of the changes in taxation which they introduced last year. When I think of the prospect of about 74 or 75 further Orders which will come before the House during the next year or two I begin to think that we might have some form of automation, with a form of shorthand in which we could put our various points.
I have one or two things to say about the Denmark Order. Where there is a fairly fundamental change in the structure of the double taxation relief it is usual 972 in these Orders that the change should be reciprocal. But in the Denmark Order, which I believe is the first of this nature which we have encountered, the change is wholly unilateral. It is entirely at the instance, though not necessarily to the benefit, of the United Kingdom Government, because it is tantamount to a unilateral withdrawal of relief for the United Kingdom investor in Denmark. One might well suggest in passing that all these Orders should be described not as double taxation relief Orders, but as double taxation withdrawal of relief Orders, for that would be a more accurate title.
The Order limits relief for the underlying tax, the actual company tax paid in the foreign country—in this case, Denmark—to those British investments in Danish companies which represent more than 25 per cent. of the voting power. For portfolio investments, anyone with less than 25 per cent. now has no relief for underlying tax.
Since in the case of Denmark there is the rather strange procedure that there is no withholding tax deducted by the Danish company when paying dividends to an overseas shareholder, the effect of the Order for portfolio investments—perhaps the Financial Secretary may not have appreciated this—is to withdraw all vestiges of double tax relief on British investments in Denmark. When one bears in mind that company tax in Denmark is substantially higher than Corporation Tax in this country—it is 44 per cent. at present—and then the dividends in this country will be subject, with no relief at all, to the full rigours of United Kingdom Income Tax and Surtax, one sees that there is a very considerable reduction in the value of the investment.
One is bound to add that, if the Danish tax rate goes up, as well it might, then, because of the taxation of the profits in Denmark, with no relief for that taxation, and the subsequent taxation of the dividends in this country, the net return to the United Kingdom investor is very nearly eliminated altogether.
This agreement is unusual, as I have said, in that there appears to be no reciprocity at all. This is a unilateral penalising of all existing United Kingdom portfolio investments in Denmark. Why is there no reciprocity here? Why have the 973 Government not been able to get a corresponding provision affecting the Danish investor in Britain?
Perhaps the hon. and learned Gentleman will have in mind the brief exchange we had on this point during our proceedings on the Finance Bill earlier this year. On 21st June, on the Question. "That Clause 28 stand part of the Bill"—it is now Section 30 of the Act—I raised the question whether it is right to maintain the distinction between the 25 per cent. test and the 10 per cent. test, the 25 per cent. being general and the 10 per cent. Commonwealth and most treaty relief. The hon. and learned Gentleman replied:There is a real distinction to be drawn between a relief granted unilaterally and one which is the result of negotiation, with give and take on both sides, where we give up something and get other benefits in exchange. At a time when we are renegotiating agreements—and we have a lot of these negotiations ahead of us—it is not a wise move to lower our sights, as it were, by lowering our unilaterally granted reliefs."—[OFFICIAL REPORT, 21st June, 1966; Vol. 730, c. 521.]Yet here, in one of the first Orders to come before us, the Government have apparently totally failed to get any corresponding side of the bargain from the other party to the agreement. Why? Why have we no reciprocity?
Second, this Order, unlike some of the others we have had, does not deal at all with the other main point requiring negotiation, namely, the adjustment of the rate of withholding tax. This was fixed in the case of much the most important country in double taxation matters, the United States, at 15 per cent., and 15 per cent. is the figure which has been recommended by the O.E.C.D. model treaty for double tax relief.
The House will remember that in this year's Finance Act there is a tiding-over provision in what is now Section 31(2) which provides temporarily for what came to be known as the mirror image relief, that the Revenue in Britain would be bound to grant a corresponding relief at the same level as the foreign company would be entitled to demand from its State. But in Denmark there is no withholding tax. A Danish company paying dividends to overseas shareholders withholds no tax and, therefore, the position is that a British company under Section 31(2) will not be entitled to withhold any 974 tax or, if it does under normal Schedule F, the shareholder will be entitled to the whole of that tax back again, I understand.
This is important, because it means that the Danish shareholder in Britain is in a much more favourable position than the British shareholders. For how long must this inequitable situation persist?
I now turn to the Order dealing with Norway. I have one rather different point to make. Here again, the Order does two things. First, it deals with the question of the underlying tax on portfolio investments—and, on this Order, I have no complaint, for it appears to be a reciprocal 10 per cent. This applies in both cases, which appears appropriate bearing in mind the changes in our tax system. But the Order also does what I have never seen done before in such an Order: it deals with the problem of the Continental Shelf in the North Sea between Britain and Norway and makes, it, as it were, part of the territory of Great Britain, in one case and Norway in the other for tax purposes.
I am puzzled as to why this should be done in a double taxation Agreement. It seems a strange thing to do, because the United Kingdom has made it clear to all its licensees, and makes it a condition of their licences to drill for gas or oil, that they become liable to United Kingdom tax—that is to say, that they are United Kingdom residents and taxable as such for all purposes.
Therefore, so far as Britain is concerned—because the Government have a monopoly right of granting licences—the definition which, under this Order, is given to the territory by including the shelf seems to have no purpose at all. I understand that the Norwegians wanted it because they thought they might not have a right to tax somehow because of the use of the words… a permanent establishment situated in Norway …in the original double taxation convention. It was thought that this would raise doubts, that they had a right to levy the tax and that it should be made clear.
But it is important to remember that this Order not only grants relief from double taxation, but also has various subsidiary purposes, dealing with tax avoidance, and so on. In no sense can 975 an Order of this kind give either party any right to exact a tax which does not already exist under its domestic legislation. If the Norwegians wanted to make sure that companies prospecting in the Continental Shelf should become liable to Norwegian tax, the right course for them—and the British Government should have insisted—would have been to pass legislation in their domestic tax law.
What has been done here by including this provision in a double taxation convention could be dangerous, because it could be that some might seek to argue that the Order by itself has brought within the scope of the domestic tax legislation of one or the other country a prospective taxpayer who would not otherwise be there. It is important to make it clear that these treaties should not be regarded as taxing instruments, but that the tax should always stem from the original domestic legislation of the country concerned.
There seems to be a somewhat questionable principle here and I should be grateful for an explanation from the hon. and learned Gentleman.
§ Mr. R. B. Cant (Stoke-on-Trent, Central)
May I ask the Financial Secretary, when he is replying, to say what effect these Orders will have on the respective balances of payments of Britain, Norway and Denmark? This is likely to be very significant in respect of other Orders which may be initiated.
§ 10.40 p.m.
§ The Financial Secretary to the Treasury (Mr. Niall MacDermot)
To answer the question of my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) first, I cannot give any figures quantifying the effect, but the general effect of both Orders will be to benefit our balance of payments position, because the purpose of them is to give effect to the important provisions following on the introduction of our Corporation Tax system and which require us to amend our double taxation agreements, in particular, to amend any provisions in an agreement requiring us to give portfolio investors in an overseas company credit in respect of their dividends for underlying overseas tax. Secondly, it is necessary to amend any provision in an agreement which no longer satisfactorily 976 provides for the regulation of the tax on dividends flowing from one country to another.
To deal with the first Order, the Denmark Agreement, the hon. Gentleman the Member for Wanstead and Woodford (Mr. Patrick Jenkin), suggested that in it we were conceding things and that there was nothing of a reciprocal nature in it. Strictly, that is not quite correct.
The Agreement does two things. Dealing with the treatment of dividends, the hon. Gentleman asked why this was not provided for in the Agreement, and the answer is that until we are able to renegotiate these Agreements in full, what we have been doing is to concentrate, in the first instance, upon obtaining immediate agreement dealing with the withdrawal of relief of underlying overseas tax. This has been the case in respect of a number of these agreements laid before the House.
As far as the treatment of dividends is concerned, this will be governed, for the time being, by the transitional provisions in this year's Finance Act. These leave them to be dealt with under what is known as "the mirror image provisions", to which the hon. Gentleman has referred, namely, that we will not levy tax on dividends following from this country to a higher extent than the maximum which may be levied by the other country on dividends flowing to this country. In the case of Denmark it is quite correct that, in practice, the Danes do not at present, levy any tax on dividends flowing from Denmark, but they are entitled to levy tax up to 5 per cent. That is the maximum. It is in that way that the 5 per cent. figure is reached in the case of portfolio investment.
Where the recipient is a company controlling not less than 50 per cent. of the voting power in the paying company, then the tax which may be levied is nil. When we turn to the other side of the matter, the withdrawal of the relief for underlying tax, this protocol to the Convention with Denmark withdraws relief completely for underlying tax for portfolio investors in respect of dividends paid after it has entered into force.
With regard to direct investments, under our general law we give relief unilaterally. The question is then a matter for agreement about what the test shall be for this purpose of direct investments. 977 In the absence of any other agreement, it is 25 per cent. generally and 10 per cent. for Commonwealth countries. This agreement with Denmark—and in this respect it is reciprocal—limits the relief to cases where there is 25 per cent. control of companies, because Denmark also adopts a 25 per cent. control test.
The hon. Member for Wanstead and Woodford said that the Norwegian Agreement was the first he had seen which dealt with the Continental Shelf question. If he refreshes his memory by looking at the New Zealand Agreement, he will see that it contained similar provisions. It has, I think, become the practice for some countries to raise this matter in their agreement. This was done in the present Agreement at the request of Norway, because the Norwegians had fears that without a provision of this kind in the Agreement they might be in difficulties.
The general effect of the provision is to extend the definition, respectively, of the United Kingdom and Norway so as to embrace each country's respective share of the Continental Shelf. The intention is to make it clear that each country should have the right to tax the profits from activities conducted on its part of the Continental Shelf. There is no question of either country seeking to impose a charge which does not exist apart from the Agreement. That is certainly not our intention, nor, we understand, is it the Norwegian intention.
The Norwegian fears arose, I think, in this way. The Convention with Norway provides that industrial or commercial properties of a United Kingdom enterprise are not to be subject to Norwegian tax unless the enterprise is carried on in a trade or business in Norway through a permanent establishment situated in Norway. There is a corresponding agreement governing the liability of Norwegian enterprises to United Kingdom tax.
The Norwegians feared that it might be argued, not owing to any weakness or defect in their domestic law but owing to the wording of the main Agreement, that, say, an offshore oil rig operating in the Norwegian part of the Continental Shelf was not a permanent establishment situated in Norway for the purpose of the double taxation Agreement.
The effect of this alteration in the definition would provide an answer to 978 any such argument and would ensure, therefore, as is the common intention, that in such a case the Norwegians would have the right to tax the profits resulting from such an activity. That was why it was included. It was done at the request of Norway and it is done in this Agreement, first, because that is a convenient way to do it and, secondly, because the problem with which it is intended to deal itself arises from a double taxation Agreement.
§ Mr. Patrick Jenkin
Can the Financial Secretary, therefore, confirm that the Order will give no right to the United Kingdom to tax, say, not the licensee, but a company hired by the licensee which was engaged in drilling for oil or natural gas within the British part of the Continental Shelf? The licensee, I understand, under his licence has to be a United Kingdom registered company, a United Kingdom resident company, and, therefore, is automatically liable to United Kingdom tax. The company which it hires to drill the holes does not have to be.
I would be grateful for a categorical assurance that the drilling company which does the work would not become liable to United Kingdom tax by virtue of this Order if it were not liable apart from the Order.
§ Mr. MacDermot
I always hesitate to give categorical assurances on any tax matter unless I am absolutely certain. If I understand aright the question which has been put to me, although I am not clear that I do, my immediate reaction is that the answer does not depend on where the company is resident, but where the activities are carried on. If the activities are carried on in the United Kingdom part of the Continental Shelf, as I understand it, the effect of these provisions is that they are subject to United Kingdom tax, and vice versa.
§ Mr. Patrick Jenkin
I must follow this up, because I thought that that was what the Financial Secretary said earlier was not the case. He said that it was not the intention that this should be used to extend the ambit of taxation beyond what our domestic taxation already provided.
§ Mr. Deputy Speaker (Mr. Sydney Irving)
Order. Is the hon. Gentleman making an intervention? He is unable to make another speech.
§ Mr. Patrick Jenkin
I am aware that I must not make a speech, Mr. Deputy Speaker. I am endeavouring to make an intervention. If a company were not liable to tax under our existing laws, what I am concerned to see is that it should not become liable to tax by virtue merely of this Treaty. If we want to change the law, we should change our own domestic legislation, and not do these things by treaties.
§ Mr. MacDermot
Perhaps there is no difference between us. I adhere to what I said. This does not impose any new liability to tax under our domestic law. However, the position at the moment is that any person carrying on such activities within our share of the Continental Shelf is already, under our domestic law, liable to tax here. I confirm that this double taxation agreement will not impose a liability to tax here in the United Kingdom which does not already exist.
§ Question put and agreed to.
That an humble Address be presented to Her Majesty, praying that, on the ratification by the Government of Denmark of the Protocol set out in the Schedule to the Order in Council entitled the Double Taxation Relief (Taxes on Income) (Denmark) Order 1966, a draft of which was laid before this House on 28th July, an Order may be made in the form of that draft.
§ To be presented by Privy Councillors or Members of Her Majesty's Household.