§ Mr. Speaker
It would be convenient to take the next two Orders together if there is no objection from either side.
§ 10.0 p.m.
§ The Financial Secretary to the Treasury (Mr. Harold Lever)
I beg to move,That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Malaysia) Order 1967 be made in the form of the draft laid before this House on 23rd October. 1967, in the last Session of Parliament.With this, therefore, I shall also deal with the other Order—That an humble Address be presented to Her Majesty, praying that on the ratification by His Majesty the King of the Belgians of the Convention set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (Belgium) Order 1967, a draft of which was laid before this House on 23rd October, 1967, in the last Session of Parliament, an Order may be made in the form of that draft.These Orders relate to the new Double Taxation Agreements with Belgium and Malaysia. I understand that the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) has expressed the view that these matters are not among the most exciting that come before the House. They concern small countries far away and in whose taxation systems there is the minimal interest. Nevertheless, double taxation agreements form an important part of our commercial and fiscal policy. I do not want to trouble the House with unnecessary technical detail, but if any hon. Member is anxious to probe details of these highly technical agreements, I will be happy, with permission of the House, to endeavour to satisfy the questions later on.
I take first the Belgian Convention. This replaces the one signed in 1953. It seems that not only our taxation has had changes in the meantime. The Belgian system has also changed somewhat and as a result it was appropriate to have a new taxation convention.
The House will be most interested in the provisions which deal with dividends, interests and royalties, and the general rule laid down for the future in the Con- 1808 vention is that withholding taxes will have a limit of 15 per cent. on all dividends flowing from one country to another, a rule which is contained in a number of our new agreements.
Withholding taxes on interest are similarly limited to 15 per cent. Royalties, on the other hand, are normally to be taxable only in the country in which the recipient is resident. In drawing up the new Belgian convention, the opportunity has been taken to bring it into line more closely with the model double taxation agreement which the O.E.C.D. has recommended to member countries. We have not completely succeeded in bringing it into line but in most major points it is.
Now I turn to the Malaysian Agreement, where we have a rather more complicated situation. In this case, the agreements being replaced date from 1949–50 and hon. Members will notice that the main part of the new agreement was originally settled as long ago as 1963. There were several constitutional difficulties in Malaysia which account for some part of the delay in finalising the arrangements and, of course, our taxation changes in the meantime have made necessary some adjustments in the final form of the Convention. I should say that at no time were British interests unprotected by a double taxation agreement because the old agreements have been continuously in force and still are. The situation will alter only when the House approves this Convention. Many of the provisions of the new agreement are the same as the old ones.
Now I comment on the treatment of dividends set out in the agreement. Malaysia still operates, as does its neighbour, Singapore, the old tax system we had up to 1965—lamented now by some. I notice that on the benches opposite there is some sign of approval for that lament, although, at the time of the introduction of Corporation Tax, I understood that the party opposite did not give any indication that it intended even if it reformed the existing taxation system to revert to the old one.
The solution we have adopted is the same as in the Singapore Agreement we considered earlier this year. First, there is to be no withholding tax. Secondly, United Kingdom residents with portfolio shareholdings in Malaysian companies 1809 will get no credit for the tax which those companies are entitled to deduct from the dividends and retain, rather as in our old system. Credit, however, will be given to a United Kingdom company which controls not less than 10 per cent. of the voting power in a Malaysian company. In the converse case, Malaysia gives credit for the Corporation Tax suffered on profits here.
In the past, the point has been made that, where countries abroad still operate a system of taxation like that here before 1965, same part of the tax which the company passes on to the shareholder when it pays the dividend should be regarded as attributable to the dividend and credit allowed accordingly. We have concluded that as, broadly speaking, a British taxpayer does not get credit in having his personal Income Tax assessed as underlying tax paid by the company, this is not really consistent with our present system.
We have agreed to give matching credit under the agreement for taxes which are spared under Malaysian legislation with the purpose of promoting development there. This concession, although it is a matching agreement, is likely to be of more use to them than to us, although we have development areas here and if any Malaysian investor comes here and were we to give similar concessions we might achieve some benefit from it.
I commend both agreements. They form part of international co-operation and good behaviour in relation to the treatment of dividends, profits and royalties and these two represent a fair and balanced agreement in each case.
§ 10.10 p.m.
§ Mr. Patrick Jenkin (Wanstead and Woodford)
The Financial Secretary has reiterated a truth of which he will become the more aware as time progresses—that these agreements do not give rise to the most exciting debates. I think that there are more than 60 still to come, though whether he and I will be dealing with them from these positions or vice versa remains to be seen.
In response to his invitation, I should like to raise one or two points on the Belgian Convention and a couple of small points on the Malaysian agree- 1810 ment and then a general point which arises out of both and which may be useful to the Government in considering some of the others. I take them in no special order, but merely in the order in which they appear in the agreements.
Two or three of the provisions in the Belgian Convention appear to be unusual, or at any rate to call for comment. The first is in Article V which defines the term "permanent establishment", because, of course, it is upon the presence in one country of a permanent establishment belonging to a business in the other that the company's taxability in the first will depend. As the hon. Gentleman has said, this closely follows the provisions of the O.E.C.D. model agreement, but there is one remarkable addition. Paragraph 2(h) includes among the things which constitute a permanent establishment sites and facilities used by organisers or operators—called here entrepreneurs—of shows, entertainments, or games of any kind where such sites and facilities are available for at least 30 days. That is not in the O.E.C.D. treaty and in my admittedly fairly limited researches I have not been able to find any comparable provision in any other agreement.
This provision would have the effect that any business which established a stall at a trade fair which was to be open for longer than 30 days and which did business from that stall, as opposed to merely exposing goods for display, would become liable to the tax in the country where the stall was on any profits which it earned at that stall.
This could give rise to dangers. Brussels, of course, is the headquarters of the European communities and we can still remember the great Brussels Fair of 1958 which went on for many months. In more recent memory we have had the Montreal Expo 67 which lasted for many months. Is it intended that under this agreement tax should be charged on the profits of all the firms which display and sell at trade fairs of that nature and, if so, at whose instance, ours or the Belgians, was this provision included and what is the justification for its inclusion?
The danger is that this will seriously inhibit participation in trade fairs likely to last longer than 30 days. Alternatively, 1811 one will have the rather ludicrous position that customers will present themselves at an exhibitors stall at a trade fair and be told, "I am sorry, but we can do no business with you here, or we will constitute a permanent establishment and lay ourselves open to Belgian, or United Kingdom, tax".
The second question arises under Article XI which relates to interest. The usual provision under the O.E.C.D. Treaty is that interest is taxable in the recipient's country. It is here provided that it may also be taxed in the payer's country. This, too, is one of the model clauses in the O.E.C.D. treaty, but that model treaty provides expressly that the rate at which tax may be deducted in the payer's country is to be only 10 per cent. whereas in this case under Article XI (2) the rate is to be 15 per cent. Again, why has there been this departure from the O.E.C.D. model treaty? We are here dealing with two countries which are founder members of the O.E.C.D. and which have close trading ties and one would have thought that they would be able to adhere almost word for word to the model treaty.
My last point on the Belgian Convention is rather more serious and it has caused me a good deal of doubt. We are now dealing with the provisions which appear in all these renegotiated agreements for the refusal of relief for underlying tax, the tax paid in the country where profits are earned by the company where there is only portfolio investment. The relief is limited to those companies which make direct investment in these overseas countries and the normal test for treaty relief is a 10 per cent. share of the voting power. But in this agreement—and I am here referring to Article XXIII—we have what appears to be an entirely novel and additional restriction. In the case of a United Kingdom investment in Belgium, credit for underlying tax, even though there may be a 10 per cent. share of the voting equity, will not be available if the Belgian company has share capital. Perhaps I can read the two or three lines from which I deduce this result:… in the case of income (other than loan interest) derived from a Belgian company other than a company with share capital by a member of that company the credit shall take into account Belgian tax charged in respect of that income. …1812 Why do we have the words:other than a company with share capital".which is a very serious limitation? It means that wherever there is direct investment in a company in Belgium with share capital, there will be no relief for the underlying tax, even if the investment exceeds the 10 per cent. limit. It may be thought that it is a very special sort of Belgian company which occurs very rarely. But my researches have shown that that is not the case. As my bible for these matters I rely on the Stationery Office publication, "Income Taxes outside the Commonwealth." In Vol. 2, paragraph 381 under the general heading, "Companies, Partnerships, &c." it says:Introduction and general principles. (1) The Belgian Commercial Code provides for seven different forms of commercial association possessing legal personality distinct from that of their members. These are briefly noted in paragraphs 384 and 389.Paragraph 384, dealing with the first of these forms of association, says:Public limited companies (sociétés anonyms). These are the ordinary type of limited liability company with capital divided into shares (actions) which are dealt with on a stock exchange.Therefore, one finds that that is the principal form of corporate entity in Belgium, but in the Convention there is a provision which appears to exclude any question of relief for underlying tax, even where there is a 10 per cent. shareholding in such a company, a société anonyme, with a capital divided into shares.
The words therefore appear to nullify even that limited relief which Her Majesty's Government are now graciously pleased to allow to investors in countries overseas. I find it difficult to believe that the words are intended to have the effect I have described. I may be wrong about their effect; I claim no special expertise in this matter. But, if that is the intention, the Order should be withdrawn and the matter examined, though I shall be delighted if there is a rational explanation.
I have two questions on the Malaysia Agreement. The first is on the taxes to be comprised within it. They are defined in paragraph 2 of Article 2 of the Schedule to the Order, to include the income taxes in Malaya itself, in Sabah and Sarawak. Article I of the Annex, 1813 which contains the original Agreement of 1963 says at paragraph 2:The present Agreement shall also apply to any other taxes of a substantially similar character imposed in the Federation of Malaya. …Does the new Malaysian 5 per cent, development tax come within that description? It is a new impost introduced by the Malaysian Finance Minister, Mr. Tan Siew Sin, in the Malaysian Parliament on 15th January this year. It is charged only on business professional and property income, and not on salaries, wages, dividends and interest. Therefore, it is not a mere surcharge on the Malaysian income tax but a new special tax, limited to certain taxpayers and certain kinds of income. It must be at least questionable whether it is a tax of a substantially similar character imposed in the Federation of Malaysia. Will it count for relief? I recognise that, as the Financial Secretary said, this is relevant only in the case of an investor who has made a direct investment in Malaysia—it is an underlying tax.
My second question is about the pioneer tax relief to which the hon. Gentleman referred. This is provided for in Article XVIII (4).
The Malaysian legislation contains special reliefs for new businesses up to five years after their establishment, to encourage new investment in a developing country. But to be effective for an overseas investor it has to be carried over and must constitute an effective reduction of his total liability and it must not be, as for a long time it was, nullified by the overseas relief being promptly ignored by an added charge in this country.
In Section 17 of the Finance Act, 1961, provision was made to give effective relief for this pioneer tax relief. Hitherto, this has been effective in the case of Malaysia, but now applies only to direct investment where there is at least 10 per cent, of the voting power. The Malaysian tax is now like our former company tax. The company pays the tax and dividend and recoups its tax. This is an underlying and not a withholding tax.
Therefore, however much relief the Malaysian Government may wish to give the portfolio investor in Malaysia it 1814 makes absolutely no difference to his ultimate tax burden in this country. He will pay the full United Kingdom tax on his Malaysian dividend with no relief for the taxes paid or spared under the pioneer relief provisions of the Malaysian legislation.
Does this penalty apply—the hon. Gentleman may not be able to answer off the cuff—to portfolio investors in Malaysia from other countries? This is a developing country which is excluded from the Government's main restrictions on overseas investment and which is anxious to attract new investors and prepared to offer tax incentives for this purpose, yet this incentive is wholly without effect on a fortfolio investor from this country. This is an unfortunate result of the change of the Government's policy as it affects Malaysia. There, the new Government has introduced some new tax reliefs, and this has the effect of excluding the portfolio investor from this relief.
This is not a short-term restriction to tide the country over a difficult period with the balance of payments but part of the Government's long-term policy for overseas investment. The irony is that, in last year's Finance Bill debates, we expressly allowed reliefs of this kind to be continued to 1968, so this withdrawing of relief has not been effective during the short term crisis period and will become effective only in the long term. This is a fiscal Alice Through the Looking Glass.
When he introduced Corporation Tax in his Budget of 1965, the Chancellor said that part of his proposals was to alter the balance between home and overseas investment and that this would require the renegotiation of all our existing double tax Conventions. He said:In many cases such relief is given at present under double taxation agreements, and we shall, of course, honour our obligations under such agreements."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 266.]Here we are, nearly three years later, and the reliefs are now being withdrawn.
Article XXIX of the Belgian Convention means that the reliefs are to be withdrawn in respect of Income Tax for any year of assessment beginning on or after 6th April, 1966; in respect of Corporation Tax for any financial year beginning on or after 1st April, 1964; 1815 and, in respect of Capital Gains Tax, for any year of assessment beginning on or after 6th April, 1965. There is a saving provision which makes sure that any reliefs which have existed hitherto and which would give a greater relief than those provided for in the new agreement will continue to apply until the new agreement has been ratified. This somewhat softens the blow. However, I suggest that the time has come when it is rather unrealistic to as it were, backdate the new agreement to the coming into effect of the new United Kingdom taxes and have what will be an ever longer and longer sort of artificial interim period during which the old provisions will continue to apply.
In renegotiating these agreements from now on—and, after all, nearly three years have elapsed since the Chancellor's original statement—they should be expressed to start from the date when they are ratified or whatever may be the most convenient date in relation to the date of ratification. That would do away with any potential undesirable element of retrospection which is always to be deplored in fiscal matters.
I have asked the Financial Secretary a number of questions arising out of these two agreements. If he can provide us with satisfactory answers I have no doubt that we shall be able to let the Orders go through.
§ Mr. Harold Lever
The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) has raised, with his usual erudition, a number of points of great importance about these treaties and my response to his questions may be somewhat involved because there are innumerable systems of taxation throughout the world and innumerable ways of raising taxes. None of them has so far been found to be agreeable, although the pastures in other countries always look a little greener than those in which we graze. If I must refer to other tax systems, I trust that the House will have patience.
The first problem that troubled the hon. Gentleman about the Belgian Agreement was the problem raised by Article V(2)(h). He pointed out that this Article says:sites and facilities used by organisers or operators of … shows, entertainments or1816games of any kind where such sites and facilities are available for at least 30 days … shall constitute a permanent establishment.The hon. Gentleman is troubled by the word "shows". Entertainments or games do not relate to our export trade—unless one thinks that exporting is fun. The real purpose of this is to deal with circuses and temporary entertainments of that kind. The exhibition stall of any English firm may be open for as long as the firm likes, as long as it is an exhibition stall. If selling takes place from the stall, and if that selling lasts for more than 30 days, then it could be treated as a permanent establishment. It would then fall to be decided under Belgian law whether that was so and, of course, we would not be in a position to contest it if the selling had taken place for longer than 30 days.
However, the hon. Gentleman need not trouble himself. A firm may set up a stall and show for any length of time without coming within this provision, provided it does not sell. And if it does sell for longer than 30 days, it can both show and sell. If it goes on selling and showing for a long time it could not help but be brought within the general law and be treated as a permanent establishment; and, presumably, that is why the Belgian authorities insisted that this provision should be inserted. But certainly I would have thought that no English trader would be hardly affected by this.
The second point raised is that the withholding charge on interest is not 10 per cent. as suggested in the O.E.C.D. model treaty, but 15 per cent. These negotiations are always carried on in a confidential and even, one might say, conspiratorial atmosphere, and it is not possible to go through the whole of the discusisons that finally end in what we hope to regard as a balanced agreement fair to both sides. All I can tell the hon. Member is that, though both sides were trying to keep to the O.E.C.D. model, the best that they could do in coming to a balanced agreement was 15 per cent. If that is a sin, it cannot be helped; but it is the best that, in all the circumstances, both parties would agree.
The third point is one of great importance. The hon. Member appears to believe that Article XXIII(1) does not give the normal double taxation relief to investors in limited companies in Belgium 1817 which have a share capital. I think that he is mistaken. That is understandable from the drafting, because it is not drafted with the care with which we draft statutes and contracts in England, but it is clear that his anxieties are without foundation. That article, if I may use somewhat popular language to sum up a provision of this kind, extends to non-share capital companies—that is, a sort of limited partnership company without a share capital—the provisions which are available to ordinary companies which have a share capital; but it does not exclude the relief in respect of those companies which have share capital.
The hon. Member is shaking his head, but I can assure him that both parties to the agreement are clear that it has that meaning, and that meaning derives from the last words of the article:In the case of a dividend paid by a company which is a resident of Belgium"—that means a company with share capital—to a company which is a resident of the United Kingdom and which controls directly or indirectly not less than 10 per cent. of the voting power in the Belgian company, the credit shall take into account (in addition to any Belgian to K payable in respect of the dividend) the Belgian tax payable by the company in respect of its profits.There are two provisions. I know that at first glance they do rather look like one, but there are two provisions contained in Article XXIII(1). One governs what I would call the limited partnership company, and the other governs the ordinary company. We have procured for the ordinary company the normal double taxation relief, and, in addition, ensured that where there are minority companies, which may be called limited partnerships, the same provisions will apply. In the case of limited partnerships we have gone further than with companies because, where there is unlimited liability, an individual can have the whole of the underlying tax relief available to him against his English tax, which would not be the case if it were a company limited by shares.
The hon. Member will see that the consequence is that we not only do not exclude tie share capital type company, but we bring in the limited partnership type company and bring it in on terms exceedingly more advantageous to its 1818 English shareholders than would be the case if it were a share company.
I must now turn to the Malaysian situation. I am asked, first, will the new 5 per cent. development tax in Malaysia qualify for relief as being sufficiently similar to the other taxes to be treated in the same way? The answer is: yes, it will. That is understood with the Malaysian authorities.
The second question asked was, are portfolio investors now precluded from obtaining any benefit from the pioneer relief provisions; that is to say, do they get some benefit from the phantom tax which would have been paid, and is not, because of the pioneer relief? I call it phantom tax, because it exists only notionally. The answer is that we treat phantom tax in the same way as real tax. No phantom can complain of that.
We cannot treat a portfolio or other investor better than if the tax had been paid by the company. The consequence of this phantom relief is as if the company had paid the tax. If that will not result in an advantage to the United Kingdom shareholder, he will not get the relief from the phantom tax, but, equally, he will not get any relief if the company has not paid real tax. If he would have got relief from the real tax, we treat the phantom tax as being exactly as if it had been real tax. It is like politics in this country, where we treat an illusion sufficiently widely held as if it were a real fact. In the same way, the Inland Revenue treats phantom relief as if it was a real relief, and give tax relief accordingly.
I am asked whether this provision on the treatment of phantom tax applies to other countries. As I understand it, countries treat this in a varying manner, and I must ask the hon. Gentleman's leave not to trouble the House with an encyclopaedic review, even if I am capable of it, or capable of having it produced for me, on how this phantom tax is treated by other countries. Some treat it worse than others.
§ Mr. Patrick Jenkin
I am sure the hon. Gentleman appreciates the point that if there is no other substantial body of countries which deprive their portfolio investors of the advantages of what he rightly calls the phantom tax, it places British investors in this Commonwealth 1819 developing country in a very unfavourable position.
§ Mr. Lever
But it is not true that we deprive them of the advantage. As I have said, we cannot do more than treat the company and the shareholder as if the tax had been paid. Therefore, if any relief follows from that, he gets it. And even the shareholder who does not get relief because he would not have got relief if real tax had been paid is better off than if real tax is paid, because his asset growing, undiminished by the application of local tax.
If there is a portfolio investor in a company not paying tax on this relief, that company is thereby advantaged. The company is getting the full benefit of the tax relief, and the shareholder is not being penalised in any way, because the tax is a phantom tax and not a real one. I think that the hon. Gentleman's complaint on that score is really misconceived.
I do not know what more the hon. Gentleman wants us to do. Would he want us to treat the phantom tax as more valuable, that is, treat the tax that is not paid as more valuable than the tax which the company in Malaysia has paid? That treatment would be somewhat eccentric, and although we have many faults in our Inland Revenue system, deliberate eccentricity is not one of them.
Finally, the hon. Gentleman asked us to stop this habit of retrospection to the beginning of the new tax system of 1965. The reason for this is the great convenience to both countries, but I assure the hon. Gentleman that no English taxpayer is any worse off. He can only be advantaged by this habit of retrospection. The hon. Gentleman said that all retrospection is undesirable. Speaking as a taxpayer, I am prepared to welcome—and I think that it would be given a general welcome by all taxpayers—any retrospection which advantages me.
I appreciate that retrospection to one's disadvantage is open to grave criticism. I think the hon. Gentleman knows that I am not enthusiastic for that form of retrospection, but no taxpayer can complain if the State decides to have retro- 1820 spection which is convenient to the two countries in the double taxation agreement, and then says to him, "You can pick whichever system you like, whichever suits you best, whichever pays you more. If you want the old system to be treated as being in force for the purpose of computing your tax because that suits you better than the new one, you can have it until the House brings it into law. If you prefer the new tax system, and it is better for your pocket, you can have that". I think that the hon. Gentleman is erecting a principle which does not exist.
What we are doing by retrospection is giving the taxpayer an option. We are not imposing a new liability on him. We are giving him an extra option. For once he may benefit from administrative convenience. In those circumstances, I do not think that the hon. Gentleman ought to take it to heart too much if we present the British taxpayer with this option, largely on the ground of administrative convenience.
I hope that I have satisfied the hon. Gentleman and the House that these agreements ought to be passed into law.
§ Question put and agreed to.
That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Malaysia) Order 1967 be made in the form of the draft laid before this House on 23rd October, 1967, in the last Session of Parliament.
§ To be presented by Privy Councillors or Members of Her Majesty's Household.
That an humble Address be presented to Her Majesty, praying that on the ratification by His Majesty the King of the Belgians of the Convention set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (Belgium) Order 1967, a draft of which was laid before this House on 23rd October 1967, in the last Session of Parliament, an Order may be made in the form of that draft.—[Mr. Harold Lever.]
§ To be presented by Privy Councillors or Members of Her Majesty's Household.