§ 8.23 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 on the ratification by the Government of the Kingdom of the Netherlands of the Convention set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (Netherlands) Order 1967, a draft of which was laid before this House on 27th November, an Order may be made in the form of that draft.
§ This is another of the Double Taxation Orders which are gradually being brought before the House. I can only apologise for the fact that these, unlike troubles, come singly. The House would prefer them to come in groups. It is unfortunate that on this occasion, and with my apologies, it comes as a single one.
§ This new Convention is to replace the existing Double Taxation Convention between the United Kingdom and Holland which was signed on 15th October, 1948. The new Convention retains much of the substance of the 1948 Convention, but the opportunity has been taken to bring the text more closely into line with the model articles which the Organisation for Economic Co-operation and Development has recommended member countries to adopt. I will try to state in summary the most important variations from the 1948 Convention and, if any hon. Member has that detailed curiosity which sometimes uncomfortably emerges in these discussions, I will do my utmost to cover the points raised.
§ First, and perhaps most important, is withholding tax on dividends. The 1948 Convention provided, in effect, that dividends flowed from company to company in both countries without any withholding tax. The new Convention in general permits each country to charge a tax on dividends paid to residents of the other country at a rate not exceeding 5 per cent. in the case of dividends received by a company with a holding of 25 per cent. or more in the paying company and in all other cases 15 per cent.—-that is, 5 per cent. where there is a 25 per cent. holding, which is treated for this purpose rather generously as being a semi-subsidiary company, and in all other cases 15 per cent. Where income continues to be taxable in both 139 countries, relief from double taxation is given by the country of the taxpayer's residence. That will be the position under the new Convention.
§ The new Convention also includes provisions, absent from the 1948 Convention, whereby capital gains are normally to be taxed only in the country of the taxpayer's residence, unless they arise from the disposal of the assets of a permanent establishment which the taxpayer has in the other country.
§ Under the new Convention, as under the 1948 Convention, shipping and air transport profits and certain trading profits not arising through a permanent establishment are to be taxed only in the country of the taxpayer's residence. Government salaries and pensions are normally to be taxed by the paying Government. Payments made for the maintenance of visiting students are, subject to certain conditions, to be exempt in the country visited.
§ The Convention is in general to take effect in the United Kingdom for all years for Corporation Tax and for 1968–69 and subsequent years for Income Tax, Surtax and Capital Gains Tax. The 1948 Convention is superseded as from the dates on which the new Convention is to take effect, subject to a saving to prevent the retrospective withdrawal of relief due under the 1948 Convention.
§ I hope that this modest agreement which has been reached covering double taxation with the Netherlands will meet with the approval of the House.
§ 8.23 p.m.
§ Mr. Patrick Jenkin (Wanstead and Woodford)
The Convention certainly accords very closely with the Model Convention of the O.E.C.D.—indeed, perhaps more closely than any other we have yet considered in this current series. Therefore, I have very few points to make on it.
One point which I might make by way of introduction is that I am delighted to see that my words spoken last Thursday night in objecting to the retrospective element in many of these Conventions have so rapidly borne fruit.
I confess that this was probably in print before I addressed the House on Thursday, but the fact is that, contrary 140 to what we have had so far, this Convention is expressed in Article 31, paragraph (2,a,i):In respect of income tax (including surtax) and capital gains tax for any year of assessment beginning on or after 6th April, 1968.I am delighted to see that, and I hope this precedent will be followed, rather than the other which I criticised last week.
The one question I should like to address to the Financial Secretary on the Convention arises out of Article 11, which is the article concerning withholding tax on dividends and which he described briefly, succinctly and accurately to the House a moment ago. My question arises on paragraph (7) which provides as follows:Not later than five years after the date of the entry into force of this Convention the taxation authorities shall consult together to study the possibility of an amendment of this Convention which would reduce the rate mentioned in paragraph (2a) of this Article.The rate mentioned in paragraph (2,a) is the withholding rate of 5 per cent. which the Financial Secretary properly said will be the rate allowed on investments which amount to more than 25 per cent. of the voting power.
This appears to raise a question. With the 5 per cent. withholding tax it seems that both the United Kingdom investor in Holland and the Dutch investor in the United Kingdom are treated broadly similarly. In each case the foreign tax paid both as the underlying tax and as the withholding tax will exceed the tax which would have been payable in the investor's own country. Therefore, no further tax would be paid, the whole amount of the tax in the investor's own country being relieved as a credit under the double taxation Convention.
If the 5 per cent. withholding tax is abolished—which is clearly possible under the terms of paragraph (7) which I have just read—then, whereas this would continue to be true of the United Kingdom investor in Holland, it would no longer be true of the Dutch investor in this country. This arises because the rate of Corporation Tax in Holland is currently 46 per cent. whereas the rate of Corporation Tax in this country is 42½ per cent.
Therefore, the question I ask is: will not the effect of removing the 5 per cent. 141 withholding tax be to create a greater imbalance between the two sides than already exists if it is retained? Inevitably the rates of tax differ. There is bound to be some imbalance. Would not the effect of removing this withholding tax be to increase imbalance to the detriment not only of the United Kingdom investor in Holland but also of the United Kingdom Revenue, in that if the 5 per cent. withholding tax is removed the Dutch investor in this country would pay only his 42½ per cent. Corporation Tax on that share of his profits and would create the difference between that and the 46 per cent. tax in his own country to the Dutch Revenue?
§ Mr. Harold Lever indicated assent.
§ Mr. Jenkin
I am not wholly convinced that I am right, but I am glad to see the Financial Secretary nodding. Does not this seem to lead to the conclusion that the United Kingdom Government would be wise to resist any move by the Dutch authorities to remove or even reduce this 5 per cent. rate?
This leads me to a further question. If this is right, why was this provision included? Did the British Government feel it necessary to accede to a Dutch request that this provision should be included? Can the Government at this stage give any indication of what their attitude would be if the Dutch Government came forward with a request to invoke the provisions of paragraph (7) and start to negotiate for the reduction or even the removal of the 5 per cent. withholding tax? If the hon. Gentleman can throw a little more light on this provision, I see no reason why the House should not accede to his request to give this Order an unopposed passage through the House, and we could let it go like that.
§ 8.34 p.m.
§ Sir Eric Errington (Aldershot)
I should like to ask a simple question arising out of Article 31. The article states that the Convention shall have effect, in respect of Income Tax and Capital Gains Tax, on 6th April, 1968; and in the case of Corporation Tax, in the year beginning on or after 1st April, 1964. I hope that the question I have to put is simple and susceptible of simple answer. Is there a distinction between the effect of the statutory Instrument of 1948 and Article 31 of the Convention?
142 I ask that question in regard to all the matters covered save Capital Gains Tax and Corporation Tax, which did not exist in 1948. I have in mind anyone who would get the benefit of this double taxation relief in respect of Income Tax and Surtax. Will there be any difference in effect for the ordinary man in the street who receives dividends during this year and next year? I think that I understand the effect as regards Corporation Tax, though I am not sure why the date is 1st April, 1964.
§ 8.35 p.m.
§ Mr. Harold Lever
The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) asked about Article 11(7) and wanted to know why it was there. I am sorry not to be able to be specifically enlightening upon the circumstances which lead to the finalising of any particular Article and its paragraphs. These are all the subject of careful negotiation, as the hon. Gentleman knows, and, in the nature of things, the negotiations have to remain confidential. Otherwise, it would not be possible to have the free contact of minds which is necessary to achieve treaties of this kind.
All I can tell the hon. Gentleman is that, after discussion about the arrangements covered by Article 11, the parties came to the conclusion that it would be desirable and useful if, after five years, we could look at the matter again. It will be observed that this represents a change from the previous 1948 Convention practice. The parties have agreed that, in the circumstances, they will look at it again together if necessary, if either of them wants to, in five years.
§ Mr. Patrick Jenkin
The paragraph beginsNot later than five years…It can be renegotiated within five years, as I understand it.
§ Mr. Lever
I accept the correction. Within five years, we can talk about it and look at it further. What view would be taken at any point during the five years, if the Netherlands Government asked us to consult or if we asked them to consult about it, I cannot say at this time. As the hon. Gentleman said a day or two ago, when we discussed the double taxation treaty with Belgium, there may come a time when I shall be 143 on the other side of the House discussing these somewhat esoteric matters and he will be on this.
§ Mr. W. Howie(Luton): Never.
§ Mr. Lever
I recognise that that is exceedingly improbable, but the hon. Gentleman seems to regard it as probable. However, even as a possibility, one must exclude the thought that I should attempt to forecast what the hon. Gentleman would say were he in my position when the relevant consultations took place. All I can say at this stage is that, whether his computations are right or wrong, we shall bear in mind what he said about the consequences if any consultations do arise.
In reply to the hon. Member for Aldershot (Sir E. Errington), I can only say that no one will be worse off retrospectively by reason of this Convention. The 1948 Convention is kept in force so far as it confers a benefit which would otherwise be taken away up to the date of this Order coming into force. Therefore, the hon. Gentleman can be quite clear that until today every United Kingdom citizen is treated for tax purposes at least as well as he would be treated under the 1948 Convention. I think that the hon. Gentleman went on to ask how the new treatment will compare with the old.
§ Sir E. Errington
On dividends. There are other matters to which I need not refer. I ask only about the Income Tax position.
§ Mr. Lever
As I thought I had explained, the old position was that neither Government took anything for dividends. Under the new Convention, if one has a holding of 25 per cent. or more in a Dutch company a 5 per cent. withholding tax will be taken from the dividend. If one has a holding of less than 25 per cent., a 15 per cent. withholding tax will be taken from the dividend. Both withholding taxes are new, because the previous Convention arranged that no withholding tax would be taken by either party. I think that that meets both the hon. Gentleman's points. If I have not quite followed them I would gladly go into them later with him.
As the hon. Member for Wanstead and Woodford said, the Convention 144 closely follows the O.E.C.D. recommendation, with this modification. I hope that the Convention is acceptable to the House.
§ Question put and agreed to.
§ That an humble Address be presented to Her Majesty, praying that on the ratification by the Government of the Kingdom of the Netherlands of the Convention set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Incomes) (Netherlands) Order 1967, a draft of which was laid before this House on 27th November, an Order may be made in the form of that draft.
§ To be presented by Privy Councillors or Members of Her Majesty's Household.