DOUBLE TAXATION RELIEF (CANADA, TRINIDAD AND TOBAGO AND SINGAPORE) (Hansard, 6 March 1967)

§ The Financial Secretary to the Treasury (Mr. Niall MacDermot)
I beg to move, That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Canada) Order 1967 be made in the form of the draft laid before this House on 23rd January. It may be convenient, Mr. Speaker, if we discuss, at the same time, the following two Instruments: That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Trinidad and Tobago) Order 1967 be made in the form of the draft laid before this House on 7th February. That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Singapore) Order 1967 be made in the form of the draft laid before this House on 10th February.

§ Mr. Speaker
I have no objection to that course, if the Opposition have no objection.

§ Mr. Patrick Jenkin (Wanstead and Woodford)
It seems to be a perfectly satisfactory course, Mr. Speaker.

§ Mr. MacDermot
These are three further double taxation agreements which have been renegotiated recently. As the House will remember, we have been renegotiating a number of agreements in consequence of the changes in the taxation system, with the introduction here of Corporation Tax and Capital Gains Tax. As it happens, these three agreements were all terminated by the other country and while, naturally, we have taken into account in the negotiations the tax changes in this country, the renegotiation would have been needed in any event in all three cases.
There are advantages in this because it enables us to bring these agreements up to date and embody in them, as we have done in many other agreements, many of the new model provisions which were laid down by O.E.C.D.—or if not to adopt them completely, to adopt them with modifications. It might be convenient if I briefly explain the provisions of the three agreements.
The Canada Agreement first. The previous comprehensive agreement, which dates back to 1946, was determined by the Canadian Government from April, 1965, and the House will remember that there was a limited interim agreement which was signed in December of that year and approved by the House. This is now the new comprehensive agreement which, in effect, incorporates the substance of that limited agreement with one exception, in that there is a special rule concerning the profits of Canadian life assurance companies. This is dealt with in Article 6 (7). It retains much of what was contained in the old 1946 Agreement and it contains several new provisions, the more important of which I shall mention.
First, in dealing with the treatment of dividends flowing from one country to another, in general, each country has agreed that it should have the right to impose a withholding tax limited to a maximum of 15 per cent. This is subject to special withholding tax exemptions contained in Article 9 (4), which deals with the case where dividends are paid to a shareholder in the other country and 90 per cent. of the paying com- 962 pany's income is derived from a business carried on in that other country.
For this exemption to operate—and it operates particularly in relation to investments of British companies operating in Canada—the Canadians give up their right to impose their additional 15 per cent. non-resident's tax, as it is called, and which was a special protection measure which they adopted as a result of many, particularly United States, companies operating in Canada through branches rather than through subsidiaries to avoid the withholding tax.
Secondly, the relief for underlying tax follows the common form in that it is restricted to that which we are prepared to give unilaterally. In other words, relief is given only where the recipient of the dividends is what I would call a 10 per cent. parent; that is, a parent company in the sense that it controls 10 per cent. of the voting power of the paying company.
Thirdly, on the matter of interest payments, each country agrees to limit the tax which it may pay on interest flowing to the other country to a 15 per cent. rate.
Copyright royalties are still to be exempt in the country of origin, and other royalties may be taxed up to 10 per cent. in the country of origin.
The agreement contains a provision in Article 12 covering capital gains. This is based on an O.E.C.D. recommendation and is provided against the eventuality of Canada later introducing a capital gains tax. It does not operate at the moment.
There are a substantial number of other provisions in the agreement. As I have said, it retains the substance of many of the 1946 provisions and the wording has been brought more closely into line with O.E.C.D. Articles.
The agreement also provides that certain classes of income are to be exempt in the country of origin. Some of these are of considerable importance to us. They include shipping and air transport profits, certain trading profits not arising through a permanent establishment, pensions, purchased annuities, and earnings of temporary business visitors.
Government salaries are normally to be taxed by the paying Government only, 963 and there are also provisions under which the remuneration of visiting professors and teachers, and payments made for the maintenance of visiting students and research workers may be exempt in the country visited.
I turn now to the second Order, relating to Trinidad and Tobago. The previous agreement was terminated with effect from 1st April, 1966, owing to changes in their tax system which were analogous to ours. As both countries now have the Corporation Tax system, it has been agreed that in the treatment of dividends each country will be permitted to charge up to 25 per cent. withholding tax on portfolio investment and up to 15 per cent. on direct investment, the test of direct investment for this purpose being a holding of 25 per cent. voting power by the parent company in the subsidiary.
There is provision for relief for underlying tax. It is already limited to payment of 10 per cent. voting power of the parent company. The interest provisions, again, are the same as under the Canada Order—

§ Mr. Patrick Jenkin
Can the hon. Gentleman say something about the disappearance of the pioneer tax relief as it affects this Convention?

Mr. MarDermot
I will come to that later, if I may.
I turn now to the royalties provision. Copyright royalties are to be taxed only by the recipient countries, but other royalties up to 15 per cent. Most of the other provisions follow the general line which I outlined in relation to the Canada Agreement.
The hon. Gentleman referred to the point that under this agreement, unlike the next one, there is no provision for matching credit, the term given to the position where developing countries, when they introduce provisions to spare tax on investment which is intended to promote development, the other country from which the investment comes sometimes agrees to give matching credit, the effect of which is that the benefit of the tax concession goes to the investing taxpayer rather than to the Exchequer of the country concerned.
The reason for the different treatment here is that this was an agreed provision 964 and a necessary provision in order to get a balance for the whole of the tax agreement. This is not the only difference between the Trinidad and Tobago Agreement and the Singapore Agreement, and it was on this basis that we were able to reach agreement with the Trinidad and Tobago Governments. Both Governments are satisfied that the agreement, as a whole, gives a fair balance, and it was signed and agreed on that basis.
The previous Singapore Agreement, which dates back to 1949, was terminated by the Singapore Government as from a date in 1962. A fresh agreement was negotiated and signed under the previous Administration in August, 1963, but it was never brought into legal effect owing, in the first instance, to the constitutional changes in Singapore, and then later to the United Kingdom tax changes.
Singapore continued, by unilateral action, to give the reliefs which would have been due under the 1963 agreement. The new agreement is in effect, a revised version of the 1963 Agreement, which is operative, with necessary adaptations, from the 1962 date of expiry of the old agreement.
If I may refer briefly to the main changes, Singapore is still operating on what I may call the old tax system which we had before the Corporation Tax system—[HON. MEMBERS: "Hear, hear."] I hear some murmurings of, "Hear, hear." I do not know whether the Opposition have changed their mind and want to abolish the Corporation Tax system, but I thought that we had argued the details and that the principles had been agreed.

§ Mr. Speaker
Order. Hon. Members must keep to the Order in front of them.

§ Mr. MacDermot
We have accordingly agreed to retain the old rule that neither country will impose a withholding tax on dividends flowing to the other country. This is subject to certain exemptions which are to be found in Article 7. It is perhaps important, in this connection, that the income tax which the Singapore Government levy on companies is a 40 per cent. tax, so that the rate involved is the same as that under our Corporation Tax system. The balance of this new arrangement is that there is almost identical tax treatment for dividends 965 flowing in either direction. The credit which one country has to give for the other's tax in relation to dividends is limited, first, to any withholding tax charges which may be made under the exceptional cases to which I referred a moment ago, and, secondly, as in the other agreements, to underlying tax only in the case of direct investment where dividends are paid to a parent with 10 per cent. voting power control.
The other important points in the agreement are that we agree to give matching credit, in this case for taxes which are spared under the Singapore legislation, to promote development, and as under the Canada Agreement, there is a precautionary provision to meet the eventuality of their introducing a capital gains tax. Another difference between this and the Trinidad and Tobago Agreement is that in this case all royalties, not only copyright royalties, are taxable only in the country of the recipient.
All these three agreements are the result of careful negotiations, and the variations between them are the result of particular circumstances peculiar to each of the countries concerned. In all cases we are satisfied that they are fair and balanced agreements, and I commend them to the House.