§ 10.10 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) (Australia) Order 1968 be made in the form of the draft laid before this House on 17th January 1968.I am glad to be able to bring forward a number of double taxation Orders to the House, which I know is avid for such Orders, finding them an irresistible fascination. I have four to present and am glad to be able to do so on one occasion, because the House's appetite is best sated by dealing with a number all at one time.
§ Mr. Patrick Jenkin (Wanstead and Woodford)On a point of order, Mr. Speaker. Perhaps it would be convenient to deal separately first with the Australian Agreement, on which there are a number of points. Then we could deal with the other four, smaller Orders. If the Financial Secretary would agree, we should be pleased to go along with that.
§ Mr. SpeakerIt is a matter for the convenience of the House. We can, therefore, take the Australian Order first and then discuss the following four together.
§ Mr. LeverThe first and most important is the Australian Agreement. The existing agreement with Australia, which this one replaces, was signed in 1946 and was one of the first of our comprehensive double taxation agreements to be negotiated. In a number of respects, the 1946 agreement's provisions needed revision. From our point of view, it was particularly necessary to make amendments having regard to the tax changes which occurred in 1965 and, at the same time, we were anxious to bring this agreement more into accord with the model convention drawn up by the O.E.C.D. In spite of the House's appetite, to which I have alluded, for details of such agreements, I do not propose or this occasion to weary the House with too long an exposition. I will summarise as briefly as I can the main points.
First, the withholding tax on all dividends flowing from one country to the other is limited to 15 per cent. Under the 788 old agreement, dividends flowing to a U.K. parent company from a wholly owned Australian subsidiary were completely exempt from this tax and, under the so-called "mirror image "legislation—Section 31 of the Finance Act, 1966—dividends flowing from a wholly owned U.K. subsidiary to an Australian parent company have been similarly exempted altogether. In future, however, such dividends will be subject to the same withholding rate as any other dividend—that is, both the parent and the subsidiary dividends.
Secondly, in accordance with practice in all the agreements we have negotiated since the introduction of Corporation Tax, credit will be given for Australian underlying tax only in the case of direct investment—that is, where a U.K. company controls at least 10 per cent. of the voting power in the Australian company paying the dividend. That is normal practice. Thirdly, provision is made for the first time of a maximum withholding rate on interest. Under the old agreement, both countries were free to impose their full domestic rates, but the new agreement limits tax which can be withheld to 10 per cent.
Fourthly, the new agreement allows the country from which royalty payments are made to withhold tax from them up to a maximum of 10 per cent. whereas under the old agreement only the country in which the recipient of the royalties resided could charge tax.
Those are the main points of this interesting agreement which I commend to the House.
§ 10.15 p.m.
§ Mr. Patrick Jenkin (Wanstead and Woodford)I am grateful to the Financial Secretary for his brief exposition. One or two of my hon. Friends have questions to put and we would be happy if the hon. Gentleman would then reply to the debate.
Before coming to questions of detail, it is salutary, on important agreements, such as this most certainly is, to stand back for a moment and try to look at its overall effect. The Financial Secretary has remarked that the original Australian Agreement was one of the very first to be negotiated. It was signed more than 21 years ago, in October, 1946. The 789 circumstances obtaining then were very different from those which obtain today. In those days it was possible for the United Kingdom to insist that the whole of the tax arising from United Kingdom shipping companies which were United Kingdom owned should accrue to this country. Similarly, it was possible for us to insist that dividends paid by wholly-owned subsidiaries in Australia of British parent companies should suffer no tax in Australia.
Without doubt, the new agreement represents a marked swing away from that pattern of events. Perhaps the most noteworthy feature of the new agreement is the extent to which the Australian Treasury benefits to an extent vastly greater than does its U.K. counterpart. One tends to look at these double taxation agreements from the point of view of the taxpayer, from the point of view of the investing company, and therefore to look at the ambit of taxation and the extent o relief from the individual's point of view.
However, it is no less important to consider it from the point of view of the effect which the agreement has on the Exchequers of the two countries. The striking thing is the imbalance of the effect, and this calls for some inquiry. One has only to list the changes under this head to recognise what has happened. I take them in no particular order.
Under Article 8 we have the withdrawal of the exemption from Australian tax of dividends received by a U.K. holding company from a wholly-owned Australian subsidiary. In the same Article is the restriction of the United Kingdom tax deducted from dividends to 15 per cent., thus reducing the tax available for credit against the Australian tax on shareholders. That, too, operates to the advantage of the Australian Revenue. In Article 9 is the new imposition of a 10 per cent. withholding tax on interest paid from Australian sources to U.K. residents. In Article 10 is the imposition of a new 10 per cent. withholding tax on royalties paid from Australian sources to U.K. residents, which the Financial Secretary mentioned.
In Article 6 we find that the Australian Government is entitled to levy tax in certain limited circumstances on 790 British ships provided that they operate solely within Australian waters. In Article 16 is the restriction of the exemption of U.K. professors and teachers visiting Australia to cases where the income is taxed in the United Kingdom.
Under Article 8, one has now the total exemption from the United Kingdom Tax of dividends paid to Australian shareholders in certain U.K. companies deriving income from operations in Australia. Each and every one of these operates to increase the proportion of tax taken by the Australian revenue. In addition to these advantages, the Australian Treasury benefits under the terms of the Income Tax Assessment Act 1967, which withdrew, as from 1st July last year the right to treat the withholding tax deduction as provisional, and requires a computation of Australian liability as a whole to he made.
In many cases of small Australian incomes this has resulted in repayment of the whole or part of the withholding tax and this repayment will no longer be available to U.K. residents. One can go on. The Australian Treasury also proposes to tax interest and royalties received by Australian resdients from U.K. sources subject, of course, to the credits of the 10 per cent. withholding tax which the Convention allows to be deducted.
All of these represent advantages to the Australian revenue. What do we get from our side? The U.K. Treasury benefits really effectively only in one respect and that is in Article 19, the restriction of credit for underlying taxes to the cases of direct investment, cases of companies which have at least 10 per cent. of the voting control of the company in Australia. That appears to be virtually the only advantage which the British Treasury gets from this. If one takes this position and recognises that the occasion for the renegotiation of this long-standing agreement was because the British Government introdunced their new taxes, and particularly the new pattern of Corporation Tax, one is bound to conclude that we have here a really very indifferent bargain.
In some senses it reflects a switch in what I believe is referred to, in tax circles, as fiscal sovereignty, that is to say, it reflects the increased economic power and independence which Australia 791 now enjoys compared with the position 21 years ago. Thus it was that the Treasurer in Australia, the right hon. William McMahon, M.P., was able to say, when the new agreement was published:
The Government—that is, the Australian Government—… is confident that, from Australia's standpoint, the new agreement is a distinct advantage on the old.…I am bound to say that no British Chancellor could say that.I am bound to ask: was it not possible to retain any of the Pioneer Tax reliefs which could extend reliefs in this country by virtue of the 1961 Finance Act? For instance, there is the 100 per cent. exemption on uranium profits under Section 23(d) of the Australian Act, or the 20 per cent. exemption from profits from mining of minerals, under Section 23(a). These are all things which the British National Committee of the International Chamber of Commerce asked when they knew that this agreement was to be renegotiated. In view of all the advantages which I have listed which accrue to the Australian revenue was it not possible for the British Treasury at any rate to get some of these concessions?
I now have one or two particular points to raise on the agreement. There is a very peculiar phrase in Article 4(2) where, defining the term "permanent establishment", there is included "a management." Surely this should be "a place of management"? If one studies the Conventions relating to Canada, New Zealand, Germany, Singapore, Trinidad and Tobago, all of which have been renegotiated in the last few months, every single one refers to "a place of management". Why have we got this extraordinary phrase, that "permanent establishment" includes "a management"? I suggest that this is almost meaningless. I wonder whether there has been a misprint which can be presumably put right without any further Parliamentary procedures.
In paragraph (2,h) a "permanent establishment" includes
a building site or a construction, installation or assembly project which exists for more than six months"—792 that is to say, the profits are not exempt from tax in the country in which the building has taken place if it lasts for longer than six months. The Canadian agreement contains a similar provision, but the Canadian Government were able to get in a period of 12 months, twice the period in the Australian Agreement.If one is to have such a term, 12 months is a much more reasonable period. There must be very few major projects which an overseas construction company could complete within six months. There must be a good many more which could be done within 12 months. It cannot be right to subject overseas construction companies to tax on the footing that they are resident in the overseas territory merely because they work for six months.
In paragraph (5) of the Article, there is the question of the selling agent—the agent who operates in the overseas territory on behalf of the enterprise in the home territory. There used to be in the old Australian Agreement a very useful exception to this, that if the agent merely concluded contracts at prices which were authorised by his principal, that did not turn the agent into a permanent establishment in the overseas country. That exception has been removed. Therefore, if he has any authority at all to conclude contracts, even though he may have no discretion as to price, he is still regarded as a permanentestablishment. This seems unreasonable.
The Financial Secretary has referred to Article 8 which concerns dividends. The only point which one can make is that, although this is a mirror image and this 15 per cent. withholding tax applies equally to both, because of the pattern of investment between the two countries, this operates in favour of the Australian Revenue and against our own.
In Article 10 we have the new tax on royalties. Paragraph (6) reads:
Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties paid exceeds the amount which would have been agreed upon in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount.This is our old friend the commercial rate of royalty, which excludes any special circumstances. The Financial Secretary 793 will remember, because I believe that he took part in the debates, the great arguments which we had when we discussed this matter in relation to close companies. On 21st June, 1966, the Chief Secretary said—and he said similar things over and over again; I quote only one instance because otherwise it is a work of supererogation—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.]Yet that is exactly what paragraph (6) requires to be done. I believe that this is right. Paragraph (6) is an entirely operable paragraph in the Convention. But one is bound to ask why it was, when it came to close companies in this country, the matter was so impossible. Does not paragraph (6) demonstrate the falsity of the argument with which the House was then being confronted?I should be grateful if the Financial Secretary would look at paragraph (4) of Article 19. This raises a somewhat more complex point which I hope I shall be able to explain quite briefly. Article 19 provides for the allowances of credit against either United Kingdom or Australian tax any tax suffered in the other territory. Paragraph (4) is, I understand, something new in a double tax treaty of this sort. To explain it simply, this enables a company in one of the territories to obtain double tax credit for tax suffered in the other territory on profits which are deemed to arise where, by reason of the two companies concerned, although not at arm's length, the profits in the other territory are less than they would have been if the transaction had been at arm's length. This is a perfectly logical and sensible provision, and to that extent, of course, one welcomes it.
However, although the position is clear as between two companies, and this is what the Article refers to, one in the U.K. and the other in Australia, the position is not so clear, at least so far as I understand, where the U.K. company is trading in Australia not through a company but through a branch which is permanently established. If the branch profits are not those which could be expected, if the transaction is at arm's length under Section 136 of the Australian Income Tax Assessment Act, 1936–66, the 794 commissioners of taxation can in Australia increase the assessment to cover the profits which could have arisen.
This situation is exactly the same as that described in relation to the two companies to which Article 19(4) applies, but the question is this. It is very far from clear that the situation which the Australian Act takes account of, that is to say, between the enterprise and one of its own branches, applies under the double taxation convention. In other words, will relief be given for the additional tax which will be charged? It has been suggested to me that Article 5(1) and (8) may cover the position, but it is certainly not anything like as clearly stated as it is in relation to the two-company situation which is dealt with in Article 19(4). If the Financial Secretary could perhaps clarify that situation I am sure that it would be helpful.
In conclusion, one is bound to think that this agreement does not represent a red letter day either for the U.K. taxpayer or for the U.K. Revenue. We recognise that, of course, many of the changes are forced upon us by recent changes of circumstances between ourselves and Australia since the original taxation convention was negotiated, but, nevertheless, it does represent a substantial shift in fiscal sovereignty, and it has to be recognised, I think, as inevitable. If the Financial Secretary can answer the questions put to him—I know that one or two of my hon. Friends have questions on this—we perhaps can allow the agreement to go through, although without any great enthusiasm.
§ 10.32 p.m.
§ Mr. Cranley Onslow (Woking)I should like briefly to raise one small point where, I am glad to say, neither Treasury appears to draw any advantage. This arises out of one of the terms of the old agreement, and concerns the question of British war widows resident in Australia. It was originally drawn to my attention some nine months ago by the Officers Pensions Society.
I understand that under the old agreement British war widows resident in Australia were obliged to have British tax deducted from their pensions whereas in Australia war widows are not subject to tax, and this created a situation where many people felt the intentions of the Australian authorities in regard to war 795 widows were being unfortunately thwarted by the terms of the old agreement.
I understand that under Article 14 of the new agreement there has been a radical alteration of this situation, and that as paragraph (1) of the Article is now worded it will mean that British war widows resident in Australia will not pay British tax on their pensions and that they will, therefore, be on a par with Australian war widows resident in Australia, although Australian war widows resident in this country will still be liable to pay British tax on their pensions.
If this is so—and I hope that it will be confirmed that it is so—then clearly there is something, however small, which we welcome in the new agreement. I believe that—if, again, I am right in this—this new agreement brings our practice in relation to Australia into line with that applying to Canada and to New Zealand. Perhaps I could ask the Financial Secretary not only to confirm that the point I have raised is correctly taken, but also that it is the intention of the Government, when other double taxation agreements come to be renegotiated, to seek to apply no less liberal terms in the case of war widows resident in the other territories concerned.
§ 10.35 p.m.
§ Mr. Harold LeverIt is always a somewhat disagreeable task to reply to detailed questions in relation to the deal which is represented by a double taxation agreement. The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) has asked very searching questions and has requested details about this agreement. He has asserted that the agreement is, on the whole, less advantageous to this country than the old agreement, though he has candidly recognised that that is not the crucial point. The crucial point for us is: was this the best agreement overall that could be negotiated with the Australian Government?
I do not say that a bad agreement is better than no agreement, but some reasonably negotiated agreement is, on the whole, to be preferred to no agreement at all, which creates great uncertainty for investors and traders who very much welcome the existence of these double taxation arrangements.
796 I have to tell the hon. Member, in relation to almost every one of his queries, that the position is that the agreement reflects in its legal consequences the best deal we could get having regard to the circumstances of the negotiations. On balance, we are satisfied that we have negotiated from our point of view a satisfactory agreement. Who gains by it and who loses by it is difficult to tell. First of all, most of the figures are not available, and, in any case, the relationship between Britain and Australia is not one of total equality. That is to say, we invest on the whole a good deal more in Australia than Australia invests here. So the consequences cannot be in some abstract way judged to be to the advantage of Australia or to the advantage of Great Britain.
All I can assure the House is that very skilled negotiators who have been engaged in the somewhat tedious task of negotiating these double taxation agreements all over the world never come to a final agreement unless they are satisfied that it is an acceptable negotiated agreement. I commend the agreement to the House on that basis. I cannot really do more than that to assist the hon. Gentleman.
I will, however, deal with two points. One is the question of the valuing of royalties. I am sorry that this is such a barren answer from the hon. Gentleman's point of view, but—
§ Mr. Patrick JenkinI am grateful to the hon. Gentleman for appreciating the barrenness of his answer. The whole point of my introductory remarks was that we never need have negotiated the agreement at all had we not been determined to thrust the new Corporation Tax system down the throats of everybody in this country. It is that which has provided the occasion for the renegotiation of this matter which otherwise was pretty satisfactory from the point of view of this country. The Government simply lost out over it.
§ Mr. LeverThe hon. Gentleman contents himself with that assertion. I am advised that it is exceedingly difficult to assess, on the information available to Governments and to the Revenue, what is the net effect of this agreement compared to the other agreement. The hon. Gentleman is entitled to his opinion, but 797 I am advised that on balance this represents a fair settlement.
One of the difficulties when we bring these matters before the House is that it is not in this country's interest that I should appear at the Box in each case triumphantly pronouncing that the agreement is an advantage to us. The best thing that any Financial Secretary can say in relation to these agreements after they are negotiated is that he thinks they are a fair settlement. I do not think that any gain will come to us by making debating points on the details and the consequences. All I can say is that these agreements are not lightheartedly entered into, and they are not necessarily derived from the Corporation Tax provisions or anything else, although I admit that changes in Income Tax legislation normally promote some alteration in these Agreements.
However, this is the best agreement we have. I think it is a fair agreement. I cannot go into an evaluation of the consequences of every provision, because this is never done in relation to agreements, for the reasons that I have given.
The hon. Gentleman has an argument on the question of royalty. Though it is l'esprit d'escalier, it has come too late for the debate, but it is one which he might have used, or, for that matter, which I might have used when I enjoyed a more untrammelled freedom than I do now, because if the hon. Gentleman refreshes his mind about the debates he will remember that I took the view, before the double taxation agreements, that it was possible to value royalties, though one might have to look at the matter again, should it arise during the course of the next Finance Bill, in the light of the firm statement made by the Chief Secretary. At any rate, my views are on record, and I am happy to see that the confident view that I then expressed has been confirmed by what has been arranged here.
The hon. Gentleman referred to Article 19(4). There is an identical paragraph, which was approved by the House, in the agreement with the United States. That is how the paragraph goes. It follows, as does the royalty paragraph, the model agreement which the House approved in the case of the United States, and I think that it would be wise to approve it in this case, too.
§ Mr. Patrick JenkinIt was not that the paragraph was unclear, but that it extended only to a company-company relationship. I asked whether the same applied to extend the relief if the extra tax had been charged on a branch whose profits had been understated because of the less than arms-length relationship.
§ Mr. LeverI shall have to look into that in detail. All I can say now is that this is the wording we always use to cover this area of double taxation agreements. If the hon. Gentleman has any complicated situation in mind, and would like me to look into it, I shall be glad to do so and discuss it with him. I would not like to give an off-the-cuff judgment about hypothetical circumstances. The only reassuring aspect is that these are the identical words in the United States Agreement, which was approved by the House.
The hon. Member for Woking (Mr. Onslow) raised the question of war widows. It is true that they will now be exempt from United Kingdom tax under the agreement. I am glad that this gives him some satisfaction, and I hope that it will enable him more confidently to support the agreement.
§ Mr. Patrick JenkinWhat about "a management"?
§ Mr. LeverI have to give the same answer as I did on the other Article. The terms used to describe legal situations are themselves matters for negotiation in any of these agreements. These words were used because they were finally agreed by the negotiators as appropriate to describe a management. Whatever legal consequences flow from these words, they are haggled over and negotiated, and their legal consequences evaluated by both parties.
I hope that the House will not think me surly, but I cannot go into an evaluation of how those words will affect us compared with alternative words which we might have negotiated, but were not able to. I am not prepared to concede that these words are not more favourable than the other words. Their meaning is subject to interpretation by the courts, but this formula was agreed after long negotiations between the two sets of negotiators. That they differ in one 799 agreement from the words used in another is not an accident or haphazard. These differences in wording are intended to have a legal consequence.
I am not prepared to give a detailed ruling about how that interpretation will be taken in the revenue courts of the two countries. No doubt the negotiators, who are far more familiar with the legal position in both countries, had this in mind when these terms were agreed. I ask the House to believe that none of these things is agreed to carelessly or by an oversight. Everyone would prefer some other formula or phrase with legal consequences. These are carefully considered before agreement is reached, and I therefore commend the Order to the House.
§ 10.45 p.m.
§ Mr. Iain Macleod (Enfield, West)I cannot think that the Financial Secretary is wholly happy with the answer that he has tried to give the House. It is very rare that he comes before the House patently underbriefed and, on matters of some importance, completely unbriefed. I do not want to press him too hard on these matters. I have not taken the close interest in this Order that my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) has. The only point I wish to follow is that about Article 4 which reads:
(2) The term 'permanent establishment' includes—(a) a management…The point that we put from this side of the House is a simple one: is that meaningful, in the jargon, or is it meaningless? Is it, in fact, a misprint? It looks like a misprint and it may well be. If it is, we can accept that answer. My hon. Friend pointed out that on a number of other occasions in a number of similar Orders the words are "a place of management".If necessary, I can go on talking until the pigeon arrives with the answer, but we would like to know whether this is a misprint. It happens in the best regulated Governments—though nobody could attribute that phrase to this Government. If it is a misprint, very well. If not, could the Financial Secretary explain what it means?
§ Mr. Harold LeverThe right hon. Gentleman has asked me to draw aside some of the veil from the briefing material which is supplied. I hope that the House will not suppose that in giving this general answer to the hon. and right hon. Gentlemen's questions that the words used are a deal. They are not alterable and the House has to assess the deal the best way that it can.
If the right hon. Gentleman had given me longer notice of his anxieties about particular words—these are voluminous agreements and I do not pretend to be master of every dot and comma—I would have attempted to satisfy him. Having had no notice of the fine point that he raises, I am not as clear on the detail as I would wish to be, but I will try to give the right hon. Gentleman the satisfaction that he desires.
It was thought that the original wording would not catch the peripatetic manager and the words "place of" were deleted. That was done because somebody thought that there would be some distinction drawn between the original place of management and a wandering manager. It was pointed out in the old agreement, which had no immoveable property Article, that agricultural or pastoral property was covered by the permanent establishment Article. Dealing with it in the immoveable property Article as in the United Kingdom draft has the disadvantage of not giving the protection of the rules of Article 6 about the allowance of reasonable expenses. It could, therefore, be preferable to deal with such property in the present Article and add a reference to forestry.
I do not like to strip aside the veil of these exciting negotiations, but I go further to gratify the right hon. Gentleman. At the request of the Australians the word "installation" was added to sub-paragraph 2(g) to cover the person who contracts to manufacture, supply and install equipment. That covers, with a little more clarity, the point that the right hon. Gentleman was pressing.
§ Question put and agreed to.
§
Resolved,
That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Australia) Order 1968 be made in the form of the draft laid before this House on 17th January 1968.
§ To be presented by Privy Councillors or Members of Her Majesty's Household.