DOUBLE TAXATION RELIEF (Hansard, 14 June 1968)

HC Deb 14 June 1968 vol 766 cc613-23 613

§ Mr. Speaker
I have had a word with the two Front Benches about the next 10 Orders. Order No. 8—the one referring to Portugal—is wider than the others, but both Front Benches have agreed that it would be convenient if we discussed together all the Orders down to No. 12 on the Order Paper.

§ 12.30 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 Taxa-ation Relief (Taxes on Income) (Antigua) Order 1968 be made in the form of the draft laid before this House on 10th May. I am grateful to you, Mr. Speaker, for conveniencing us by enabling us to deal with this unusually large batch of Orders together. They can conveniently be so discussed. The agreement with Portugal is a new, comprehensive agreement and I will say something about it separately. The other nine are all to amend existing agreements to withdraw from portfolio shareholders the credit which they have hitherto enjoyed for tax on the profits of the company paying their dividends. The agreements are similar to agreements with eight other Commonwealth countries which were approved by the House earlier this year and I need to make only one or two new points.
The first is that the two agreements with Antigua and St. Vincent expressly exclude from the benefits of the principal agreement companies which take advantage of special provisions of the tax law of those countries, enabling companies, at the cost of becoming liable to a merely nominal rate of tax, to acquire a fiscal residence in those countries and to use those countries as tax havens and there- 614 fore take advantage of the double taxation agreement to escape virtually all tax on United Kingdom dividends. The object of our double taxation agreement is to prevent taxpayers paying two lots of tax and it is certainly not our intention that they should be used to ensure that the taxpayer pays virtually no tax at all.
In the making of agreements with these countries, we have taken that into account and in making agreements with other countries offering equivalent tax facilities, we intend to ensure that those who make use of these facilities do not benefit from the double taxation agreements. This would be agreed on both sides, I think.
The second point is that, in each agreement, the withdrawal of credit from portfolio shareholders is expressed to take effect from 6th April last. The date was chosen to coincide with the date for the withdrawal of the corresponding unilateral relief. These agreements are part of a large batch of amending agreements which were put to Commonwealth Governments last year and it was hoped that they would all be in force by this April. In the event, although the amending agreement was signed on or before 6th April, it was not possible to complete the subsequent formalities in time to give effect to the agreements by April of this year. So that the withdrawal of the relief shall not be made retrospective, the Inland Revenue will, in practice, allow credit in respect of any dividends paid from those countries before the agreements come into force. There will be no retrospective effect.
The Convention with Portugal is the first comprehensive double taxation agreement with that country, although a limited agreement was made in 1961, providing for the reciprocal exemption from tax of shipping and air transport profits. The new Convention is based on the model Articles which the O.E.C.D. recommended member countries to adopt, and, as it follows generally the pattern of our other recent conventions, I will not weary the House with a detailed summary.
However, there are two points which I should mention. The first is the withholding taxes. The Convention provides, as a general rule, that the tax which can be charged in the source country is limited to 5 per cent. for royalties, 10 per 615 cent. for interest and 15 per cent. for dividends—although there is a reduced limit of 10 per cent. in the case of dividends received by a company with a holding of 25 per cent. or more in the paying company.
Second, Article 22 is the Article under which we give credit to people resident here for tax paid in Portugal. It provides for credit not only for tax actually paid in Portugal, but also for so-called "matching credit" that is, credit for tax "spared" in Portugal to encourage development there.
I hope that these new agreements will meet with the approval of the House. If there are any points which. any hon. Member wishes to raise on this somewhat abstruse area of the tax law, I will do my best to answer them.

§ 12.35 p.m.

§ Mr. Patrick Jenkin (Wanstead and Woodford)
The Financial Secretary and I are becoming accustomed to debating these thrilling matters in an almost empty House, but I find it slightly intimidating to be accompanied on this occasion by my hon. Friend the Member for Finchley (Mrs. Thatcher), who is perhaps the one hon. Member who will understand what we are talking about.
I am grateful for the hon. Gentleman's explanation and I also will deal first with the Commonwealth Orders which, as he said, represent the largest group which we have ever considered together in this current spate of re-negotiated agreements.
The Orders make it clear that there will continue to be relief for the underlying tax paid by companies operating in these countries in cases of direct investment, which is defined as where the United Kingdom company holds 10 per cent. of the shares of the voting rights in the overseas company. But we are dealing in every case here with territories which operate a system of company taxation which does not provide for any withholding tax from dividends. As a result, in these cases, there is to be no double taxation relief at all for portfolio investors in those countries.
The double taxation paid by the companies operating in the overseas territories is paid in the form of a tax on the company's profits, and although some of the countries operate a credit system 616 and some simply pay their dividends free of any further tax, the result for the United Kingdom portfolio investor is the same, namely, that none of the tax paid by the overseas company qualifies for relief from double taxation when it is received in this country.
This circumstance was discussed in our debates on the 1966 Finance Bill, when we were dealing with unilateral relief on what was then Clause 28, which became Section 30 of the Act. I moved an Amendment to the effect that, in the circumstances envisaged, unilateral relief should be granted on the principle that half the tax paid by the company in the overseas territory should be regarded as of the nature of a withholding tax and should, therefore, be eligible for relief against the taxes payable on the dividends in this country.
The relief which I then sought was refused by the then hon. and learned Gentleman the Financial Secretary, the hon. Gentleman's predecessor, but I should like to quote what he said: Obviously, there may be such varieties of circumstances and rates of tax that any attempt to take a proportion—a half or any other—of the profits, would result in an anomalous situation. The right way of dealing with this would be to withdraw the unilateral relief. But, of course, we shall be negotiating double taxation agreements in nearly all cases with the countries concerned. The substance of the hon. Member's argument is something which may well have to be considered in arriving at an overall settlement in those agreements as to what is right and fair. The hon. and learned Gentleman went on to say: I can give the assurance that, in the sense that it affects both the overseas countries and our investors in those countries, our negotiators will adopt a reasonably flexible approach to the question."—[OFFICIAL REPORT, 21st June, 1966; Vol. 730, c. 519.] Here we have the results of what the hon. and learned Gentleman was then pleased to call "a reasonably flexible approach", and the result, as the hon. Gentleman will recognise, is precisely nothing. There is to be no relief whatever for portfolio investors in this situation.
Here we are dealing with investors in under-developed countries of the Commonwealth and in developing countries —Antigua, Cyprus, Dominica, Sierra Leone, Zambia, Gambia. Malawi, St. Lucia and St. Vincent. These are all 617 countries clamouring for investment to promote their development. The effect of the Orders is to eliminate double tax relief for portfolio investment by British investors.
I regard that as a highly unsatisfactory situation. It is certainly not the result which any reasonable person was entitled to expect from what the then Financial Secretary said in the debate in 1966. The present incumbent of that office, whom we all admire, owes the House some explanation of how it has come about that what was intended to be a reasonable and flexible approach has resulted in nothing at all.
I turn to the Portugal Order. Like the hon. Member, I wish to raise only a couple of points, in my case both on Article 22. There is a most surprising omission from the Article. It is fair to say that this is the first of the modern double-tax conventions where this omission occurs. It is that there is nothing whatever in the agreement about the giving of credit for underlying tax in the case of direct investment.
Why should that be? It seems a surprising state of affairs. Is it the intention that in the case of direct investment in Portugal, unlike any other country with which we have treaty obligations or any other country which is covered by the provisions granting unilateral relief, there is to be no relief for underlying tax? Or is it that the case is to be dealt with as though there was no agreement because the agreement is silent on the point? In other words, is it the case that for direct investment the matter is to be treated as qualifying for unilateral relief so that the rules applicable to unilateral relief for underlying tax are to apply? If that is so, the Financial Secretary will appreciate the consequence. For it is only where the direct investment amounts to 25 per cent. of the holding in the Portuguese company that that will apply.
I know that there have been some exceptions, but the general pattern has been that in the case of Commonwealth countries and of treaty relief countries, the test whether an investment is a direct or a portfolio investment is whether the holding of the British investing company in the overseas company amounts to 10 per cent. For countries which are 618 neither in the Commonwealth nor have treaty relief arrangements with us, the figure is 25 per cent.
In 1966, I moved an Amendment suggesting that as the number of countries with which we have treaties increases, so the number of countries to which the 25 per cent. figure applies will be diminished. In the circumstances, I suggested, the time would shortly come when it would be inappropriate to try to draw this distinction between the 25 per cent. cases and the 10 per cent. cases and that all should be put on the 10 per cent. basis.
Here we have a case of a treaty relief with an important trading partner—Portugal, I remind the House, is a member of E.F.T.A.—in which, if the matter is as I understand it to be, it is to be dealt with as though it were a case for unilateral relief, which means that a direct investor in Portugal will get the relief only if his shareholding amounts to 25 per cent. of the whole. Why should Portugal be treated in that way, which is less favourable than the treatment, shall we say, of Finland, another member of E.F.T.A., with whom an agreement was recently announced? Why is it felt that direct investment in Portugal is less worthy of encouragement than direct investment in Finland?
My other comment on this treaty is of a rather more benign nature in that I note with pleasure that in this case the Government have been able to concede, for the benefit of Portugal and of the British investor in Portugal that there should be relief for what the Financial Secretary called tax paid—taxes which are deemed to have been paid by the company in Portugal, but which have not been paid because relief is granted under special circumstances by the Portuguese tax authorities. That provision is welcome and goes some way to offset the disadvantages from which investors in Portugal suffer as a result of the application, as I mentioned earlier, of the 25 per cent. rule rather than the 10 per cent. rule.
Here again, we are bound to ask why there are differences in agreements which cover different countries in respect of which we might have thought that similar treatment would have been sought. The Financial Secretary will recall that three or four months ago we debated the new comprehensive agreement with Australia and that on that occasion I 619 made a number of criticisms of the extent to which that agreement had swung the balance of advantage substantially in favour of the Australian Government and of Australian investors in Britain to the detriment of the British Government, the British taxpayer and the British investor. One of the points to which I then drew attention was that all the provisions for pioneering which the Australian Government were pleased to grant to encourage new investment in their rapidly developing country were being denied to British investors.
Here we have a case of a country— Portugal—not in the Commonwealth, a country with which, from an investment angle, we have much less direct association, both historically and emotionally, than we have with Australia; and yet with that country we have an arrangement which allows the British investor the advantage of the pioneer tax reliefs which were not granted in Australia. What is the motive and the rationale of that difference? Presumably it is deliberately sought by the British negotiators when they draw up these treaties.
I must tell the Financial Secretary that I shall not be satisfied with the stock answer, "The hon. Member must take the agreement as a whole. We get the best terms we can." That is not good enough in a specific case such as this, in which we are dealing with important advantages which are available in respect of Portugal but not in respect of Australia, where, surely, the Government ought to have been able to arrange similar relief for British investors.
If the Financial Secretary would answer those questions, then, despite the misgivings which I have expressed, and despite the strong objections which I have on the Commonwealth agreement to the difference between the pledge—that is not too strong a word—which the hon. Member's predecessors gave in 1966 and the results as we see them today, perhaps the responsible attitude for the Opposition to take would be that we should not seek to challenge these Orders in the Division Lobby.

§ 12.48 p.m.

§ Mr. Harold Lever
I do not know whether I need the leave of the House to reply, but, in any event, I will ask for it.
620 I am sure that the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) is aware of the passionate general interest in these technical details by our colleagues. I can only conclude that many of them prefer to study these rather abstruse matters in HANSARD rather than to get them, with more difficulty, orally by presence in the House.
The points raised by the hon. Member are of wide general interest. He asked, first, why we have not provided some relief for British portfolio investors where there is no withholding tax which would produce that relief for them.
I agree that my hon. and learned Friend my predecessor undertook to look flexibly at these matters. The fact that a flexible approach has not resulted in these cases, in no concession having been thought to be necessary or desirable for portfolio investors, does not mean that the subject has not been considered. One must have regard to the tax systems in operation in the countries with which we are dealing and to other circumstances.
We must always remember that we are dealing with portfolio investments only. The amount of these investments in these countries cannot be very large, and I do not think that there will be any calamitous fall in the stock exchanges of Antigua, Santa Lucia, or Malawi as a result of this omission to provide withholding tax relief.

§ Mr. Patrick Jenkin
That is an amusing point, but portfolio investment and direct investment are terms of art which turn on the 10 per cent. concept. One can imagine cases which perhaps the hon. Gentleman and I would regard as trade investments but which, because they do not amount to the full 10 per cent., fail to qualify for the relief available. It is to these cases that the argument is principally directed.

§ Mr. Lever
As always in these matters, the hon. Gentleman is absolutely right, and I agree that the comment I have made does not wholly exclude the argument that we should have taken into account the possibility of smaller holdings being appropriate for some relief. We had regard to this in the course of the negotiations but we came to the conclusion, on the general basis of the tax systems prevailing in these countries and 621 the general circumstances of investment there, that no departure in regard to the general principle was desirable in these cases—the general principle being that relief for portfolio investments can arise only where there is a withholding tax.
I am sorry if that is a disappointment to the hon. Gentleman and I assure him that in any future negotiations the closest regard will be paid to the point he has raised. I will not use the word "undertaking" in this connection, because I am sure that the hon. Gentleman rightly expects his comments to be sincerely taken into account by our negotiators. We are satisfied, on these agreements, that there is no ground in any of these cases for departing from the general principle I have enunciated.
The hon. Gentleman wanted to know why we had not negotiated relief for underlying tax for Portugal but are relying solely on the unilateral relief which is available to those with a 25 per cent. or more shareholding. There is no provision in the model O.E.C.D. double taxation agreement for giving relief for underlying tax. It does not follow, therefore, as an automatic prima facie assumption, that we should always so arrange it.
While I would hate to use a stock answer, one must consider the matter from the point of view of the overall negotiations. The Portuguese did not deal with the question of relief for underlying tax and we therefore felt that it was not necessary that we should be bound to do so. There will be relief, which seems adequate in the circumstances, where there is a 25 per cent. shareholding, for the underlying tax.
The hon. Gentleman then wanted to know why we had agreed to the taxes-spread point, although he welcomed it, and asked why we had not agreed to it in respect of Australia. Treading timidly on the borderlines of order, I might inform the hon. Gentleman that, in the Australian case, this action was part of the bundle of agreement and disagreement which finally produced the ultimate agreement. The Australians were satisfied with the agreement as it stood, and we had no reason to alter it. If I were to go into more close examination of the Australian agreement I would be called to order. I must, therefore, narrow my comment to welcoming what the hon. 622 Gentleman said about the granting of spread-tax relief in the case of Portugal; and if he wants to examine the Australian agreement more closely we will have to find a vehicle other than this discussion for answering his questions fully.

§ Mr. Patrick Jenkin
On the Commonwealth point, where the whole of the tax is underlying tax, will the hon. Gentleman look sympathetically at any Amendments which we might seek to table to this year's Finance Bill? I understand that this could be done unilaterally, as it were, without affecting our rights or obligations under the Treaty and which would grant some relief—

§ Mr. Speaker
Order. With all the good will in the world, we cannot now debate the Finance Bill.

§ Question put and agreed to.

§ Resolved,

§ That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Antigua) Order 1968 be made in the form of the draft laid before this House on 10th May.