HC Deb 05 November 1968 vol 772 cc831-44

10.14 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) (Grenada) Order 1968 be made in the form of the draft laid before this House on 14th October, in the last Session of Parliament.

Mr. Speaker

It has been suggested to me—and I have no objection—that we should take together the four Double Taxation Orders which are on the Order Paper, if that is the will of both sides of the House.

Mr. Patrick Jenkin (Wanstead and Woodford)

We are entirely agreeable on this side of the House, Mr. Speaker.

Mr. Lever

I know that the House is eager to discuss the details of the four double taxation Orders and I am sure that they will be greatly convenienced by the decision that they should be discussed together. The Orders govern arrangements between this country, France, Sweden, Lesotho, and Grenada.

The fourth Order relates to a new comprehensive double taxation Convention with France. This is to replace the existing comprehensive Convention which was signed in 1950 and which is in need of revision following the changes in our tax system in 1965 and in the French tax system recently.

The new Convention with France is based on the model agreement recommended by the O.E.C.D. for adoption, and it follows generally the pattern of our other recent Conventions. I will not weary the House with a detailed exposition of the provisions, as the House has followed so closely similar provisions in previous agreements relating to other countries which I have had the pleasure of presenting to the House.

I might just mention the withholding taxes. The Convention provides as a general rule that the tax which can be charged in the source country is to be nil for royalties and limited to a maximum of 10 per cent. for interest and 15 per cent. for dividends. There is a reduced limit of 5 per cent. for dividends received by a company with a holding of 10 per cent. or more in the paying company.

The Order relating to Sweden gives effect to a Supplementary Protocol amending the comprehensive Convention which was signed in 1960. The House will remember that this Convention has already been amended, following the changes in our domestic tax law in 1965, by a Protocol which was signed in 1966 and which withdrew from portfolio investors entitlement for relief for overseas company tax on the profits from which their dividends are derived. That is the underlying tax. The Supplementary Protocol now before the House completes the further modifications to the Convention arising out of our tax changes in 1965, and the amendments made by the Supplementary Protocol in general follow the recommendations of the O.E.C.D. and are in line with the pattern of other similar recent Conventions. Again I think it would be troublesome to go into the details, the House having these details so firmly in mind from the previous occasions when we have discussed them.

The new Supplementary Protocol with Sweden provides as a general rule that the tax which can be charged in the source country on dividends is limited to a maximum of 15 per cent., with a reduced rate of 5 per cent. for dividends received from a company with a holding of 25 per cent. or more in the paying company. Interest and royalties will in general continue as hitherto to be exempt from tax in the source country.

The Orders relating to Lesotho and Grenada are two more in the series of Orders relating to amending agreements with smaller Commonwealth countries. Like the other Orders in the series, their object is to withdraw from portfolio shareholders their entitlement to credit for tax on the profits out of which their dividends are paid.

I hope that these new double taxation arrangements, which I am sure hon. Members will have studied with close attention and interest, will meet with the approval of the House, but if I have failed to cover all the detailed and esoteric points I would be happy to answer the enquiries of hon. Members upon them.

10.20 p.m.

Mr. R. Gresham Cooke (Twickenham)

Having just visited the charming island of Grenada, through the good offices of the C. P. A., I should like to ask the Financial Secretary two or three questions about this Order.

I am interested to know whether it will help British investment in the island. It is obvious that such investment is required for hotels, tourism, and, I think, for light industry. I was struck to find in one of the Windward Islands that the Americans were already getting on with sub-contracting work for light industries, and it seemed to me that here was a great opportunity for British investment. In one island, for example, the Americans had a little factory making or setting up Christmas cards. That seemed to be the sort of thing that could be done in Grenada.

These islands exist entirely on agriculture, the sale of bananas, nutmegs, man goes, and the rest of it. It is obvious that what is needed is technical schools and the knowledge to set up—

Mr. Speaker

Order. I, too, am interested in Grenada, but the hon. Gentleman must link his remarks to the Order before us.

Mr. Gresham Cooke

Of course, Mr. Speaker.

I wanted to ask the Financial Secretary whether the Order will help British investment to establish hotels, factories and other developments in the island of Grenada, which we all wish very well. I welcome the Order and hope that it will do good for the island. It is going through a difficult time, being entirely dependent on agriculture. It requires British technology and investment, and I hope that both will come through this Order.

10.22 p.m.

Mr. Patrick Jenkin (Wanstead and Woodford)

I am happy to follow my hon. Friend the Member for Twickenham (Mr. Gresham Cooke) in pressing the Financial Secretary a little further on the Order relating to Grenada.

My hon. Friend has put his finger right on the point. It is the effect that the Order will have on British investment in the territory. It is a country where the tax system is not dissimilar from that which we operated before we moved to the Corporation Tax system. Companies operating in Grenada pay a company tax, declare a dividend, and are entitled to recoup themselves by deducting from the dividend of the company tax which they have paid so that, in effect, it is passed on to the shareholders. But, of course, this is a company tax and not a true withholding tax, and the effect of the Order will be to deprive a British portfolio shareholder with a shareholding in Grenada from any doubt tax relief.

This is a matter which I raised when we debated the remainder of the Windward and Leeward Islands Double Taxation Orders in June of this year. Mr. Speaker, I apologise if I have to quote from my own speeches, but there are no others to which I can refer in the subject. I raised with the Financial Secretary the precise difficulty of these cases, of which there are many among the smaller territories of the Commonwealth, where the effect of the Orders is totally to deprive a portfolio shareholder from any relief in respect of tax paid in the overseas territory, for the reason that this is not a withholding tax but is treated for double tax purposes as an underlying tax.

When I raised the matter, I quoted to the Financial Secretary a passage from a speech made in 1966 by the hon. and learned Member for Derby, North (Mr. MacDermot), his predecessor as Financial Secretary, where he said when the point was made that it was the Government's intention to adopt a reasonably flexible attitude. I complained last June that when we had the first batch of double taxation conventions to which this point applied nothing had been done to give effect to that intention.

The Financial Secretary was good enough to acknowledge the point. He said: I assure him "— that is, me— 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."—[OFFICIAL REPORT, 14th June, 1968; Vol. 766. c. 621.] All I can say is that here we have yet another example where, apparently, no account has been taken of the point raised on several occasions where the effect would be to reduce the attractiveness of these territories for investment by British investors. The only result will be to leave the way wide open for investment from other countries. I hope that the Financial Secretary can give a rather more satisfactory explanation on this occasion as to why this has been done in this case.

I now turn briefly to the Swedish Convention. Here there is only article to which I draw attention—the new Article VIII(4), set out in Article 4. This provision has the effect of nullifying, in relation to Sweden, certain provisions of paragraph 1(1)(d) of the 11th Schedule of the Finance Act, 1965 and of making certain interest paid by British companies to Swedish associates a distribution and not a deduction for Corporation Tax. The Financial Secretary will be aware that these provisions of the 11th Schedule have aroused considerable irritation in industrial circles here, especially in terms of their effect upon companies that raise loans in Switzerland and elsewhere on the Continent. The hon. Gentleman will remember that we raised this matter in Committee and that our arguments were dismissed.

Here, in this Convention—and as far as I am aware this is the only Convention in which it appears—we find that this provision concerning paragraph 1(1)(d) is waived in relation to loans raised in Sweden. Why should there be a specific and specially favourable treatment of companies which borrow their money in Sweden rather than elsewhere? I expect the hon. Gentleman to say that we have to take the whole Convention together, but it comes as something of a surprise to find what was regarded by the Government as an important facet of the Corporation Tax reforms here being nullified in respect of one country.

I now turn to the French Convention—the most important of the four in that it is a new, comprehensive agreement and follows closely the O.E.C.D. model. There are one or two provisions which differ from that. Article 4 deals with the definition of the term "permanent establishment", and is, in general, in accordance with the Convention. Paragraph (7) of Article 4, dealing with insurance companies, is both new and outside the O.E.C.D. model. It provides that an insurance enterprise of one coun- try will be deemed to have a permanent establishment in the other country if it collects premiums from or insures risks situated there. On the face of it, this would appear to impose a heavy new liability to French tax on the part of a British company establishing an office in France merely for the purpose of collecting premiums.

I have been given to understand that it is not the intention of the French authorities to enforce this new provision strictly according to its terms, but only if the activities of the branch companies go beyond mere routine administration and engage in what they describe as a habitual and normal commercial activity. I understand that they have also indicated that they would not regard the conduct of reinsurance business as making the branch liable for tax. This is a rather strange state of affairs. Here we have a provision of an Order which has been put before the House which, I understand, it is not the intention of the other contracting party to enforce according to its terms.

A number of questions arise. If this provision is not intended to be applied, why is it in the Order? What is the purpose of putting in stringent financial provisions if, at the same time, one of the parties will not enforce them? Secondly, what are the circumstances in which this provision will become strictly enforceable so that a branch will become liable to French tax if it merely collects premiums? I understand that our practice in the United Kingdom is that we will subject to tax a branch of a foreign insurance company only if that branch accepts proposals.

Can we, by a change in administration, which perhaps is all that it would amount to, so alter our practice that we would, as it were, provoke the French into applying this new provision strictly? Would it be, perhaps, only if we passed a law to change our treatment of branches of French insurance companies here that the French would be entitled, if that is the right word, to resile from the understanding which they have conveyed not to apply paragraph 7 strictly? What warning would be given to British insurance companies which have branches in France that their taxation treatment would be liable to be changed in what could be a stiff and swingeing way? The third question which arises is how the Treasury intends to publicise what is tantamount to a major extra-statutory concession so that insurance companies may be aware both of the circumstances and of the waiver of the strict application and of the possible risks which they run of having the provision applied strictly in certain events. This is something new which I am not aware of having encountered in double taxation conventions before, a provision imposing an entirely new liability to tax but which, we are told, one of the parties has no intention of applying strictly from the outset. This requires explanation.

The effect of Article 10, a new article with which I do not quarrel, is to bring into taxation the profits of a branch operating in France of a United Kingdom establishment and to bring the taxation into line with what has always been the position of the taxation of the subsidiary operating overseas. It seems to me to be a move in the right direction that one should not have a major taxation difference between the operation of a branch and the operation of a subsidiary, because there may be very good commercial reasons why a branch is preferable to a subsidiary, or vice versa.

It seems to me, however, that the effect of this article is to swing the balance the other way. It appears that the curious formula that the tax shall not exceed 15 per cent. of two-thirds of the profits of the permanent establishment after payment of the corporation tax on those profits will have the effect of taxing branch profits rather more heavily than of taxing income from subsidiaries. I would be grateful if the Financial Secretary could confirm this and indicate the extent of the difference. Clearly, if it is merely a minimal difference, we would not take severe objection. If, on the other hand, it is one of substance, it requires explanation.

May I turn to Article 24 which introduces the new restriction on the relief for underlying tax for portfolio investment? This is now confined to direct investment, and the usual phrase appears in Article 24 (a) (ii) indicating the extent of that. But there seems to be an extra condition which I am not sure that I understand. It is certainly a new condition to me, and I should be grateful if the Financial Secretary will explain it. It appears to apply so that there is a new condition which must be satisfied if Britain is to give relief for underlying tax in respect of a dividend paid by a French Company to a British parent. This new condition is related to the rate of tax charged on a dividend paid by the United Kingdom company to a French company and, furthermore, to the rate of tax in force at the date when the Convention was signed.

If there is an increase in the tax on a dividend paid by the British company to a French company, then, as a retaliation, as it were, the United Kingdom Revenue will no longer allow relief for underlying tax in respect of a dividend paid by a French company to a British company. In other words, this provides the British Revenue with a right of retaliation if the French increase their tax on a particular dividend above a certain level.

I can understand that from the point of view of the Revenue a right of retaliation of this sort may be a useful weapon in their armoury, but what is the effect on the individual investor—let us say on a company which has invested in France? Because the French increase their tax on dividends from Britain to France, the effect is to be that the British Revenue will increase its tax on a British company which has invested in France. That seems to be an extraordinary process of robbing Peter to pay Paul, and to require some justification.

One or two questions come to mind. Will this be an automatic retaliation if the condition ceases to be satisfied and France raises the appropriate level of tax above the level at the date on which the Convention was signed, or is there some discretion in the Revenue to decide whether to invoke the condition? Suppose we reduce the rate of withholding tax—which is not impossible—on dividends paid by a British company to a French parent, with the result that the amount of tax against which double taxation relief will be available in France has been reduced, and as a result the French think it right to recoup to themselves the difference. After all, we shall have done exactly the same thing in the opposite direction. Would this happen without provoking the retaliation? By relieving a French investor in this country of certain of the tax, could we find ourselves obliged because of this condition in Article 24(a)(ii) to impose additional tax on a British investor in France? If so, that seems to be an astonishing result of this provision. It seems to me a very strange proposal, which is liable to give rise to some uncertainty.

As the House is aware, there is a good deal of mutual investment—it is growing, and I welcome the fact—by French companies in this country and by British companies in France, which offers many attractive opportunities within the Common Market. I feel that the Government should make it entirely clear where they stand on this point.

Next, I raise again a small issue which I have raised before—that concerning retrospection, which occurs under Article 30(1)(a). It will be seen from that paragraphs (i), (ii) and (iii) that this is to apply to tax in one case going back to April, 1966. It will be seen that from April, 1966, in respect of Corporation Tax going back to April, 1964 and in respect of Capital Gains Tax going back to April, 1966. Having read paragraph (2), I am aware that there is a saving provision that nobody will be forced to pay any more tax as a result of the retrospection. That is to say, if the effect is to increase liability, it is not to increase liability back beyond the date of the Convention. Nevertheless, this is strictly retrospective fiscal legislation. The mere fact that there is a relieving provision to prevent anybody from having an increased liability does not detract from this principle.

We have had a number of Conventions, since I last raised the complaint of Conventions being supposed to apply from the date on which they took effect, and this principle has been accepted by the Treasury. I regard this as an infinitely preferable form of delegated legislation. I dislike this business of our nearly being in 1969 and having a provision which says that it shall apply to Corporation Tax going back to the financial year beginning 1964, nearly five years ago.

10.41 p.m.

Mr. Harold Lever

With the leave of the House, I will answer the many interesting points that have been raised.

First, however, I must congratulate the hon. Member for Twickenham (Mr. Gresham Cooke) on his maiden speech on behalf of, as far as I know, all back benchers opposite on this subject, the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) otherwise having a monopoly in the conduct of these affairs.

I was asked what would be the effect of the Lesotho and Grenada Orders on investment incentives for British investors to encourage growth, manufacturing and so on in those countries. The answer is that, for practical purposes, these Instruments will not in any way deter investors. It is true that, somewhat pedantically, we have in the treaty underlying tax rules which apply everywhere else, but in fact in these countries that will have no importance because they are concerned only with portfolio investment.

As hon. Gentlemen opposite know, once there is any direct investment or other such consideration in the country, the underlying tax is available; and, in these circumstances, we need not worry unduly. I might add that there is not a lively stock exchange in either country.

Mr. Patrick Jenkin

That is not the point.

Mr. Lever

The hon. Gentleman obviously prefers pedantic abstraction to reality.

If one is talking about investment in these charming places, one is talking not of portfolio investment but of direct investment or investment which, at the least, will represent 10 per cent. of the share in the company. That sort of investment gets the underlying tax advantage which the hon. Member for Twickenham is anxious it should have. If there were a stock exchange in one of these countries and somebody bought less than 10 per cent. of the shares in a local company, he would suffer a disadvantage compared with the position that used to prevail before the 1965 Act.

Mr. Gresham Cooke

If a British hotel company put 50 per cent. into building a hotel in Grenada, the other 50 per cent. being supplied from local sources, would that company obtain the full advantage from double taxation relief?

Mr. Lever

It would get the full advantage. Portfolio investment would not, as I explained, get that advantage.

Mr. Patrick Jenkin

If a consortium of 12 hotel companies, which is not an impossible venture, were to invest directly in Grenada in equal shares, that advantage would not be obtained. The figure of 10 per cent. is arbitrary and to talk about there being no flourishing stock exchange in Grenada is begging the point.

Mr. Lever

That intervention is an exercise in hypothetics; in other words, those dangers which might theoretically exist but which never do. If the hon. Gentleman will provide me with details of a consortium of 12 hotel companies which have gone into syndicate in equal shares in Grenada, I shall be happy to look at the whole matter again. Indeed, I give the hon. Gentleman an undertaking that if he can provide me with such an example, I will seriously consider renegotiating the Convention. In the first instance, however, he must provide this interesting syndicate not too artificially conjured together.

I know that the hon. Member for Twickenham, who is more interested in the practical side, is relieved to know that, if he has as little as a 10 per cent. shareholding, he will get the full relief for the underlying tax. There may be a garden in Granada, but there is no stock exchange in Grenada, so the portfolio relief is not relevant to this matter.

The hon. Member raised other points of great interest. I will deal, first, with the Swedish Convention. What seems to trouble him on the new Article VIII (4) is that we have made a concession which he and his hon. Friends pressed for in debates on the 1965 Finance Bill, and which, he says, we are making exceptionally in the case of Sweden. It is almost a relief to find that the hon. Member, who has more knowledge of these treaties, I think, than any other hon. Member, including the Financial Secretary, should be in error here. This is not exceptional. The main countries where the same provision applies are Switzerland, the United States, Belgium and Australia. So he will be gratified to know that, in implementing it in the case of Sweden and other countries, we are meeting a great deal of the Opposition's case on the Finance Bill.

It will not have escaped the hon. Member's attention that all these countries have a well ordered tax system of their own and fairly normal rates of tax prevailing, so it will not lend itself to mere channelling of income from the British company into a tax haven or anything of that kind. This is a reasonable provision. The hon. Member wanted it to apply generally. We have applied it pretty generally to the main countries, and where we can get reciprocity and it is appropriate, we are happy to apply it to any country.

The hon. Member mentioned the French treaty. Article 4(7) deals with incomes. All these treaties are a matter for negotiation and give and take. We cannot dictate them, but must reach agreement with the other side, in this case the French Government. They insist that all their double taxation agreements should have this somewhat strangely worded clause, but do not enforce it strictly, so far as an Englishman reading the translation from the French in this Convention would understand it.

We are glad that that is so. We had to accept the Clause and have every reason to think that it will not be troublesome to British insurance companies, which, happily, will not need a great deal of publicising of this, because they are frequently aware of the situation over a long period and there is little danger of any of them not being aware of this. Perhaps we can discuss outside the Chamber the suggestion that we should be more active in informing insurance companies. We have no option in the matter.

On Article 24 (a) (ii), it is true that, if the French Government increase their tax system and make it more burdensome, we will be entitled to alter our arrangements in relation to the British investors in France. This is not as strange as the hon. Gentleman seemed to think. At first sight, I agree, it does seem a little odd that because the French impose more tax on their own citizens investing in England, we should impose more on an Englishman investing in France, but it is not so strange, because the whole object of these treaties is to encourage the free play of investment and mutuality is at the heart of it.

The hon. Member should welcome anything inclined to deter the French Government from treating people who invest in this country more severely than they do at present, because, as he said, it is highly desirable that the French should be encouraged to invest here. This provision is simply to say that we shall have the right, if the French taken steps—it is not automatic—which we sincerely hope they will not and which we have no reason to suppose they will, which would disincline Frenchmen from investing here, we might correspondingly, if we thought it right, take steps to discourage British investment in France. This is all in the interests of mutuality and of encouraging the two-way flow of investment which the hon. Gentleman has more than once welcomed.

The hon. Gentleman's last point was the question of retrospection. On this, I must be absolutely plain. We have not retrospected, because restrospection means that we enforce the law on people in respect of a past situation against their wish. Far from that, what we have done is to establish a law in respect of past dividends which investors may apply if they wish. If they prefer to operate the law as it was in the past, they have the absolute right to do it.

That is not retrospection. That is simply instituting a new system of law. For convenience we say to the investor, "You may, if you wish, in respect of the past operate the law which existed in the past." We think it convenient for most people to operate the new law even in respect of past dividends. If they do not like it, they do not have to do it. With that kind of retrospection one is tempted to recall the old joke—"With such an enemy you do not need a friend."

Here the Government are not acting to penalise the investor. The Government are not acting retrospectively to enforce upon him something to his disadvantage or even to his advantage. They simply offer him a new code of law to apply to these dividends. If he does not want it in respect of past dividends, he can operate the old law. That is neither offensive nor retrospective. In these circumstances, I have no hestitation in commending the four Orders to the House.

Question put and agreed to.

Resolved, That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Grenada) Order 1968 be made in the form of the draft laid before this House on 14th October, in the last Session of Parliament.

To be presented by Privy Councillors or Members of Her Majesty's Household.

Resolved, That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Lesotho) Order 1968 be made in the form of the draft laid before this House on 14th October, in the last Session of Parliament.—[Mr. Harold Lever.]

To be presented by Privy Councillors or Members of Her Majesty's Household.

Resolved, That an humble Address be presented to Her Majesty, praying that, on the ratification by the Government of the Kingdom of Sweden, of the Supplementary Protocol set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (Sweden) (No. 2) Order 1968, a draft of which was laid before this House on 26th August, 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.

Resolved, That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (France) Order 1968 be made in the form of the draft laid before this House on 16th July, in the last Session of Parliament.—[Mr. Harold Lever.]

To be presented by Privy Councillors or Members of Her Majesty's Household.