DOUBLE TAXATION RELIEF

HC Deb 17 February 1969 vol 778 cc156-78

Mr. Speaker

It has been suggested to me that we might debate with the first Order the four other Orders. The first Order will be moved and on that we shall debate all five Orders, heterogeneous as they are. Are there any objections?

Mr. Patrick Jenkin (Wanstead and Woodford)

None from this side, Sir.

9.53 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 Denmark of the Supplementary Protocol set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (Denmark) Order 1969, a copy of which was laid before this House on 31st January 1969, an Order may be made in the form of that draft. I am very grateful, Mr. Speaker, for the fact that we are able to take the discussion on these Orders together. I doubt whether there will be a vehement debate on them, because they follow a well established pattern for dealing with double taxation.

The first Order relates to Denmark and gives effect to the Supplementary Protocol amending the comprehensive Convention which was signed in 1950. As the House will remember, this Convention was also amended following the changes in our domestic tax law in 1965 by a Protocol which was signed in the following year and which withdrew from portfolio investors the title to relief for overseas company tax on the profits from which their dividends are derived. The Supplementary Protocol now before the House completes the further modifications to the Convention arising from these tax changes in 1965.

The amendments made by this Supplementary Protocol follow in general the pattern of our other recent Conventions, so I do not think that the House will wish me to go into details other than to mention the withholding rates. This Supplementary Protocol with Denmark provides that as a general rule the tax which can be charged in the source country is limited to a maximum of 15 per cent., with a reduced rate of 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. Interest and royalties will continue, as hitherto, to be exempt from tax in the source country.

Turning to the Seychelles Order, I need only say that this is yet another in the series of Orders relating to amending agreements with smaller Commonwealth countries which are intended to withdraw credit relief from portfolio shareholders. The agreement provides for this relief to be withdrawn from April, 1968. But, as in the case of some previous agreements, which in the event were not concluded until after that date, the Revenue will in practice continue to allow credit in respect of dividends paid before the new arrangement comes into force. There will be no kind of retrospective effect.

The agreement also makes suitable provision regarding a new land sales tax which we understand the Seychelles is proposing to introduce. We get interesting glimpses of other people's fiscal acrobatics in the course of surveying these double taxation agreements.

Mr. William Baxter (West Stirlingshire)

Will the Financial Secretary let us know what is the exact position of someone who may have some investments in the Seychelles? What percentage would he be permitted to take out?

Mr. Lever

I am afraid this double taxation Order does not relate to such questions, but I shall be happy to give my hon. Friend any information he requires on the investment situation in the Seychelles and, indeed, in any of the other areas which will be covered by these agreements, but I am afraid these arrangements relate only to the way in which we treat dividends coming from the Seychelles and the way in which they treat dividends which we pay to Seychelles shareholders in United Kingdom companies. They do not cover the point in which my hon. Friend is interested.

Mr. Baxter

I want to find out how investors in the Seychelles are treated with regard to dividends coming out of the Seychelles.

Mr. Lever

They are treated in exactly the same manner as they treat our investors, which is the manner which I have already recited to my hon. Friend. I shall be happy to go over it again, but I think that for the convenience of the House this must be on another occasion. I will readily make that deal with my hon. Friend.

Mr. Baxter

On a point of order, Mr. Speaker. How can I be expected to take exception or to agree to the Financial Secretary's statement if he is not prepared to reiterate a point that he has made and that I am not able to comprehend to the full without a proper explanation?

Mr. Speaker

This is an exceedingly difficult matter. We cannot ask Ministers to keep repeating statements they make because an hon. Member does not understand them. There will be a debate, and the hon. Member will have an opportunity of speaking.

Mr. Baxter

Further to that point of order. Mr. Speaker. If the Minister is not prepared to repeat and explain what he really means, can you do it on his behalf?

Mr. Speaker

That is the last thing that Mr. Speaker would wish to do.

Mr. Lever

I hope my hon. Friend will not think that I am being discourteous. I did not know that there was a feeling among hon. Members that Ministers should repeat themselves. I thought that Ministers were often guilty of doing so and that this was resented by hon. Members.

Briefly, if it helps my hon. Friend, we deduct from the dividends that we pay out to the Seychelles 15 per cent. except that where the portfolio shareholding is 25 per cent. or more in the United Kingdom company we give relief for the underlying tax paid by the company in the Seychelles. If my hon. Friend is assisted by that, I am happy. If he is not, I shall be happy to go into it in somewhat greater detail with him at his convenience.

Mr. Baxter

Surely this is an appropriate time for the Financial Secretary to the Treasury to give an explanation for my consent or Parliament's consent to a particular matter which is brought before us. If the Financial Secretary does not give us a satisfactory explanation, one must naturally take exception. I am only asking my hon. Friend in the usual manner to give Parliament an explanation of the measures which he is asking us to approve.

Mr. Lever

I have done my best for my hon. Friend. Perhaps he will follow with the same eager attention the details of the other Orders.

The third of these Orders relates to a new comprehensive double taxation Convention with South Africa. This is to replace the existing Convention, with which the House is familiar, signed in 1962. The House will recall that the existing Convention has already been amended, following the changes in our domestic tax law in 1965, by a Protocol signed in 1967 which withdrew from portfolio investors entitlement to relief for overseas company tax on the profits from which their dividends are derived. Even after amendment by the Protocol, however, there remain a number of further changes neces- sary because of our new tax system, and it was thought that the most convenient course would be to make a completely new Convention.

This new Convention with South Africa follows the general pattern of our recent Conventions, with which the House will be familiar. Again, I do not think that I need go into a detailed summary of the provisions of the Convention. My hon. Friend the Member for West Stirlingshire (Mr. W. Baxter), who is anxious to be enlightened on the Convention, will, no doubt, have a copy before him. He will see there carefully, fully and lucidly set out the details of the new arrangement to which the Convention gives effect. I hope that this new double taxation arrangement will have the approval of the House. If there are any points which trouble my hon. Friend, I shall, if I have the leave of the House, do my best to deal with them later.

The Order relating to Spain—I hope that I may have my hon. Friend's attention, since I do not want him to miss this—deals with a matter which I can elucidate briefly. It is concerned with a limited agreement covering air transport profits, providing that air transport undertakings of one country will be exempt from tax in the other country. This is the rule followed as regards air transport profits in our comprehensive double taxation agreements. Unhappily, however, in the case of Spain we have no double taxation convention as yet, though we hope to achieve one after suitable discussions. In the meantime, I think that my hon. Friend and the House will be glad to know that we have a limited agreement covering aircraft companies operating between the two countries. In other words, the United Kingdom authorities relieve of taxation Spanish aircraft which fly in this country and the Spanish authorities do not charge tax on aircraft flying in Spain which belong to the United Kingdom. I hope that that gives my hon. Friend what he wants to know.

The last Order relates to a new comprehensive agreement with Swaziland, replacing the arrangement made with that country in 1949. It takes account of recent tax changes here and in Swaziland. In 1968, Swaziland introduced a withholding tax on dividends and interest paid to non-residents, but under the terms of the 1949 arrangement the new tax could not be levied or dividends flowing to the United Kingdom. The new agreement allows Swaziland to impose its withholding tax on United Kingdom residents' dividends up to a maximum rate of 15 per cent. Similarly, we shall be able to take 15 per cent. tax on dividends going to Swaziland. In general, the agreement, like the new Convention with South Africa, follows the general pattern of our recent double taxation agreements and, in accordance with our general policy, it withdraws from portfolio shareholders entitlement to credit for the underlying tax on the profits out of which their dividends are paid. The agreement is expressed to come into effect for 1968–69, but there is provision to ensure that, in general, the relief available under the old arrangement is not withdrawn retrospectively.

I hope that all these agreements will seem suitable to the House and will receive the approval of those hon. Members who have studied them. Each one is substantial, with complex and detailed technical provisions. I do not think that it would assist the House to add to the undoubtedly lengthy studies which hon. Members will have given to the documents. If there are any questions arising from those studies on which hon. Members would enjoy an answer, I shall be happy to provide it.

10.5 p.m.

Mr. Patrick Jenkin

I cannot help feeling that the House would be absolutely appalled if on every single one of the 70 or 80 Conventions which have to be debated the Financial Secretary yielded to the blandishments of the hon. Member for West Stirlingshire (Mr. W. Baxter) and explained all their details here. Certainly I should be appalled, and I am delighted that the Financial Secretary has resisted that temptation.

I should like to say something about the object of the agreements by way of comment rather than asking the hon. Gentleman any detailed questions. He said at the beginning that they followed closely the pattern of many we have already considered. Looking at the Danish agreement, I can confirm that. As he said, it is a second bite at the cherry. The 1966 Protocol withdrew relief for underlying tax on portfolio investments. Now we are dealing with the dividends which have hitherto fallen to be dealt with under Section 31 of the Finance Act, 1966. In passing, I am interested to note that the Government have tabled Regulations extending the operation of that Section for yet a further year. Under the Section, there has been a 5 per cent. withholding tax in respect of dividends paid from a portfolio investment and a nil withholding tax on direct investment, and the direct investment has had a 50 per cent. shareholding test. Under the new Protocol, withholding tax is 15 per cent. for portfolio investment and 5 per cent. for direct investment, with a 25 per cent. test. This represents a considerable change of the pattern of taxation of dividends flowing between the two countries.

My next comment is relevant to one or two of the other agreements. I very much welcome the provision in Article 12(4) relating to the coming into operation of the Section. Article 12(2) contains what we have regrettably come to recognise as a pattern of retrospection, although there is a saving clause that nobody is to be worse off as a result of the retrospection. When we come to paragraph (4) we find that it is to apply only in relation to dividends payable on or after the date of entry into force of this Supplementary Protocol. Since the Supplementary Protocol is concerned primarily with dividends, this takes a great deal of the sting out of the criticism of the otherwise retrospective pattern.

I should like to think that possibly that paragraph owes something to the repeated criticisms directed at the Government for their insistence always on backdating these double tax agreements. I should like to think that possibly we have had some effect. If so, I very much appreciate that notice has at last been taken of those criticisms. If I am assuming too much, and this has been achieved without pressure from the House, I still welcome it.

I draw the attention of the House to the splendid undiplomatic language by which the Order would have to cease to be of effect. In Article 11 there appears the new Article XXII, which says: The present Convention shall remain in force until denounced by one of the High Contracting Parties. This is a new word for me in double tax conventions. I should very much like to be a fly on the wall when this Convention is denounced, and would only wish that it was the former Foreign Secretary, the right hon. Member for Belper (Mr. George Brown), who was doing the denouncing. That would no doubt be a sound worth hearing.

I have only one point to make on the Seychelles agreement, and it is one that I have made before when we have debated these matters, both with the present Financial Secretary and with his predecessors. It relates to the situation in an overseas territory where the whole of the company tax is deducted and retained when the dividend is paid to the shareholder. The result is that the shareholder gets his dividend from a Seychelles company net of tax, but because the tax is the same as was paid by the company, there is no double tax relief in the case of portfolio investment.

This seems to be unfair. I have drawn attention to it repeatedly. Indeed, as long ago as 1966 the then Financial Secretary undertook that when these double taxation conventions were being negotiated regard would be had to this point. We have had now a number of them, and in no single one has any regard been had at all to the absence of any relief for withholding tax in a case where withholding tax represents tax which was originally charged on a company's profits. This is not a question of underlying tax. Some part of that should be regarded as withholding tax and as qualifying for relief. Under this agreement and a number of others this has not happened. We are getting a little impatient about this.

One would hope the Government would encourage these agreements. They are principally with smaller territories of the Commonwealth where we would want to encourage investment, and, indeed, there is a conference going on at the moment in Amsterdam where this country—not the Government—is represented by a distinguished industrialist, Sir Duncan Oppenheimer, under the aspices of the United Nations, and it is aimed at increasing investment in under-developed countries. Here is another example, as there has been in convention after convention, of specific denial of any double taxation relief at all to portfolio investors and I do not think it is good enough.

I have no comment on the Swaziland Order. It appears to be entirely in common form and does not call for any special remark.

The Spanish agreement, as the Financial Secretary has said, is of very limited importance, relating only to air transport profits. The question I would address to the hon. Gentleman is, why have we not yet had a fully comprehensive agreement with Spain relating to double taxation? There is an increasing volume of investment and other movement between this country and Spain, and it is becoming increasingly inconvenient that these are having to be dealt with under unilateral provisions and not under treaty provisions. It was as long ago as 1st June, 1964, that the Treasury put out a statement which said that preliminary discussions of the question of a comprehensive double taxation agreement between Spain and the United Kingdom were held in Madrid in May, 1964, between representatives of the two countries.

It went on: From these preliminary conversations it seems likely that it will be possible to make further useful progress. It is hoped to make arrangements to continue the discussions in London in due course". That was in June, 1964. Here we are in 1969, and the most that the Treasury has been able to produce is this ridiculous little mus, this one agreement dealing with air transport profits. I hope that the hon. Gentleman can tell us what has been happening about the rest. Why have we not yet got a comprehensive agreement with Spain?

Finally, I turn to the agreement with South Africa. This is in the usual form, but this is one provision I am bound to describe, particularly in the political context in which we find ourselves, as truly remarkable. If there is one country in the whole world for which right hon. and hon. Gentlemen and Ladies opposite reserve their fullest condemnation, even to the extent of trade boycotts of one sort and another, it is South Africa, and when one thinks of the Labour Party's pathological dislike of foreign investment of all sorts, surely to goodness one would expect to find in the South African agreement the full stringency and rigour of the law being applied so that foreign investment in South Africa would be penalised to the maximum extent. This, I must tell hon. Members opposite, is not what happens under this agreement. It is quite different. Dividends here are now being treated rather more favourably under the new convention than they were treated under the 1962 Convention.

Mr. W. Baxter

Is the hon. Gentleman opposing that?

Mr. Jenkin

I am remarking on it as a truly remarkable phenomenon. Of course I am not opposing it; I am not complaining.

Mr. Baxter rose—

Mr. Jenkin

The hon. Gentleman will no doubt be able to catch Mr. Speaker's eye and make his point. I am not surprised that he finds himself rather nettled by this.

Under the 1962 Convention portfolio dividend suffered a 15 per cent. withholding tax, and dividend from direct investment only a 5 per cent. withholding tax, but a direct investment was defined as one in which an overseas shareholder had at least a 50 per cent. shareholding. Under the new Convention the percentages of withholding tax are the same, 15 per cent. for portfolio and 5 per cent. for direct, but the qualifying criterion for a direct investment has been reduced from a 50 per cent. shareholding to a 25 per cent. shareholding, so that we have the astonishing result that certain minority investors in South Africa of all countries, those who have less than 50 per cent. or more than 25 per cent., will now suffer a lower South African withholding tax than they have hitherto suffered.

They will continue to get the underlying tax relief for the company taxation provided they have more than a 10 per cent. shareholding, but as the company tax in South Africa is only 36⅔ per cent. it is conceivable that they will find that the whole of the foreign tax is eligible for relief against British tax, and that this position has actually been improved under the new Convention.

The hon. Member for West Stirlingshire asked me if I approved of that. Yes, I do; but are hon. Gentlemen opposite happy with that? We have now debated over 40 double tax conventions since the 1965 Finance Act, and I believe that this is the only example where the company investor in this country investing in an overseas country is better off as the result of the Government's tax changes. It may be only a marginal improvement, but it is nevertheless an improvement, and it is happening in South Africa.

Cecil Rhodes defined his philosophy in the southern part of Africa as philanthropy plus 5 per cent. The Government and hon. Gentlemen opposite have gone one better than that: moral condemnation plus 10 per cent. I wonder what the hon. Members for Ebbw Vale (Mr. Michael Foot) and Lewisham, South (Mr. Carol Johnson), who are constantly inveighing against the Government's liberal attitude to overseas investment, would say if they knew that under the South African Convention a company investor in this country was being more favourably treated than hitherto? It is lucky for the Financial Secretary to the Treasury that these hon. Gentlemen are not in the House tonight, otherwise I fancy we should be here for a long time.

The Orders are in their usual form. We welcome them as yet one more stage in this massive renegotiation in which the Treasury and the Inland Revenue are engaged. We hope that the process will soon be finished and that we can call to a halt this interminable "Peyton Place" of a serial story in which the Financial Secretary and I have to engage several times a month.

Mr. Lever

With the leave of the House, I should like, out of courtesy to the hon. Member, to answer the points he has made and also to correct a slip of the tongue which I made in response to my hon. Friend's intervention.

It takes two to make a double taxation agreement, we are very ready to make one with the Spanish authorities, and one is still being negotiated. We have not yet been able to get a complete agreement, but there are many respectable precedents for signing a limited agreement until the major agreement can be obtained, and we do not despair of that.

It is true that the South African agreement improves the British investor's position on investments compared with the 1962 Treaty, but it merely brings it into line, and rather less than into line, with many other countries with which we have double taxation agreements.

Finally, perhaps I might correct my slip of the tongue. I would not like my hon. Friend the Member for West Stirlingshire to be under any misapprehension. I think that I said that a 25 per cent. holding would entitle a United Kingdom shareholder in a Seychelles company to underlying tax relief. I should have said that a 10 per cent. holding in any shares held in the Seychelles would be satisfactory.

In those circumstances, I hope that the House will now proceed to pass these Orders.

Question put and agreed to.

Resolved, That an humble Address be presented to Her Majesty, praying that, on the ratification by the Government of the Kingdom of Denmark of the Supplementary Protocol set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (Denmark) Order 1969, a copy of which was laid before this House on 31st January, 1969, 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) (Seychelles) Order 1969, be made in the form of the draft laid before this House on 31st January.—[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 Republic of South Africa of the Convention set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (South Africa) Order 1969, a draft of which was laid before this House on 31st January, 1969, 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 (Air Transport Profits) (Spain) Order 1969 be made in the form of the draft laid before this House on 31st January.—[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) (Swaziland) Order 1969 be made in the form of the draft laid before this House on 31st January.—Mr. Harold Lever.]

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

c168
1. NATIONAL THEATRE BILL 53 words
c168
2. NATIONAL THEATRE [MONEY] 73 words
cc169-78
3. TELEPHONE SERVICE (PRIVATELY-OWNED EQUIPMENT) 3,714 words