DOUBLE TAXATION ORDERS (Hansard, 17 July 1969)

§ The Chief Secretary to the Treasury (Mr. John Diamond)
I beg to move, That an humble Address be presented to Her Majesty, praying that on the ratification by the Government of the Italian Republic of the Protocol set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (Italy) Order 1969, a draft of which was laid before this House on 24th June, an Order may be made in the form of that draft.

§ Mr. Deputy Speaker (Mr. Sydney Irving)
Although this and the following two double-taxation Orders differ in scope and content, they may be considered sufficiently similar to be debated together if that is convenient to the House.

§ Mr. Diamond
I am sure that that course would meet the convenience of the House, Mr. Deputy Speaker. I hope, too, that it will be convenient to it if I speak to the Orders in place of my right hon. Friend the Financial Secretary to the Treasury, who is the expert in these matters but who, I think, would be better occupied in bed rather than staying here at a late hour in view of certain circumstances.
The first of these Orders relates to Italy and gives effect to a protocol amending the comprehensive Convention which was signed in 1960. The two main features of the protocol are as follows. First, it withdraws from United Kingdom residents with portfolio investments in Italy the title to credit here for tax suffered by an Italian company on profits out of which dividends are paid. Secondly, in general, it limits the withholding tax in the source country on dividends to 15 per cent. in the case of portfolio investment and 5 per cent. in the case of direct investment.
I turn now to the Jamaican Order. This is yet another in the series of Orders relating to amending agreements with the smaller Commonwealth countries which are intended primarily to withdraw credit relief from portfolio shareholders. There is one special feature of this agreement to which I should draw the House's attention. The agreement expressly excludes from the benefits of the principal agreement any companies which, under special provisions of Jamaican law, are liable to a merely nominal rate of tax on their investment income. Such companies could otherwise take advantage of the double taxation agreement to escape almost entirely from tax on dividends paid by United Kingdom companies.
Double taxation agreements are made to deal with the problems that arise where two countries tax the same income and, as my right hon. Friend indicated when the House considered amending agreements with Antigua and St. Vincent last year, we are not prepared to allow 1077 them to be abused so that some taxpayers pay virtually no tax anywhere on income leaving the United Kingdom.
The final Order relates to a new comprehensive double taxation Convention with Austria. This is to replace the existing Convention which was signed in 1956. The new Convention with Austria follows the general pattern of our recent Conventions with which the House will already be familiar, so that I do not think I need to go into a detailed summary of its provisions.
Perhaps, however, I might mention the withholding rates. The Convention provides, as a general rule, that the tax which can be charged in the source country on income flowing from one country to the other is, in general, not to exceed 15 per cent. in the case of dividends and 10 per cent. in the case of royalties paid to a company which controls more than 50 per cent. of the voting power of the company paying the royalties. Other royalties and interest are normally to be taxed only in the country of the taxpayer's residence.
I hope that these Orders will meet with approval of the House. If there are any particular points which hon. Members wish to raise, I will do my best to answer them.

§ Mr. Patrick Jenkin (Wanstead and Woodford)
I assure my hon. Friend the Member for Birmingham, Selly Oak (Mr. Gurden) that I shall be extremely brief. I have only two points which I would be grateful if the Chief Secretary would answer.
One arises on the Italian agreement. It is a point I have made on previous occasions and which I shall continue to make every time I feel that it is relevant. This is the back dating of the operation of these agreements—to a date, in this case, over two years before the coming into effect of the Order. I appreciate that there is a saving clause that no one is going to pay any more tax as a result of the change of the rules than they would have paid under the old rules, but this only goes part of the way to meet the case.
It is in principle undesirable that rules should be changed and should be expressed to operate retrospectively, and I hope that those whose business it is to negotiate these agreements with foreign 1078 countries will take note of what is said about this matter on the Floor of the House. The Financial Secretary, who we are sorry is not with us, has repeatedly recognised that the point has substance I hope, as I have said, that those concerned will take notice and seek to ensure—although it is not always possible, I agree—that when these agreements are negotiated the commencement provisions do not operate with retrospective effect.
There is a curious point which rises under the agreement with Austria. I refer to Article 24, which is the operative article for relieving the taxpayer from double taxation, and in particular to the phrase in brackets in paragraph I which refers to the case of dividends and excludes tax payable in respect of profits out of which the dividend is paid. At first sight that would appear to preclude any relief for underlying tax paid in Austria by a company which is paying the dividend to a United Kingdom shareholder.
However, am I right in believing that that is not in fact the result of this provision? Am I right in believing that the relief which the United Kingdom taxpayer is entitled to for underlying tax if he is an investor in a direct investment with 25 per cent. of the shareholding continues to be governed by paragraph 2 of the 16th Schedule of the Finance Act, 1965, that is to say, that the apparent exclusion under Article 24(1) of the Convention would not appear to override the relief which the United Kingdom Revenue gives unilaterally under the 16th Schedule of the Finance Act, 1965?
If the Chief Secretary would comment on those two matters, I am sure that we could let these Motions go through without further delay.

§ Mr. Diamond
I am grateful to the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) for his courtesy in giving me notice of the questions he intended to raise.
He referred to Article 24 of the Austrian Agreement. He is, as usual, correct on his reading of the document. The explanation is that during the course of the negotiations it emerged that it would be right not to provide for any reciprocal obligation to give relief for 1079 indirect tax, or underlying tax. Where that reciprocity is not available in the case of the holder of 25 per cent. or more of the voting power, the normal unilateral relief applies.
He referred to the Italian Agreement and correctly drew the attention of the House to the fact that no damage is being suffered, in the sense that any taxpayer automatically, without exercising the option, gets whichever is the better treatment, either under the old or under the new, provision.
He drew our attention to the apparent retrospective effect of an Order beginning on 6th April, 1967. I am talking now only about this negotiation. I am not aware of the circumstances of the other negotiations for which my right hon. Friend has taken responsibility and about which he has responded to the hon. Member on previous occasions.
I understand that in this case that is the date inserted in the preliminary agreement as being an appropriate date, but time elapses during the course of which negotiation takes place. I fully take on board the hon. Member's point that negotiation should be speedy. However, with this and with all others it takes two people to make an agreement, and one cannot say more than that at this stage. I note what the hon. Member has said about it being far better for all of us if the date had been more contemporaneous.