HC Deb 10 March 1969 vol 779 cc1121-6

10.15 p.m.

The Financial Secretary to the Treasury (Mr. Harold Lever)

I beg to move, That the Non-Residents' Transitional Relief from Income Tax on Dividends (Extension of Period) Order 1969, a draft of which was laid before this House on 12th February, be approved.

Mr. Speaker

It has occurred to me that we might take this Motion with the following Motion: That the Transitional Relief for Interest and Royalties paid to Non-Residents (Extension of Period) Order 1969, a draft of which was laid before this House on 12th February, be approved, if there is no indication of opposition from either side of the House.

Mr. Lever

I am grateful to Mr. Speaker that you allow us to discuss these two Orders together. This will make them even more interesting to the House than these Orders usually are. They both deal with transitional double taxation arrangements arising out of the 1965 tax changes. The House discussed similar Orders a year ago and I need not say much about them because the House will no doubt have freshly in mind what I said on the last occasion.

In 1965 when the tax system was changed many of our existing double taxation arrangements became outdated and had to be renegotiated. This started almost immediately on the passing of the 1965 Act, but the matters covered by the agreements are very technical and the process of negotiation has inevitably often been long drawn out for reasons beyond this country's control. Accordingly, the House agreed to provisions in the 1966 Finance Act dealing with the treatment under our tax code of certain dividends, interest and royalties paid to residents of other countries pending renegotiation of the agreements with those other countries. Sections 31 and 32 of the 1966 Act provided that these transitional arrangements should run for 1966–67 and 1967–68, but the period could be extended by Order. The Orders made last year extended the operation of the Sections to 1968–69. The present draft Orders provide for a further extension in 1969–70.

Section 31 deals with a small group of pre-1965 agreements which placed no obligation on the United Kingdom to limit Income Tax on dividends going to another country, even though they placed a limitation on the other country's rate of withholding tax on dividends coming to the United Kingdom. It was felt that in the circumstances there was a moral obligation on us not to charge more tax than the other country would charge when dividends were paid to the United Kingdom.

Section 32 is concerned with interest and royalties paid by United Kingdom companies to residents of countries with which we have agreements. It is generally accepted that, where a country enters into a reciprocal undertaking to give relief from its tax on outgoing interest and royalties, it should not then effectively undo the benefit of the relief by refusing to treat the payment in question as a deduction in arriving at the taxable profits of the company which pays the interest or royalties to the non-resident. Section 32 therefore overrides provisions in the 1965 Finance Act which have the effect of treating these payments in certain circumstances as distributions of the company making them and therefore as not being deductible from that company's profits in arriving at them for computation for tax purposes.

As the House will recall, we have frequently had before us over the past year draft Orders relating to revised double taxation agreements. In particular, we have in recent months had the opportunity of debating new agreements with Denmark, France, South Africa and Sweden, which, as they enter into force, supersede the provisions of Section 31. The renegotiation of the other agreements is proceeding satisfactorily. While this is the case, it makes sense that the transitional arrangements provided in 1966 should continue to run and I therefore ask the House to agree to these Orders.

10.21 p.m.

Mr. Patrick Jenkin (Wanstead and Woodford)

I too, have refreshed my memory by looking up last year's debate on similar Orders, but the point which stuck in my mind on reading it was the extent to which my hon. Friend the Member for Barkston Ash (Mr. Alison) fell foul of yourself, Mr. Speaker, in attempting to take the debate wider than the Question before the House. I will heed the warning and address myself very closely to the question of whether the operation of these two Sections of the Finance Act, 1966, should be further renewed for another year in what one might call transitional relief in the case of dividends under Section 31 and interest and royalties under Section 32.

The question really turns on what stage we have reached in this process of renegotiation of the double taxation conventions to which the Financial Secretary referred. He has told us that the agreements to which Section 31 relates were a relatively small group of the double taxation conventions covering 11 countries. According to my calculations, six of these agreements have been negotiated and then passed by the House. He has just told us that two more—that with France and that with Sweden—have been negotiated, but, as I understand the matter, has yet to be brought before the House in the form of a Statutory Instrument. This leaves three agreements, mentioned in Schedule 9 to the 1966 Act—that with Austria, that with Japan and that with Pakistan.

It would be helpful before we pass the first of these Orders into law if the hon. Gentleman could tell us when he expects that the agreements with Austria, Japan and Pakistan will be negotiated and presented to the House. In other words, if we renew the power under Section 31 and Schedule 9 of the 1966 Act will this be the last time these transitional provisions will have to be renewed?

Secondly, I turn to Section 32 and to the second Order. Section 32 (4) refers to "any arrangements"—that is to say, it is not limited, as Section 31 was limited, merely to agreements listed in the Schedule but covers any of the arrangements as defined in the Section.

I cannot pretend to have looked through the details of all the regulations to see which were those which fell within Section 32 relating to the deduction of tax from interest and royalties but there are about 88 overseas territories of one sort or another with which we have at any time had double taxation agreements. In some cases the agreements are very limited. We have already passed through the House 44 such agreements, which means we are exactly half way and that there are 44 agreements still to be passed by the House, although some of the negotiations may already have reached fruition or certainly will be far advanced. This is in a period from the middle of 1965 to the beginning of 1969.

Therefore, asking the same question on this Order as I asked on the earlier Orders, when can we expect this process to end? Is it going to be another 3½ years? Are we going to have to renew Section 32 of the 1966 Act for a further three or even four years? I anticipate that we may find ourselves with further changes in the pattern of the Corporation Tax which will help to start the whole process over again. I hope this does not seem too depressing to those whose business it is to negotiate these agreements.

Before we pass these Orders it would be helpful if we could have some idea, on Section 31, whether the three remaining agreements are likely to be negotiated and ratified during the ensuing year and, on Section 32, how much longer we can expect this process to take. For how many more years will Section 32 have to remain operative in the future?

If the Financial Secretary could give us that information I see no reason why we should not approve these Orders without—perhaps I look around me a little apprehensively—troubling the House with a Division on this occasion.

10.26 p.m.

Mr. Harold Lever

I deal with this question encouraged by the implication of the hon. Gentleman that I shall be responsible in three or four years' time for the renewing of these Orders. The hon. Gentleman spoke with a note of reproach which would hardly be appropriate were he referring to a future Conservative Government, unless the hon. Member has an objectivity which we have not expected of him.

The short answer to the hon. Member's question is that so far as Section 31 is concerned, the new agreements have been recently signed with Japan and Norway and these will be brought before the House for approval shortly. Agreement has been reached at the official level with Austria, Finland and Germany on the text of a new agreement or protocol, and these are expected to be signed before long. That leaves only the Faroe Islands, Pakistan and South-West Africa, and these are under consideration. I think that will perhaps be encouraging news for the hon. Gentleman.

How many agreements still remain to be negotiated is, in effect, what the hon. Member is asking, and how long will this process take? My calculation is one less than the hon. Member's. I think it is because we lost a country in some amalgamation on the Asian Continent. There are only 43 cases still to negotiate, unless in the meantime during the process new nationalities emerge, which has not been uncommon in recent years. But at the time of speaking there are 43 cases still to be negotiated. We are proceeding as fast as we can, but it takes two not only to make a quarrel but to make a double taxation agreement. Consequently, we cannot get everybody to move as fast as we should like, but we hope to be through on this process as soon as other countries have come to a reasonable agreement with us upon it.

If we do not renegotiate within the time specified in this Motion, it will, I fear, be necessary for a Government of whatever complexion may be in power at the time to propose further Orders.

Question put and agreed to.

Resolved, That the Non-Residents' Transitional Relief from Income Tax on Dividends (Extension of Period) Order 1969, a draft of which was laid before this House on 12th February, be approved.

Transitional Relief for Interest and Royalties paid to Non-Residents (Extension of Period) Order 1969 [draft laid before the House 12th February], approved.—[Mr. Harold Lever.]