DOUBLE TAXATION RELIEF (FINLAND) (Hansard, 14 November 1969)

§ The Financial Secretary to the Treasury (Mr. Dick Taverne)
I beg to move,
That an humble Address be presented to Her Majesty, praying that on the ratification by the Government of the Republic of Finland of the Convention set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (Finland) Order 1969, a draft of which was laid before this House on 13th October, in the last session of Parliament, an Order may be made in the form of that Draft.
This is a new double taxation convention with Finland to replace the convention which was signed in 1951. The House may remember that the existing convention has already been amended, following the changes in our domestic law in 1965, by a protocol signed in 1966 which withdrew from portfolio investors the title to relief from overseas company tax on the profits from which their dividends were derived. Even after that amendment by protocol, there still remained a number of further changes which were necessary because of our new tax law, and it was thought that the most convenient course would be the making of a completely new convention.
The new conventon with Finland follows the general pattern of our recent conventions, with which some hon. Members will be familiar, and I do not propose to go into a detailed summary of its provisions other than to mention the withholding rates.
The general rule under the new convention is that the tax which can be charged in the source country on dividends paid to residents in the other country is not to exceed 5 per cent. if the recipient is a company which controls at least 25 per cent. of the voting power in the paying company, or 15 per cent. in other cases. Interest and royalties are, in general, to be exempt from tax in the source country.
I hope that the new convention wi[...] meet with the approval of the House. If there are particular points that the hon. Member for Barkston Ash (Mr. Alison) or any other hon. Member wishes to raise, I will do my best to answer them.

§ Mr. Michael Alison (Barkston Ash)
We on this side broadly welcome the new Double Taxation Relief Order for Finland, which brings up to date our fiscal relations with that country following the 1965 reorganisation in our own taxation affairs. So far as I can see, these new arrangements benefit the United Kingdom revenue, at least by comparison with the amended 1951 convention—that is, the protocol of 1966—if not by comparison with the original convention.
Perhaps the Minister will comment briefly on the question whether the new convention is advantageous to the United Kingdom revenue, because he will appreciate that there have been a number of orders which the House has considered in the last three years—for example, those with the United States and Australia, just to mention two of the important ones—where on the whole the out-turn of the new arrangements was not quite so advantageous to the United Kingdom revenue as their predecessors had been.
Not the least of the attractiveness of the new provisions is that a number of the articles are based upon the new O.E.C.D. model articles which are increasingly finding favour amongst O.E.C.D. countries in instruments of this sort. I single out for favourable comment Articles 18, 21 and 22, relating to artistes and athletes, students, and teachers.
I imagine that the provisions which have been deliberately written into the new convention are particularly to be welcomed in the case of Finland, with which we would want to establish ever-closer relations on a cultural level, particularly in the light of its own delicate geographical and political position.
I have a number of queries for the Minister. The first relates to the new provisions relating to dividends. In the matter of the underlying tax, Article 25 provides that credit for underlying tax is to be given mutually in cases of direct investment—that is, where the resident recipient company owns at least 10 per cent. of the voting power of the paying company. The operative figure is 10 per cent. I believe that this, in the matter of underlying tax, is the normal percent- 800 age which has been a feature of the double taxation conventions that we have entered into recently. Is the new provision relating to dividends, as distinct from the percentage factor governing underlying tax, the normal one?
That means that the dividend withholding tax would normally be limited to 15 per cent., except where the ownership of the paying company by the recipient company was 25 per cent. or more, when the withholding rate drops to 5 per cent. That figure of 25 per cent. seems exceedingly high when one remembers that with underlying tax ownership of only 10 per cent. is required. Perhaps the hon. and learned Gentleman appreciates the distinction between the two percentages. Is 25 per cent. a normal figure for these sort of conventions?
My second query relates to capital gains. The Explanatory Note, which is helpful, states: Capital gains arising from the disposal of movable property are normally to be taxed only in the country of the taxpayer's residence …". With immovable property, it seems, according to Article 7, that the incidence of capital gains tax will arise in the country where the immovable property is located. There is, therefore, this distinction, that in the case of movable property there will be a tax on capital gains in the country of the owner's residence while the charge on immovable property is to be levied in the country where it is situated.
This is a point of interest in agriculture, which is one of the major activities in the Finnish economy. I wonder what will be the position of United Kingdom agricultural or pastoral enterprises which have farming interests in Finland. Presumably, since cattle and livestock qualify under Article 7 as immovable property, they will be subject to Finnish capital gains tax on a normal sale of beasts and other livestock there, as distinct from the United Kingdom. In that case, will there be liability to some form of Finnish capital gains tax?
As a penetrating conundrum, the Minister might like to reflect on a position that is common place in cattle dealing and agriculture as between the United 801 Kingdom and Ireland. If cattle—immovable property—situated in Finland were brought to the United Kingdom and disposed of here, an almost inconceivable fiscal problem would arise, since immovable property would prove to have been highly movable, and disposal would have been in the United Kingdom, whereas technically the disposal could only take place in the country of origin—Finland.
I will not bother the hon. and learned Gentleman too much with that point, but it does lead me to seek assurance on a related matter. If a United Kingdom enterprise having farming and livestock interests in Finland gets taxed on the disposal of livestock in Finland is there a corresponding offset in respect of its liability in the United Kingdom? Is the transaction only to be taxed in Finland, and is there any offset in respect of tax that might arise here?
The Financial Secretary will have noticed the very helpful commentary to the various Articles which the Treasury have provided. It explains that paragraph (1) of Article 25 provides that where income or chargeable gains continue to be taxed in both countries, the United Kingdom will give United Kingdom residents credit against its own tax for Finnish tax payable on income or chargeable gains from sources in Finland. This is reassuring, I take it to mean that it does not much matter whether tax arises under capital gains or movable or immovable property, because wherever it arises there will be a corresponding offset for the taxpayer in the country of his residence.
I hope that we can take it that if, in Finland, there is a wealth tax as opposed to capital gains tax, and wealth tax is levied on immovable property which, if disposed of, would give rise to capital gains tax in the United Kingdom, that we would offset against capital gains tax here.

§ Mr. Taverne
I thank the hon. Member for Barkston Ash (Mr. Alison) for giving me notice of one point that he wished to mention. I should like to associate myself with him in welcoming the form of the convention, modelled, as it is, on the recommendations of the 802 Fiscal Committee of the O.E.C.D. I agree that the convention is advantageous to us, but it would be a mistake to say that it is possible to make an exact calculation of its gain or loss to the United Kingdom. It is regarded as a properly balanced convention, one that is fair to both sides, but it would be a mistake to think that it must be calculated in each case in terms, as it were, a balance sheet, because there is a general business advantage in having these conventions between different countries.
I can assure the hon. Gentleman that the dividend withholding rate is as followed in a large number of agreements. The figure is normally a matter of negotiation, but in this case it is not by any means abnormally high.
There is a difference between treatment of capital gains and the treatment of taxes on capital. Taxes on capital are dealt with by Article 24, and those on capital gain by Article 14. As the Explanatory Note states: Capital gains arising from the disposal of movable property are normally to be taxed only in the country of the taxpayer's residence … whereas immovable property may be taxed in the country in which it is situated.
The hon. Gentleman asked whether cattle were movable or immovable property, and he is quite right in his inference. Article 14 states: Capital gains from the alienation of immovable property, as defined in paragraph (2) of Article 7, may be taxed in the Contracting State … But in paragraph (2) one finds: The term immovable property shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry … To the question of what the position would be if cattle from Finland were sold in this country, I would not like to give a complete answer here and now. Finland may tax immovable property—which, strangely enough, includes cattle, which seem to be highly movable—by capital gains tax. If that happens, and if the immovable property is owned by residents here, there will be a compensating credit against capital gains tax here.