HC Deb 12 January 1977 vol 923 cc1573-604

10.32 p.m.

The Minister of State, Treasury (Mr. Denzil Davies)

I beg to move, That an humble Address be presented to Her Majesty, praying that, on the ratification by the Government of the United States of America of the Convention set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (United States of America) Order 1976, a draft of which was laid before this House on 14th April 1976 in the last Session of Parliament, an Order be made in the form of that draft. With your permission, Mr. Deputy Speaker, and for the convenience of the House, I suggest that we might debate at the same time the following similar motion relating to double taxation: That an humble Address be presented to Her Majesty, praying that, on the ratification by the Government of the United States of America of the Protocol set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (United States of America) (No. 2) Order 1976, a draft of which was laid before this House on 9th November 1976 in the last Session of Parliament, an Order be made in the form of that draft. Both motions relate to a new double taxation convention with the United States. The new convention replaces the existing convention which dates from 1945 and has been modified on several occasions since then. Although many of the provisions of the new convention are similar to those contained in the earlier arrangements, there are several significant changes. Perhaps the most important relates to dividends.

The treatment proposed for dividends flowing from the United Kingdom differs from that provided in other orders which have come before the House since the introduction of the imputation system of corporation tax in 1973. In these other orders the tax credit in respect of dividends paid by a United Kingdom company has been given only to portfolio investors in the partner country—that is to say, to individuals who are resident there and also to companies resident there which control less than 10 per cent. of the voting power in the United Kingdom company paying the dividend.

Under the dividends article in the proposed convention with the United States, the tax credit will be given to United States portfolio shareholders in a similar way to the other orders I have mentioned, but United States direct investors—that is corporations resident in the United States which control 10 per cent. or more of the voting stock of the United Kingdom company paying the dividend—will also receive a tax credit. In this case, however—that is to say, in the case of United States direct investors—the tax credit will be less than that payable to portfolio investors.

In granting a tax credit to direct investors we are recognising that United Kingdom dividends paid to United States direct investors may find their way out of the corporate sector and into the hands of portfolio shareholders in the United States. This is because under our imputation system of corporate taxation the tax credit is the means by which relief is given for the economic double taxation which occurs when the profits of a company are taxed in its hands and taxed again when they are distributed to shareholders.

The extent to which we are prepared to pay a tax credit to direct investors is of course a matter of balance having regard to the terms of the convention as a whole. As with the other terms of the convention, at the end of the day it is a question of weighing up the costs and benefits.

The provision of the dividends article in respect of dividends flowing to the United Kingdom reflects the differences between the company tax systems in the United Kingdom and the United States. The United States has, broadly speaking, the same system as the United Kingdom had before the change to the imputation system in 1973. Under the new convention, the American withholding tax levied on dividends flowing from the United States to this country to direct investors will be 5 per cent. so long as we pay tax credits in the way provided for in the convention. The rate of withholding tax on other—non-direct—dividends will remain at 15 per cent., as in the convention at present in force.

There are one or two other apsects of the new convention which I should mention briefly. Our petroleum revenue tax will qualify for tax credit relief in the United States. Also, we shall be able to tax in accordance with our domestic law gains made from the disposal of North Sea licences—which we could not do under the existing convention.

The new convention will eliminate the problems which were caused by various technical flaws in one of the articles of the existing convention—Article XV—which gave rise to effects which were quite unintended by both countries when the 1966 Protocol was agreed.

There are two other provisions which are of particular interest. The first is designed to limit the power of constituent States of the United States to compute the State tax liability of United Kingdom enterprises doing business in their territory by reference to business activities of the enterprise which are unconnected with that State. The other provision is aimed at possible abuse of the convention by third country residents who choose to set up companies in either the United Kingdom or the United States solely as a means by which to secure the benefits of the convention.

I should also like to mention the article of the convention which provides a remedy for the person who is being taxed both by the United States and by the United Kingdom and who considers that the taxation is not in accordance with the terms of the convention. This is Article 25—containing the mutual agreement procedure—and it enables the two Revenues to attempt to resolve the dispute by direct contact with each other.

This procedure is, I understand, well known to international tax practitioners as the "Competent authority channel" and both we and, I believe, the Americans regard this channel as providing a very valuable means of ensuring the elimination of double taxation. We had a similar provision in the "old" convention, and it always worked well. I hope that the new provision—which is rather more elaborate than the old one—will continue to enable these problems of double taxation to be resolved satisfactorily.

I ought perhaps to comment briefly on Article 17 of the convention—that is to say, the article concerned with the taxation of public entertainers who are residents of one country and work in the other. The treatment of entertainers under the present treaty—which dates back to 1946—has been changed by Article 17 and brought into line with the recommendations of OECD to give the country in which the earnings arise the right to tax them however short the period of stay in that country.

Those with relatively small earnings will not be affected but there will be an effect on those earning more than $15,000—or the equivalent in pounds sterling—in a tax year. But the effect on American entertainers coming to work here—for example, to make a film—would not normally be anything like as severe as some representative bodies were at first inclined to think. After discussions with the Revenue and after the article had been explained, they were quite satisfied that the provisions were not as severe as they thought.

They are not as severe because of the reliefs available under the provisions of the Finance Act 1974 which the present Government introduced in connection with the taxation of "foreign emoluments". It is, of course, not a question of the entertainer having to bear tax in both countries on the same income. Double taxation is eliminated by the country of residence giving credit for the tax paid in the country where the earnings arise.

In conclusion, I would like to say that the new convention with the United States represents a determined effort by both countries to have a convention which is fair to both countries with terms that are properly balanced. It conforms to the principles of the OECD model convention, and this is to be expected, bearing in mind the important part which both the United States and ourselves play in the deliberations of the Committee on Fiscal Affairs of the OECD. This is a major convention, and a great deal of effort and negotiating skill on both sides has gone into getting its terms right. I believe the terms to be very attractive to both British investors in the United States and American investors here, and I commend it to the House.

If there are any points relating to this complex document which any hon. Member wants to raise I will, of course, do my best to answer them.

10.41 p.m.

Mr. Peter Hordern (Horsham and Crawley)

The Minister has said that this is a major convention, and that is so. It will have a profound effect on the flow of funds across the exchanges. He dealt in some detail with some of the provisions, and I am grateful for his explanation of Article 17, as I believe that it will produce some solace to those American visitors—film stars and pop stars—who had thought that their earnings were to be taxed at the United Kingdom rate.

It is a most important convention, not merely because, as the hon. Gentleman hopes, it will serve as a model for future conventions, but because of its liberalising effect on trade between our two countries. I have some criticisms of the convention, but it should not be thought that simply because the debate is late at night the convention is in any way trivial. Hundreds of millions of pounds are involved across the exchanges.

The United States has more investment in this country than the United Kingdom has in the United States. This advantage has been greatly strengthened by the massive investment in recent years by the United States in the North Sea. About £15,000 million has been invested in the North Sea altogether, but a great deal of it has come from American sources. We do not know what the price of oil will be in the next few years, but it is reasonable to expect that it will be higher than at present. We know what the interest charges on the loans so far extended will be.

We hope that the oil companies will make substantial profits. The country will get revenue through corporation tax from North Sea oil and from the petroleum revenue tax. But the reduction of the withholding tax which the convention allows—or the increase of cash available to the American oil companies made possible by the convention—will inevitably mean much higher remittances to the United States. These remittances would have been very high in any case. The Treasury estimates concerning interest, profits and dividends accruing to overseas countries from North Sea operations are that the outflow will be £750 million this year, £1,250 million in 1979, and £1,750 million in 1980—rather more than double in just three years.

The effective rate of withholding tax will now be 21.625 per cent. That is a substantial reduction from the position under the imputation system as it existed before. So for this reason there will be much larger remittances to the United States. I have confirmed this point with one or two American oil companies. There will also be an incentive to increase the rate of distribution because the ACT element, and thus the part that can be reclaimed, increases with the amount of distribution.

For example, if we compare a 25 per cent. dividend distribution with full distribution we get an effective tax rate of 48.77 per cent. on the 25 per cent. distribution, but a tax rate of only 39 per cent. on a full distribution.

I do not deny that we shall also benefit by the substantial reduction in the United States withholding tax on British companies from 15 per cent. to 5 per cent. We shall certainly get higher remittances, too. But we shall get nothing like the remittances that will flow to the United States.

My first question is: were the Treasury estimates of dividend and interest accruing to the United States from North Sea operations taken with this Convention in mind? If not, what will be the extra flow of funds accross the exchanges to the United States as a result of this substantial reduction in the witholding tax?

The Minister of State must have these figures and it is right that the House should know what these estimates are. There is bound to be a massive flow of funds amounting, in all probability, to many millions of pounds as a direct result of this measure. Not just the American oil companies will be involved. There are about 2,000 subsidiaries of United States companies in this country. They have a book value of £5 billion. Their investment last year was said to amount to $4,218 million compared with $2,300 million just three years ago. The level of investment has been increasing very fast in recent years.

These companies do not invest simply to help Britain's economy. They invest to secure a profit and to remit as high a proportion of that profit as they can. The effect, therefore, of reducing the withholding tax by some 40 per cent. will be to increase the other remittances to the United States by a substantial figure.

The House should know what the Treasury estimates of this flow will be. In 1966 the Financial Secretary to the Treasury estimated that the loss to the Revenue on dividends maintained at that time would be only £6 million. He also took into account the effect of investment allowances, which accounted for another £23 million.

The Ministers of State ought to tell the House what the present estimates are of the extra flow of funds that will occur by the reduction in the witholding tax. We are expecting a great deal from the North Sea. We only hope that the advantage to the balance of payments will be sufficiently large to meet the outflow of these remittances.

It is reasonable to expect further United States investment here. I wish the same could be said about British investment in the United States. I recognise the substantial advantage for British firms of the witholding tax being reduced from 15 per cent. to 5 per cent. But, unlike American firms, which have to pay no penalty to invest here, British firms have to pay a premium of almost 50 per per cent. to invest directly in the United States. That means that scarcely any investment takes place by a straight transfer of funds.

Money has to be borrowed in the United States, or through the Euro-dollar Market. That being so, it will be more to the advantage of British firms not to remit profits but to retain them in their United States subsidiaries. We make no complaint about reducing barriers to international investment. Indeed, we welcome it. But I trust that the Government are aware of the consequences, which, with regard to remittances, look like being far more favourable to the United States, and the US International Revenue Service, than to this country.

So much for the economic effects of the convention. I now turn to some other matters that should be clarified.

First, I turn to the film industry, to which the Minister of State referred. The Press has reported that there is considerable concern that, under Article 17, United States entertainers will face substantially increased United Kingdom tax bills on their earnings here. As I read Article 17, the word used is "may", and I take it to mean, therefore, that Article 17 is permissive in its effect and that any change in the existing position could be brought about only by special legislation in the Finance Bill. I should be grateful if the Minister would confirm that that is the position.

I hope that this position would also apply to United Kingdom entertainers in the United States, because the evidence is that the United States Internal Revenue Service takes a quite different view. It does not believe it right that companies should not be taxed if the purpose of forming them is to take control of the services of performers. It seems to have a rather different view of Article 17 than that which the Minister announced. It would be helpful if the Minister could say whether Article 17 is permissive, as it appears to be, and how the Government propose to treat it. I understand that it is to be treated under the Finance Act 1974 in terms of the treatment of American visitors here; that is to say, the same treatment as American residents. Perhaps the hon. Gentleman will confirm that.

Will the Minister also tell the House about the position of third country partnerships, trusts or estates? Is the fact that a trust may not be resident in either the United States or the United Kingdom likely to mean that a United Kingdom resident may not receive the benefits of the convention on United States source income if the trust should be set up in another country—say, the Bahamas? I hope that the Minister will be able to say whether that is the case.

Article 7 sets out the definition of "permanent establishments". As the term "United Kingdom" includes the Continental Shelf, under that article oil installations would seem to fall within the definition of "permanent establishments" and, therefore, would be taxable. I should be grateful if the Minister would confirm that that is the position.

There is another small point in Article 8, which affects shipping. This article, incidentally, is the new one in the second draft Statutory Instrument which we are considering. Should not the convention specify exactly what is a ship? The House will recall that we had some trouble about the definition of an oil rig. Is an oil rig a "ship" for the purposes of this article?

I turn now to what I regard as a major point of friction in the convention itself. When the convention was released in December 1975, three years had been spent in negotiation, and this was because the introduction of our imputation system produced a much higher effective withholding tax on American companies. That was the reason for the renegotiation. But the original 1945 convention had itself been substantially amended by the 1966 protocol. Today, even before passing the 1976 convention by means of this draft Statutory Instrument, we are being asked to pass another draft Statutory Instrument—the Double Taxation Relief (Taxes on Income) (United States) (No. 2) Order—which incorporates some amendments and additions made by a protocol last May. So, even before we pass the first Statutory Instrument dealing with the convention as it was originally intended, we find ourselves amending it.

Furthermore, discussions are still taking place on an amendment which concerns Article 9(4), which I call for convenience "the California case". At present, California imposes a tax on companies not by virtue of their operation in California alone but by the size of the total payroll of the company throughout the world. The State of Oregon does the same. It is plainly wrong that this situation should continue, and Article 9(4) attempts to put it right. I understand that this is due to be considered, as is the whole Treaty, by the Senate Foreign Relations Committee. So we cannot consider this article as firmly entrenched in the convention which we are asked to approve tonight. This is one major point which is yet to be ratified, and I ask the Minister to confirm that what I have said is correct. Perhaps he will also say when he expects the treaty to be ratified by the United States, because this is not the only matter in contention. Another matter is yet to be ratified.

I refer to Article 4 on the definition of fiscal residence, and in particular to the withdrawal of Article 15 of the original 1945 treaty and the effects of the Strathalmond case which followed it. I understand that Mr. David Forster, International Tax Counsel to the Secretary to the United States Treasury, will soon be negotiating with the Treasury not only on the California case but on the effects of the Strathalmond case. That concerns the position of what, in shorthand, I call the American wives—that is, the spouses of British citizens resident here.

I understand that Mr. Forster addressed the International Tax Association in New York on 10th January and said quite specifically that there were two major items open for negotiation. One was the California case. The other was the effect of dropping Article 15 of the 1945 convention.

The dropping of that article caused considerable dismay in the United States, and there is no doubt that the position of American wives of United Kingdom citizens in this country will be changed beyond recognition. I must, therefore, tell the Minister that we regard this treaty as transitional and subject to further amendment. No doubt it already is because of the California case.

The point about the Strathalmond case was that it did not simply affect United States citizens in the United Kingdom but also affected the American banks. As a result of it the Special Commissioners have found that interest received on loans made by one United States bank to another was not taxable by the United Kingdom Inland Revenue, although that interest could be charged as an expense. The real reason—and it was quite justified—for the concern about the Strathalmond case was that the Revenue was losing large sums of money from the American banks, far more than it could ever hope to gain from taxing American wives on their world-wide income. There is, of course, a case for re-negotiation here, but these American ladies should not be made the victims of an attempt to block a serious tax loophole made by the American banks.

I understand that a joint statement has been made today by the competent authorities in the United States and Britain to the effect that Article 15 of the 1945 treaty was never intended to have the consequences which followed the Strathalmond decision, and that the American banks should have been governed by Article 3. That statement, while helpful, does not, of course, have the force of law, and nobody would object if the Inland Revenue had put out a similar statement to the effect that the old Article 15 was never intended to have the effect seen in the Strathalmond case.

I do not think that American wives of British citizens should be altogether exempt from United Kingdom tax on money remitted and received here. That would be quite unreasonable. It would seem reasonable if they were taxed on income remitted to this country if they were domiciled abroad, and that was in practice the position of those United States citizens whose domicile had been accepted as being in the United States, even though they were resident here. Their income was taxed on a remittance basis, and that was the position before the Strathalmond case. I assume that it is correct that under the Domicile and Matrimonial Proceedings Act 1973 American women married to Englishmen after 1st January 1974 can still claim United States domicile, and if successful will be taxed on the remittance basis. It is also open to those who married before that date to try to establish domicile in the USA. Perhaps the Minister will confirm that that is the position.

It is by no means easy to establish domicile abroad. In the Bullock case last year a Canadian who had lived here for 40 years was successful in proving that he was domiciled in Canada. I remember the Minister saying in Committee upstairs that it was extremely difficult to prove domicile, and that one of the ways was to buy a burial plot in the country in which one wanted to be domiciled. If this convention goes through there will be many more grave-diggers in the USA than there have been so far.

The new agreement does not change the domicile position and does not change the basic remittance position. What it does is to remove the effects of the Strathalmond decision. It will ensure that a great deal of time and effort is taken up by American wives trying to establish United States domicile. It is right that we should consider their position. Of course they complain of the very high levels of tax in this country and the fact that their income is added to that of their husbands. Every Englishman complains of the same thing. What they also see is the different treatment of American men employed here by US corporations and the position of American wives of British subjects.

The House will recall that in 1974 the Government sought to impose United Kingdom tax on American employees working here if they had been here for five out of the last six years, and to impose tax on their world-wide incomes. There was an enormous row and huge protests from the entire American business community, who simply threatened to leave the country en masse. The banks said that they would leave the country. There were representations from the United States Ambassador and the officials of the Bank of England. The Government surrendered completely

The position now is that those Americans working here suffer United Kingdom tax on only half of their salary here, and only on income remitted to this country, provided that they are here for not more than nine years, which is not a long time.

Americans do not understand the subtle distinctions between domicile and residence. All they see is that American men get special tax concessions which are not available to American women, and they see this as blatant sex discrimination, as, indeed, it is.

The Government have had to make tax concessions to American males in order to keep American business here. The underlying problem is the ludicrous rates of tax. If the tax was not so high there would be no need to make concessions to Americans or anyone else. Nor, if we had United States levels of tax, would there be any objection to tax on a world-wide income basis. As it is, there is bound to be considerable protest about this convention in the USA before ratification, because it appears to be a blatant piece of sex discrimination.

I warn the Government that they will be under considerable pressure to modify the convention by a separate protocol. It seems anomalous that there should be a distinction between United States citizens who are domiciled here and those who are technically resident here. I think that the Domicile and Matrimonial Proceedings Act recognises this point—that those United States citizens who married United Kingdom citizens before January 1974 should be on the same basis as those who married after that date. I feel sure that there will be strong pressure to renegotiate this point.

I cannot pretend, therefore, that the convention is satisfactory as it is. Since it is open to ratification by the USA it would have been much better to have waited until these important points had been satisfactorily resolved. That is what we tried to persuade the Government to do. But we are not opposed to the main purpose of the convention, which is to liberalise trade, payments and investment between our two countries. If only the Government could introduce the same tax levels as exist in the USA, none of these problems would be with us. I fear that that is much to much to expect from this Government. That is why the convention is not as satisfactory as it should be and why we cannot give it the unqualified welcome that it would otherwise deserve.

11.5 p.m.

Mr. Peter Rees (Dover and Deal)

The Minister of State has been, as always, patient and courteous in his exposition of a rather complex order. Normally, any order introducing a measure of double taxation relief is welcome to the House and should be let through without overmuch comment, but, as my hon. Friend the Member for Horsham and Crawely (Mr. Hordern) has so ably explained, this is an order of particular importance for a variety of reasons.

First, I believe that it concerns the first major double taxation convention since the imputation system was introduced. As one who was privileged to be a member of the Select Committee that considered the various systems of dividdend, taxation, I naturally take a close interest in the order, particularly because one of the reasons which led the Select Committee to prefer the imputation system was that it appeared to give the balance of advantage to this country in renegotiating various double taxation conventions with other countries. Indeed, because this is the first major double taxation convention since the introduction of the imputation system, it may well prove to be a precedent for other orders. Therefore, it needs particular scrutiny by the House.

Beyond that, the investments of this country in the United States and of the United States in this country are considerable, as are the personal ties between the two countries and the amount of emigration. Therefore, the range of people, businesses and investments likely to be affected is large.

On the face of things, there is an unanswerable case for the Government's early ratification of the convention and the consequent introduction of the order translating it into domestic law. I understand that the initial argeement was signed in 1975. Therefore, the Minister might argue that there has already been overmuch delay before the introduction of the order. But when I started to investigate the circumstances and the background to the order I developed a certain hesitation about it. I hope that the Minister will go a little more deeply into its general diplomatic background. It must be a matter of delicacy for him to describe what is happening on the other side of the Atlantic. Already one further protocol has had to be signed, which is embodied in the second order. I believe that that is very unsual in this kind of case.

Secondly, the United States has not yet ratified the convention. I believe that the External Relations Committee of the Senate is due to be empanelled next month to consider it and take representations from various interested parties. So there can be no certainty of its ratification by the United States.

Thirdly, there is considerable concern in the individual States, particularly California and Oregon, because their tax-raising powers are likely to be affected by the changes in the unitary tax system. The House would be assisted if the hon. Gentleman would dwell a little on those factors and give his view on whether the convention is likely to pass through smoothly in the United States.

We understand that there are regular meetings between the United States Internal Revenue Service and the Inland Revenue. It would be interesting to discover whether the order is high on the agenda of matters to be discussed. It may be that both departments regard the matter as signed, sealed and delivered. If so, I suggest that neither has fully appreciated what is at stake.

I pass from the diplomatic background to some of what my hon. Friend so attractively described as the points of friction in the order which must be of concern to those concerned with it professionally and commercially. In this sort of order, it is important for us as the legislators for the United Kingdom to see whether a balance has been struck between the interests of this country and the interests of the United States. I am not asking that we should achieve a favoured position—that would be a juvenile approach to the matter—but we must see whether a fair balance has been struck between the portfolio and direct investments of both countries.

The Minister dealt only cursorily with this problem, and I hope that he will explain the exact position in more detail later. How will United Kingdom portfolio and direct investments in the United States be treated?

It is curious that the greater the quantum of distributed profits of a United Kingdom subsidiary of a United States parent company the greater the reliefs. Is this intentional or is it an accidental byplay? Has it been considered by the Inland Revenue? What lies behind it? Why is there to be this discrimination in favour of the subsidiaries of United States parent companies as opposed to branches? Are there deep economic reasons for this situation, or is it one of the hazards of fiscal legislation?

I hope that the Minister will take a little more time to persuade us that there has been a fair distribution of tax burdens and tax reliefs between the two countries and those who operate in them.

In electoral terms, entertainers and athletes may not be a significant group, but they are as entitled as any other group to a measure of justice. I wonder whether the Minister of State and those wo do his bidding have taken enough care to safeguard the interests of these people when they travel to perform in the United States. Why, for instance, are they denied the relief given under earlier articles to those who perform services in America for less than 183 days in any year? Why should entertainers or athletes who go for just a week or so be denied that relief?

What is the crucial distinction between dependent and independent services? I do not believe that this phrase has ever appeared before in domestic United Kingdom legislation, although there may be an OECD precedent. It would be helpful to hon. Members and those who study our debates on such esoteric matters if the Minister of State told us the difference between dependent and independent services.

In this context, what is a "fixed base"? If a pop star performs in California and, in order to avoid being mobbed, takes a house there for the duration of his stay, will this be a fixed base? There are such points of ambiguity on which the Minister owes us a more detailed explanation.

The American wives of United Kingdom residents or nationals are another group which are not significant in electoral terms; the social fabric and economic structure of this country does not stand or fall on what we do to them in fiscal terms, but they are as entitled to a measure of fiscal justice as any other group in this country. I wonder whether the Minister of State or anyone at Somerset House takes a close interest in such problems.

There is an uneasy feeling among those who study these matters that the Inland Revenue, having lost the battle with Lady Strathalmond, has chosen to fight that battle over again through this order. That is a rather unattractive way of attacking a very small problem. I believe that in these cases a measure of broad generosity is what we require of the Government. Why is it that an American lady who retains her American nationality but is regarded as domiciled here under the curious domestic provisions of our private international law is now to be subject to tax on her worldwide income? Why is she denied the sort of relief which, as my hon. Friend the Member for Hordern and Crawley so perceptively pointed out, is accorded to an American employee who may be resident here but retains his American nationality and is regarded as domiciled in the United States?

The Minister of State may say that this problem has been entirely solved by the Domicile and Matrimonial Proceedings Act 1973. But good lawyer as he is, he will recognise that that affects only those ladies who have married since 1973. The hon. Gentleman may say a little ungenerously, and with uncharacteristic lack of chivalry, that those who married before that date are a small and dwindling group. Nonetheless, they form an important group for which we must have a little care.

Must they take some dramatic step, such as abandoning their husbands for a period of years and buying a house in the United States so as to re-establish their American domicile? This is a matter that could have been solved a good deal more simply and with more generosity.

It may be that the Minister of State will say that these ladies benefited only by a side wind when the 1966 double taxation convention was introduced. We can only speculate on the motives that led to the introduction of that convention. We know that questions of governmental face come into these matters. The Government may be a little reluctant to withdraw the order, but as the whole matter will soon be at large, especially if it is opened up in the United States Senate, perhaps the hon. Gentleman will promise to come before the House with a protocol dealing a little more generously with this small but important problem.

Beyond that there are matters of technicality but still of importance. There is the issue of North Sea oil, which looms large in our debates at present. The companies operating in the North Sea are anxious to know whether a drilling rig, for instance, should be regarded as a permanent establishment. The words of the hon. Gentleman, well considered though they may be, will not determine these matters in the courts of law, but it would be of assistance to those who may tender for further blocks in the North Sea if they could discover their exact fiscal position. I have no doubt that they would pay close attention to the Minister of State's words. Perhaps he will say briefly and with his normal succinctness whether he believes that a rig should be regarded as a permanent establishment. Will a drilling company operating in the North Sea be exposed to tax on all its profits from those operations?

We must also consider partnerships. This is always an arcane, obscure and difficult area. Perhaps the Minister will share his thinking with the House. Contrary to United Kingdom domestic law, it seems that a partnership is to be regarded as a body of persons resident in a particular country. Resident where? What if a partnership contains a United States national, a United Kingdom national and perhaps some foreigner? Where would such a partnership be treated as resident? What happens if the main business of the partnership is controlled from Nassau but it happens to have a branch operating in this country or the United States? Where would that partnership be regarded as resident? Where would it be treated as carrying on its business?

These are difficult matters, and I do not criticise the Minister of State for not having tackled them in his opening speech. But before we let slip through our hands this difficult and complex order, it is only right that we should press the hon. Gentleman more closely. My hon. Friends who are assiduous in studying these orders will no doubt wish to raise the matters that I have mentioned as well as others if they catch your eye, Mr. Deputy Speaker.

I suggest that the order possibly needs a little closer scrutiny. One general observation, if I am permitted to make it while keeping within the rules of order, Mr. Deputy Speaker, is that, while I am not one for depreciating and denigrating the political institutions of this country, I wonder whether in the United States they do not handle complex technical matters of this sort in a more sensible way. I wonder whether the proper way to have dealt with this order would not have been through some sort of Select Committee, which could have heard evidence from the interested parties so that the House could then have judged in a dispassionate and non-partisan manner the merits of the order. I wonder whether all these important points have been fully considered by the technical experts who sit in the Official Box behind your right shoulder, Mr. Deputy Speaker, who, on the whole, with great ability and integrity consider these matters on our behalf.

It is not sufficient to be reassured by the Minister of State that all possible representations made to Somerset House have been carefully weighed and that all the objections have been met. I know that our civil servants are people of great devotion to duty and have great skill and deep learning, but, at the end of the day, these are matters of political judgment for us to weigh on the evidence. We cannot delegate these matters to our civil servants, however detached, industrious, and honest they may be. These are matters for us. I believe that it would be better if, like a committee of the United States Senate, we were able to weigh these matters ourselves and not have to rely on verbal assurances by the Minister of State or on a chance letter to us.

I suggest that the Leader of the House—not the Minister of State, because I recognise that he has a limited influence in this sphere—would be well advised to attend our debates on these small esoteric matters, because they often show up matters of considerable constitutional importance. If the Leader of the House were to study our debate tonight, he might have food for thought. I suggest that he might pause to consider whether we handle these matters as expeditiously, carefully and skilfully as the legislatures of other Powers. I say that with a certain diffidence and almost humility, because I was taught to believe that we ordered these matters extremely well in this country. However, I wonder whether we ought to update our constitutional procedures. With your characteristic generosity, Mr. Deputy Speaker, you have allowed me to stray outside the strict rules of order.

I suggest that, against that background and the possibility—not the probability—that the Minister may be here in six months introducing eight new protocols embodied in eight new orders, he should consider withdrawing the order tonight. After all, it would be wrong to ask the House to rush in where senatorial angels fear to tread or, if not fear to tread, at least prepare to tread with more circumspection than the Minister has shown tonight.

11.23 p.m.

Mr. John Page (Harrow, West)

I read these Statutory Instruments with great care, but I have to say that my understanding was not completely clear afterwards. I felt rather as the accountancy student felt after listening to a high-level lecture by a professor: he confessed that he was still confused, but at a much higher level. Having listened to the interesting and extremely clear speeches made by my hon. Friends and by the Minister of State, I am in much the same state of confusion.

I should like to ask the Minister two simple, straightforward questions. The first concerns Article 10. Will he confirm that the treatment of profits made by British firms in America is identical with the treatment of profits made by American firms in this country? In particular, is there any difference between the treatment of distributed and non-distributed profits? It is important to have that made clear.

The United Kingdom is by far the largest overseas investor, except for the United States, of any industrial country. I assume that the proportion will be similar for the United States. That is important because of the doubts in the minds of those involved in international business that the treatment is not completely even-handed.

My hon. Friend the Member for Horsham and Crawley (Mr. Hordern) put the position of American wives brilliantly. Perhaps the Strathalmond case ruling produced too favourable a result for the spouses, but it seems that the pendulum has been pushed too far forward. I find it extraordinary that these Statutory Intruments have been brought before the House before negotiations with the United States have been concluded.

Mr. Denzil Davies

Negotiations with the United State Internal Revenue Service have been completed. The only process left is ratification by the legislature in the way we seek tonight.

Mr. Page

The Minister appears to have a remarkable view of proceedings. Of course negotiations have been completed by the Internal Revenue but it is subject to ratification by the Senate. Considerable discussions there could result in further legislation.

Mr. Denzil Davies


Mr. Page

The Minister will have a further opportunity to speak.

I wonder whether the orders are unamendable in the United States as they are here. If they were amendable, we could have a fair and proper discussion. I hope that the Minister will assure us that the Government's mind is not closed.

11.28 p.m.

Mr. Nicholas Fairbairn (Kinross and West Perthshire)

I am particularly concerned about the taxation of American wives. I have no interest to declare—I do not have an American wife and I do not believe that there are any in my constituency—but, as a matter of justice, this is an issue of importance.

I was impressed by what the Minister said, although he said it—unusually for him as a distinguished lawyer and hon. Member whom I respect—more because of what he had been advised to say than because of what he thought was wise to say. I was impressed by the argument of my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) and by that advanced by my hon. and learned Friend the Member for Dover and Deal (Mr. Rees).

The Minister will certainly not find the answers to my questions in his brief, but it is important that such matters be considered. The question of the three matters—entertainers, the California situation and the Strathalmond case—was raised by my hon. Friend the Member for Horsham and Crawley. Is it or is it not the case that these matters are subject to negotiation at the next meeting of Finance Ministers in nine days' time? If not, upon what basis am I informed that Mr. Forster said that these three matters of protocol were still subject to discussion?

If the order goes forward tonight, is that likely to prejudice the negotiations on these three matters, whenever they occur? If it will not prejudice them, why not? It seems to me that it would prejudice them.

I am considerably concerned about the prejudice that will arise—I know the situation that existed before the Strathalmond case—in the differentiation between those who are wives, who happen to be American citizens, of British subjects and those who happen to be American males. The Labour Party has been devout in its concept that men and women should be treated equally, and equally devout in the concept that all races should be treated equally, although if they are distinguished in colour and tongue it is sometimes easier to make that distinction.

It is the fact, however, that under the order American wives will be treated differently from American males. The only possible justification upon which one can base that is the old concept that the wife is a chattel and is somehow united as a unum quid with the husband if she happens to be mug enough to marry him. I do not see how it can be regarded as just by the Labour Party—and I am sure not by a lawyer of such distinction as the Minister—that a woman who happens to be married to a British persona—number of my hon. Friends have said "English person" as if it was inevitably consequential—should have the whole of her income aggregated for tax here, whereas a man who happens to be married to a British woman does not suffer that penalty. That seems to me a grave and difficult distinction to justify, particularly in the light of all the law that we have passed, if in no other time. in this Parliament.

Will the Minister justify why he thinks that it is right to put forward an order tonight under which the whole income which is not brought to this country of a woman who happens to suffer being married to a British husband should be taxed, but the whole income of an American man who happens to suffer being married to a British woman and is resident in this country should not be taxed? I should like a simple answer to that question.

I respect the Minister because he is not like the Secretary of State for Defence, who appeared incapable of either understanding or answering any question that was put to him this evening. It is a simple question and I should like a simple answer. Why is that justified? Why is it right that an American wife should have income which never comes to this country taxed in aggregate with her husband's, which at 98 per cent. means confiscation, whereas her husband should not have if affairs are in reverse? Is sex discrimination still part of the fiscal policy of the present Government, or is it not? If they have not thought that matter out, I think that they should.

Secondly, why is it that the American negotiators at this month's negotiations considered that the three matters outstanding were subject to negotiation and that the Government take the view that they are not? Why should we pass an order tonight which appears to be final and which would have to be rectified if the matter is still one of dispute and negotiation?

It is a matter that concerns only a small number of people. It concerns only those who happen to be resident wives in Britain. They may be a small number, but I have always understood that if the Labour Party stands for anything, it stands for the rights of minorities and for the concept of justice and equality.

The question of equality is a matter of debate in the country of the nationals we are considering. There is not the slightest question but that those who have had the misfortune to be born as women and who have had either the judgment or the misjudgment to have married British citizens and to have come to reside here will be punished in a different way from those who happen to have a different sex or a different domicile. That in all equity must surely be wrong, and if the Minister can justify it, I hope that he will. I am sure that he cannot justify it and, for the very cogent and much more informed reasons that my hon and learned Friend the Member for Dover and Deal and my hon. Friend the Member for Horsham and Crawley adduced, I think that the Government would be wise to withdraw the order tonight, to reconsider it, and to enter into the negotiations which both sides want before reaching a conclusion which will be proved to be wrong, which may be prejudicial to the negotiations which will take place, and which will inevitably have to be amended at a later stage, possibly at a cost of much pain and embarrassment.

11.37 p.m.

Mr. Nicholas Winterton (Macclesfield)

I shall be very brief, because I do not pretend to be able to fathom all the intricacies of tax and double taxation and conventions such as those we are debating.

One of the duties of a Member of Parliament is to represent his constituents and, whether he has many constituents affected by a measure such as this or very few, it is only right that the case should be heard. I therefore fully support all the views advanced by my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) and also the very eloquent speeches of my hon. and learned Friends the Members for Dover and Deal (Mr. Rees) and for Kinross and West Perthshire (Mr. Fairbairn).

The Minister seemed to imply that this treaty had been ratified. It has not been ratified. I hope that I am correct in saying—perhaps the Minister will confirm this—that the United States Treasury officials are willing to discuss the problems of American wives here in the United Kingdom and the concept of an amendment to the treaty at their meeting with their counterparts in the United Kingdom later this month. I hope that the Minister of State will be prepared to confirm that this is the case and that the treaty is not likely to be ratified until, perhaps, February or March and that the United States Senate will be discussing many of the problems that have been raised in the House of Commons and that are being raised in the United States.

The complaints that have been lodged with me and the representations made to me are that many people were unaware that the measure was to come before the House and that inadequate discussion has taken place. I fully share the view expressed by my hon. and learned Friend the Member for Dover and Deal that these complicated matters would be best discussed by a Select Committee, when all necessary evidence could be taken and considered in an unhurried way. The House has been caught almost by surprise by this debate. Many people who have made representations to me believe that there has been inadequate consultation. Many thousands of people are affected and their case should be properly heard.

The Minister, who has considerable respect on this side of the House, is a learned lawyer. I believe that he thinks that the measure is inadequate, and I hope that he will take up the challenge of my hon. and learned Friend the Member for Kinross and West Perthshire. The best and most just thing he can do is withdraw the order, allow for more adequate discussion and bring it back when the views on those of the other side of the Atlantic are better known.

The Minister should understand the position particularly of the American wives in this country who will be hardly hit. I know that, like the Chancellor, he believes that rates of taxation in this country are penal. The order is final so far as this House is concerned, despite discussions which may necessitate a further debate. Our case is fair, and I hope that the Minister will accede to it.

11.42 p.m.

Mr. Ivor Clemitson (Luton East)

The hon. Member for Macclesfield (Mr. Winterton) said that he was not very well briefed on taxation matters, and I am even less so, but, as he also said, one should take an interest in these matters if they affect one's constituents. By far the largest company in my constituency is a wholly-owned subsidiary of an American company, General Motors. I am concerned about the effect, if any, of the order on the payment back to the United States of dividends from the British company. Will the order give a greater incentive to that company and others to distribute profits in the United States in the form of dividends, or to reinvest them? Clearly, it is in the interests of my constituents that any profits should be reinvested in this country so that jobs are preserved.

Before Christmas I asked a question which had been brought to my attention by a friend of mine who is an accountant. Could the Minister confirm that in the event of a maximum distribution of dividends the effective corporation tax payable by a United Kingdom subsidiary of an American company will be 42 per cent. and not the full rate of 52 per cent. as in the case of a wholly British company?

11.44 p.m.

Mr. Denzil Davies

There has been some confusion, if it is not disrespectful to say so, about what has and has not been agreed with the United States. The United Kingdom Executive has agreed with the United States Executive on the terms of a draft convention. The terms are embodied in the order, which has been presented to the United Kingdom legislature for ratification or otherwise. The same convention is being or has been presented to the United States legislature for ratification.

It is not a question of negotiations continuing between the United Kingdom Executive and the United States Executive. The next process is ratification by each legislature according to its own rules and procedure. The fact that the United States Senate and Congress have not ratified does not mean that we should wait until they have. Why should not they wait until we ratify? No double taxation agreement would ever be ratified on that basis.

Mr. Fairbairn

To which Senate or House of Representatives is the convention to be presented? I understand that a new administration is to take office in 10 days' time. The convention will not be presented before then, and all legislation in America falls, as it does here. How can the Minister say that the American legislature has the convention before it to be ratified?

Mr. Davies

The hon. and learned Gentleman asked me detailed questions about taxation law which are extremely difficult. He now wants me to tell him how the United States legislature orders its affairs. I am not in a position to say.

Mr. Fairbairn

The Minister should be.

Mr. Davies

No, I should be foolish to try to do so. The United States legislature will be asked—or perhaps has been asked—to ratify the treaty. If it is ratified by us and by the Americans, it will become a double taxation agreement and convention between us. No doubt the United States Congress will debate these matters as we are doing tonight. It may like or dislike the treaty, but the question for us is whether on the basis of the agreement which the Executives of the two countries have reached we think it is a fair treaty in the interests of the United Kingdom as a whole.

The hon. Member for Horsham and Crawley (Mr. Hordern) and my hon. Friend the Member for Luton, East (Mr. Clemitson) asked about income being remitted from this country with particular reference to North Sea investment as a result of the half tax credit given under the convention to American direct investment. Under our imputation system, without the convention there would be less incentive for inward investment in the United Kingdom. The hon. and learned Member for Dover and Deal (Mr. Rees) and I were on the Select Committee that discussed the matter.

To be a little disrespectful to one of our Common Market colleagues, the imputation system was invented by the French to be beastly to the Americans. It was designed to make inward investment unattractive. The imputation system makes it less attractive to investors because they may get back less money in dividend. On the other hand, the agreement we have negotiated moves a little bit away from the pure imputation system. It does not go all the way back to the old system but half way. It gives slightly more incentive for inward investment in this country.

We have to balance the fact that more dividends can be remitted abroad to the inward investor against the attraction of inward investment into the country. New inward investment from the United States would also create a considerable number of jobs, which we want to see. We have to balance that against the need to ensure that all the profits are not remitted.

The substantial inward investment in the North Sea by American companies benefits enormously—and will do so increasingly—United Kingdom finances and the balance of payments. We cannot approach this from the basis that the imputation system is perfect from an insular point of view. The imputation system would militate against inward investment, and it has been slightly modified in respect of the United States.

Mr. Clemitson

What my hon. Friend is saying is that the effect of the agreement on a subsidiary American company already in the United Kingdom will be to act as an incentive for the company to return more of its surplus to the United States rather than to re-invest it over here. Will it not act as a disincentive to re-investment?

Mr. Davies

No, I do not think that one can try to distinguish between existing investment of an existing company and new, fresh investment. An existing company is all the time considering fresh investment. I am sure that the great firm in my hon. Friend's constituency is still considering new investment, and whether the masters in Detroit, or wherever it may be, will want to consider it will depend on the taxation policies of this country. By moving away from strict imputation systems, we shall be encouraging the kind of inward investment that my hon. Friend wants to see.

Mr. Hordern

Would the hon. and learned Gentleman give the figures? In 1966, the then Financial Secretary to the Treasury gave the figures of remittance outflow across the exchanges. The hon. and learned Gentleman must know the figures of the outflow of dividends to the United States. What outflow does he think will occur as a result of this measure?

Mr. Davies

I cannot say what extra outflow, if any, is likely to occur. It depends on the dividend policies of the companies concerned, their need to invest their profits, and so on. It is impossible to work out how much extra may be remitted to the United States as a result of the measure. I cannot give the House figures of that kind.

The hon. Member for Horsham and Crawley raised a point, under Article 17, about the film industry. He asked whether the article was permissive. Part of it is. I understood him to be referring to the part relating to companies. In other words, if an American film star came here and did not get paid himself for his services but was employed by a non-resident company and the money was paid to that company, under our law, if the non-resident company was operating here—it probably would not be—we would have no power to pierce the corporate veil and look beyond to find where the money was actually going. In the United States, the authorities have not been so squeamish, and very often they look through companies. In such cases, therefore, the provision is permissive. If there were any change, it would have to be done through our domestic legislation.

The hon. Gentleman asked whether trusts established in the Bahamas will benefit under the convention. The answer is that they will not. The convention is only concerned with giving benefits to trusts established in the two contracting countries. It would defeat the object to give the benefit to tax havens, such as the Bahamas.

The hon. Gentleman also asked whether oil installations or drilling rigs were permanent establishments. I am not going to give legal advice from this Box to any company. It is a question of fact at the end of the day. But I should have thought generally that an oil installation or a drilling rig would come within the terms of being a permanent establishment. But that will be subject to the facts of a particular case. In general, I think it may be argued that such things are permanent establishments. I was also asked whether oil rigs were ships. I shall not answer that, but no doubt some are and some are not.

The next question related to the Californian State tax levied on a unilateral basis. The difficulty here is that a United Kingdom company with a subsidiary operating in California is at the moment taxed by the Californian State authorities on what is known as a unitary basis. It pays tax not necessarily on the actual profits made in the State but on the apportionment of the world-wide profit by reference to certain activities in California. In other words, the Californian legislature has passed a law not taxing the entity on what it necessarily does in California but looking at the world-wide activity.

In that kind of situation the agreement provides that a United Kingdom company will now be taxed in California on an appropriate measurement of its profits in the State of California. Otherwise more tax might be paid than would be reasonable or just. I would have thought that the House would welcome this. Most of the United Kingdom companies operating in California or Oregon would welcome that, but it is all subject to the ratification of the United States Congress.

Several hon. Members drew attention to Article XV of the previous Treaty and to the problem of American wives—the Strathalmond case. It is not a matter of discrimination against a man or woman, subject to the domicile point that I shall come to. The point is that up to 1966, as I understand it, and now under the new agreement, an American citizen resident in this country would have borne United Kingdom tax on dividends arising in the United States. Credit would no doubt have been given before 1966 and credit will be given now under the new agreement for any American tax payable on these dividends.

However, as a result of the Strathalmond case, which arose from an amendment in 1966 to the original treaty, it was decided that an American citizen resident in this country was not taxable in respect of American dividends and therefore not subject to British income tax. That was never intended in the original treaty. It only arose as a result of that amendment in 1966. It was one of the unintended consequences, but the Strathalmond case decided accordingly.

What we are now proposing is simply that an American citizen resident in this country who receives dividends from the United States shall be taxable to a United Kingdom tax. There is nothing reprehensible about that. That seems to be a perfectly normal proposition.

Mr. Peter Rees

The Minister said that was not intended in the 1966 Convention. What can he adduce in support of that proposition? Can he refer to any passage in Hansard, or any document, or must we take it on trust?

Mr. Denzil Davies

For the moment the hon. and learned Gentleman had better take it on trust. I shall write to the hon. and learned Gentleman and tell him why this was so, but I now want to get on and try to answer all the points that were raised.

The domicile issue is subsidiary to the main point. That is slightly different because as a result of the Domicile and Matrimonial Proceedings Act, after 1st January 1974 a woman could choose a different domicile from that of her husband. An American lady resident in this country could in theory choose to keep her American domicile. I realise that would be difficult, because domicile is a question of fact. But I accept that there might be an instance when someone was domiciled in the United States despite the fact that she was living in this country at the same time.

In that kind of case, after this treaty is ratified by both legislatures and if the woman is married after 1st January 1974, United Kingdom tax on American dividends will only be paid on the remittance basis. In other words, if the dividends are not remitted to this country, no tax will be payable. That will be different from the position before the Domicile and Matrimonial Proceedings Act 1973.

Without entering into any commitment, we shall look at this. But I want to stress that that does not mean that we shall change it. We shall look at it within the confines of the Treaty to see whether it might not be possible to equalise the treatment of the pre-1st January 1974 with the post-1st January position. But I say that without commitment.

The hon. and learned Member for Dover and Deal asked what was going on on the other side of the Atlantic. I think that he will recognise that I have said, as far as I know, what is going on there. The Congress will be asked to ratify.

The hon. and learned Member then asked about Article 10 and dividends. A United Kingdom portfolio investor in the United States will suffer a 15 per cent. withholding tax. A United Kingdom director investor in the United States will suffer a 5 per cent. withholding tax. A United States portfolio investor in this country will get the full tax credit which a United Kingdom resident would get in relation to corporation tax, less a 15 per cent. withholding tax. A direct investor in this country—which is where the argument has arisen about the imputation system—will get half the tax credit, or 17.5 instead of 35, less a 5 per cent. withholding tax on the total. So we have gone half way in relation to direct investment. We have not gone the whole way. We have gone the whole way with portfolio investment. But there is parity of treatment between us and the United States.

The hon. and learned Member asked what was the difference between dependent and independent services. I am afraid that I cannot give a very satisfactory answer. My understanding is that dependent services mean wages, remuneration for personal services provided by someone in the employment of someone else, whereas independent services are personal services not in employment, when a person is a sole trader providing personal services.

Finally, the hon. and learned Member asked where a partnership would be resident. I am afraid that that is a question of fact in these cases. I cannot give him a definitive answer.

I hope that I have dealt with all the questions that were put to me. I think that this is a fair and balanced treaty. Ministers always say that about almost every treaty, of course. But the interests of this country have been maintained. The United States is a very important investor in this country, and perhaps more so as a result of North Sea developments than previously, and we have to take that into account. We have also to consider our own balance of payments.

On balance, I think that we have achieved a fair result. Assuming that the United States Congress ratifies, if this House ratifies, this will become the new double taxation convention between our two countries.

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 United States of America of the Convention set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (United States of America) Order 1976, a draft of which was laid before this House on 14th April 1976 in the last Session of Parliament, an Order be made in the form of that draft.

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

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