UNITED STATES DOUBLE TAXATION CONVENTION (Hansard, 9 July 1979)

HC Deb 09 July 1979 vol 970 cc213-23 213

§ Question proposed, That the clause stand part of the Bill.

§ Mr. Denzil Davies
I shall not detain the Committee for long. It is a fairly late hour. As the Minister of State will perhaps tell us, clause 16 is necessary to enable the United States double taxation treaty, if and when it is ever signed, to have full legislative authority. I am not asking the Minister of State to give the reasons for the clause, which are well understood. I have no objection to it. I should, however, like him to tell us his intentions in relation to the treaty.
We read in the press again today that the hon. and learned Gentleman may depart for Washington in the autumn and may even be forced to travel to California to discuss the unitary system. This is an excellent way for Treasury Ministers to spend the autumn. I understand that Washington is very pleasant at that time of year. I would not begrudge the Minister of State his efforts to see what can be done about the unitary system of taxation.
I also understand the representations that have been made by a certain section—a fairly small section but including some important companies—of British industry which has managed to stir up a reasonable-sized lobby over recent months against the treaty. I understand its objections to the unitary system.
It is matter for the Minister's judgment whether to pursue the signing of the treaty or its ratification by the House of Commons. He knows best. I suggest, on the other hand, that he should be careful not to embroil himself further in American domestic politics. There has been considerable difficulty, not of the British Government's making, due to the emotive question in the United States of states' rights. Some see the attempt to outlaw the unitary system, through a double taxation agreement, as an infringement of states' rights. One can understand their arguments.
We must be careful. Personally, I would prefer, once the Senate has ratified the protocol, to go ahead and complete the 214 ratification before the Summer Recess. This treaty has been kept in abeyance for too long. There is, as a result, a loss to the British Exchequer and to many British companies—and not to those which have been making the noise about the unitary system. There are many other companies, some in the oil industry. which wish to see the treaty ratified.
Perhaps the Minister of State could tell us his intentions and say why he thinks further delay is necessary, and why he believes that he will be able in Washington to impress upon the Americans the need to withdraw the unitary system of taxation. We do not want to wait too long for the treaty to be ratified. It has taken a long time already. It has been a hard treaty to negotiate, and there are definite benefits to this country of having it ratified.

§ Mr. Graham Page
I cannot be so kind about the clause as the right hon. Member for Llanelli (Mr. Davies). The Minister of State is the last person whom I should wish to stab in the back, but the clause is so unconstitutional that I am astonished that it should ever appear in a Bill. It seeks to legislate about a treaty. I thought that that was the sole competence of the Executive, and not a matter for the legislature. It seeks to bind the House to two protocols about which we know very little. It is misleading in its incomplete reference to the convention. It talks about the convention signed on 31 December 1975, without reference to two later protocols and one that is in negotiation, and seeks to bind the House to those protocols as well as to the convention.
The clause attempts not to amend the statute—I should not object if it sought outright to amend the general application of section 497 of the Taxes Act—but to interpret that section just to suit an individual case. It is retrospective to the detriment of the taxpayer in that it withdraws relief to which taxpayers have been entitled over the past five years. It even fails to describe the nature and extent of that relief which it seeks to take away.
The clause seeks to deprive the other place of any power to debate this retrospective legislation. If it remains in the Bill, it will empower the Chancellor of the Exchequer to introduce a draft order 215 into the House carrying out retrospection and depriving taxpayers of relief to which, under the present law, they are entitled. Because it will be a draft order, which needs the approval only of a resolution in this House, the other House will be precluded from debating it.
In the Treasury's notes on the Finance Bill, which are available from the Vote Office, we read: Clause 16 enables full effect to be given to the provisions in the proposed new double taxation convention with the United States". It is " the proposed … convention ", so still we do not know that it is a firm convention. Indeed, it has never been ratified. But apart from that it has three protocols attached to it, one of which is not yet settled.
The background notes are frank also about the retrospective effect of the clause. We are told that it gives effect to those provisions … despite a long delay in ratifying the convention (signed in 1975) which has meant that it affects years which have now passed, and in some instances withdraws reliefs available under the existing convention. Then follows this strange statement: The clause is only an enabling provision: the substantive decision whether or not to ratify the Convention will still depend on an affirmative resolution of the House of Commons. Surely we should not have a resolution affirming a treaty. We shall have to consider a draft double taxation order under the Taxes Act to confirm the relief, or otherwise, that may arise from a treaty.
The convention was signed in December 1975, but it has not been ratified. It contains an article limiting the right of American states to impose unitary systems of tax on United Kingdom companies. Unitary taxation means, for example, that a subsidiary of a United Kingdom company operating in California, for instance, may be taxed not merely on its earnings in California but on the earnings of itself and the group throughout the world. That is what California and the state of Oregon threatened to do.
Another objection to clause 16 is that when mentioning section 497 of the Taxes Act it implies that this is merely a matter of double taxation. It is far more damaging 216 to this country than that. We are being asked to bless unfair taxation by agreeing that the Chancellor can produce a draft order instead of fighting it through diplomatic channels, as we should.
There was a subsequent protocol to the original article in the convention that the Federal Government of the United States would not impose unitary taxation on United Kingdom companies. That is not good enough. We want that undertaking not only from the Federal Government but from individual states.
The third protocol that is being negotiated puts back the original article limiting the American states in their action.
12.30 a.m.
During the Second Reading of the Bill the Minister of State tried to assure us that clause 16 was an enabling provision. If the clause had an aim or purpose, it is to enable the Chancellor to put before the House a draft order which otherwise he would not have the power to do because of its retrospective element. It endeavours to persuade the House to pass subordinate legislation, and thus preclude the other place from debating retrospective legislation.
This clause is so unconstitutional that it should be taken out of the Bill. I am not concerned so much about disturbing a treaty between Britain and the United States. I am concerned about the way in which this is being dealt with in our legislation. There must be a better way to achieve agreement on this difficult taxation problem. We should not foist a solution on the House by means of a clause which interprets rather than amends a statute and authorises the House to do something which it would not normally countenance. This is retrospective legislation—five years' retrospection—against relief which a taxpayer has been allowed, and to the detriment of the taxpayer. I ask the Minister of State to think again about the clause.

§ Mr. Peter Rees
I have to respond to the blandishments of the right hon. Member for Llanelli (Mr. Davies) and also deal with the extremely powerful speech by my right hon. Friend the Member for Crosby (Mr. Page). He and I have on many occasions battled long and hard against the principle of retrospection. I hope that I can persuade him, and the 217 Committee, that this is a special situation and that perhaps not all the circumstances have been as fully deployed in this debate as he would have liked. All I can say in extenuation is that I endeavoured to deal with this point during the Second Reading of the Bill, but the hour was late and the House was perhaps, understandably, not disposed to listen or to demand too close an exposition on that occasion. I hope, therefore, that the Committee will bear with me on this occasion.
The provision in clause 16 is an enabling one. I think that so much is common ground. It is designed to amend section 497 of the Income and Corporation Taxes Act, but it is a provision which will, if the Government are so minded when they have considered the position properly, enable them to lay an order before the House, which the House will be able to debate fully and which will translate into our domestic legislation the double taxation convention which has been signed with the United States, together with three amending protocols. Perhaps my right hon. Friend will allow me to correct him on one point. The convention was signed many years ago, as he correctly stated, and all three protocols have actually been signed. The third one was signed as recently as 15 March 1979.
The reason for this enabling provision is that an inordinate length of time will have elapsed since the convention was signed and the date when, possibly, it could be put into effect, subject to the amending protocols, if the House is so minded. I emphasise very strongly, with deference to my right hon. Friend, that there is on this occasion no particular call, unless the Committee desires to do so, to debate the substantive issue, the actual merits of the double taxation convention. There will be ample opportunity for that should an order be placed before the House.
I am caught in the cross-fire, though it is not for me to complain. The right hon. Gentleman suggests that the order should be laid before we rise for the Summer Recess, and my right hon. Friend suggests that perhaps it should not be laid at all. I think that the merits of the order could more properly be explored when, and if, it became necessary to lay 218 it before the House. I emphasise that the clause is a purely enabling provision.
I concede at once that there is a measure of retrospection here. That derives purely from the fact that about four or five years have elapsed since the convention itself was signed. The convention was designed to supersede an earlier double taxation convention, which is currently in force. The new convention, if ratified on both sides of the Atlantic, will supersede the old one, and to that extent the reliefs to which the taxpayer, both here and across the Atlantic, would have been entitled under the old convention will be superseded by such new reliefs as he could claim under the new convention.
This is a special situation and one which I am sure the Committee will appreciate does not normally occur. In extenuation I can say that under the previous Administration—to be exact, in January 1977—the House had occasion to debate the merits of the main convention very fully. They were fully explored from both sides of the House, which approved it with certain reservations. The principles were clearly accepted, so it cannot be said that the House has not had a previous opportunity to canvass, consider, debate and come to a conclusion on the main principles of the convention.
I concede that, in a technical sense, there is a measure of retrospection here. Anyone likely to have been affected by the withdrawal of reliefs under the old convention and the substitution of new, and slightly different, reliefs under the new convention has been put on notice for many years. There is no question of anyone having been taken by surprise. If there is retrospection here, it derives from a special situation and is of a highly technical nature.
The right hon. Member for Llanelli said that we should be chary of involving ourselves in a delicate diplomatic situation. No one is more conscious of that than myself and the right hon. Gentleman because the initial convention and, on dates, all three amending protocols, must have been considered, advised upon and approved by the right hon. Gentleman and his right hon. and hon. Friends.
We are sensitive to those issues particularly because today, allowing for a slight difference in time, the Senate will 219 be considering whether to ratify the convention and the three amending protocols. It would be tactless in the extreme for us to intervene in what is primarily a matter of states' rights, although it has a considerable bearing on British companies and many other foreign companies operating on the other side of the Atlantic.
These are always delicate matters when the House is debating a treaty, particularly a double taxation convention. There is no question of asking the House of Commons to legislate about a treaty. My right hon. Friend the Member for Crosby is always very exact and uses words fastidiously. He will appreciate, on reflection, that this is not legislation about a treaty. In due course the House may be asked to debate and embody in our domestic legislation fiscal provisions which will be based on the double taxation convention and the amending protocols. But that is, after all, common form, and I believe that we have had double tax conventions for at least 50 years, and maybe longer. This is, therefore, something that the House of Commons is well used to.
The point of discord concerns the possibility that individual states of the United States may be minded to impose the unitary system on United Kingdom companies, or, to be more exact, on their subsidiaries operating over there. The original convention, as it was before the reservation introduced by the Senate, by article 9(4) specifically debarred the federal authorities of the United States and Her Majesty's Government and individual states of the United States from imposing a unitary system. Unfortunately, and it is not for me to explain here tonight why, the United States Senate entered a reservation a year or so ago, and the necessary majority would not, therefore, have been forthcoming for the Senate to ratify the convention unamended.
It therefore became necessary to negotiate a protocol, which was the third protocol, signed in March this year, under which a new article 9(4) was substituted under which only the federal authorities and Her Majesty's Government are debarred from imposing the unitary system. This is, of course, a matter of regret for 220 us. We would much have preferred to see the original article 9(4).
Without seeking to canvass the merits of the issue, I can say that I well understand the concern of British and other foreign companies in the United States which are concerned about this matter. However, our Government are not empowered to enter into separate negotiations with the individual states of the United States. This issue counts as a matter of foreign affairs, and all foreign affairs are the concern of the federal authorities. We have had a report that where the question of States' rights are concerned it is a matter of considerable constitutional delicacy in the United States.
The previous Labour Administration here evidently felt that it was right—and I am not certain that I entirely dissent from that view—to accept the convention in this truncated form, recognising that neither the federal authorities nor Her Majesty's Government have expressed, explicitly or implicitly, any approval for the unitary system. This is perhaps the question of substance to which we can return if any order is laid before the House embodying the convention in our domestic legislation.

§ Mr. Graham Page
Does my hon. and learned Friend mean that within the double taxation order that we shall be asked to approve there will be some sort of approval of the freedom of the states to use the unitary tax system against our companies there? It seems to be that by approving the clause we are giving some blessing to that. If it was previously in the treaty, if it is taken out of the treaty and the states are allowed to do that, and if we approve the treaty, or the double taxation provisions of it, are we not approving this unitary taxation system on our companies in the states?

§ 12.45 a.m.

§ Mr. Rees
No. I do not think that that construction is possible. I do not think that anyone who has followed our debates or looked at the convention as amended could possibly draw that conclusion. In the convention, with the amending protocols, there is a specific provision prohibiting the federal authorities and Her Majesty's Government from imposing the unitary system. How, then, it could be argued that we are tacitly 221 approving the unitary system, I do not understand.
If, and when, we come to debate this—if the House is so minded—we shall indicate by any means that is open to us that we do not approve and do not support the imposition of the unitary system either by individual states of the United States or by any other state with whom we may be in commerce. This point has been taken up with me. I have been pressed strongly on this matter. I reassure the Committee that no words that have fallen from this Administration, or, to be fair, from the previous one, could be construed as giving any support to the imposition of the unitary system by individual states of the United States or by any other foreign Government. We shall be able to come to the merits of the issue if and when an order comes to be laid before the House.
The right hon. Member for Llanelli pressed me to say that we shall lay the order immediately. I do not know what would have been in his and his right hon. Friends' minds had he been standing at this Dispatch Box tonight. Perhaps they would have brought in the order. We have taken a different view. We have come late to this problem. We have considered it before, but, inevitably, one has to wait until one is presented with the papers. It is for that reason that I have accepted an invitation from an assistant secretary to the United States Treasury, Mr. Lubick, to go to Washington in September to review the scene with him. I know that the right hon. Gentleman has encouraged me to do that and has sung the charms of Washington in the autumn, and who knows better than he about this? This is not, as I said, a personal pleasure jaunt. There will be serious business to attend to. [HON. MEMBERS: " Hear, hear."] I am grateful for the unanimous support of the Committee. Mr. Lubick, who has visited this country, has been left in no doubt of our concern about this matter. Indeed, I think it is fair to say that the United States federal authorities are concerned about it. They are concerned about the constitutional implications.
There are two other points that deserve exploration and can be better explored over there than they can in this Committee or anywhere on this side of the Atlantic. I 222 understand that Senator Mathias is to introduce a Bill, one of the provisions of which will be to disable a state from introducing the unitary system. It is not for me to pass any judgment on the advisability of such legislation or whether it is likely to commend itself to the Senate. All I say is that this is one of the matters that I shall wish to consider and examine in Washington.
Secondly, there has been a certain amount of litigation in the United States—one case in California was that of Japan Line v. County of Los Angeles—where various companies have sought to challenge the constitutionality of the unitary system, with a measure of success, but it will be important to determine whether there is likely to be more litigation or whether the eventual outcome will be a federal decision that will demonstrate that this kind of tax system introduced by an individual state is not constitutional. These are difficult matters to explore from this side of the Atlantic, and difficult for us to debate and explore at this time in this convention's history.
I hope that I have reassured the Committee that there is no question whatever of our endeavouring to rush through some botched-up piece of domestic legislation, legislating, as my right hon. Friend said, on a treaty. If, on my return from Washington, I feel that it is appropriate, and if my right hon. and learned Friend feels able to accept such advice as I am able to tender to him, perhaps in due course, in the autumn, an order will be laid before the House and the House will be able to debate it. No doubt the Patronage Secretary and the Chancellor of the Duchy of Lancaster who organise Government business will make full time available for that. We shall then be able to debate the substantive issues and go over this ground again.
I remind the Committee that we went over the convention itself in January 1977. I did imperfectly touch on these issues during the Second Reading debate. I hope that I have reassured the Committee that nothing improper, and certainly nothing that is disadvantageous to this country, is being proposed in clause 16. I hope that the Committee will therefore support me and that the clause will stand part of the Bill.