HC Deb 18 February 1980 vol 979 cc173-200 10.23 pm
The Minister of State, Treasury (Mr. Peter Rees)

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 and Protocols set out in the Schedule to the draft Order entitled the Double Taxation Relief (Taxes on Income) (The United States of America) Order 1980, which draft was laid before this House on 31 January, an Order be made in the form of that draft. Tonight the House returns for the third time to the double taxation convention with the United States and the three protocols. For technical reasons they are embodied in a new draft order, but in substance they are precisely the same. They are designed to supersede the convention with the United States which was entered into in 1945. With the lapse of the years there is a clear case for adjustment of the fiscal take between the two countries and of the rights and reliefs available to taxpayers of both countries.

The convention and the three protocols were negotiated with the federal authorities by the previous Administration. I make no point on that. I am not pretending that this Administration could have done any better or would have done any worse than their predecessors.

The convention was approved by the House after a debate on 12 January 1977. The principal issue debated involved the fiscal reliefs available to the American wives of United Kingdom taxpayers. A notable contribution was made by my hon. Friend the Member for Horsham and Crawley (Mr. Hordern), who mentioned that and article 9(4), which is the basis of tonight's debate.

In deference to the views expressed on that occasion a second protocol was negotiated. The right hon. Member for Llanelli (Mr. Davies) can take credit for that. That adjusted, so far as was possible, the position of American wives who might have been domiciled outside Britain had it not been for a marriage at an earlier stage in Britain's legislative history. On that occasion the unitary system of taxation, which was covered by article 9(4), was mentioned, but not in great depth. I hope that the House will forgive me if I refer to that tonight.

The general principle adopted by Britain and by other countries that have adopted the OECD model of double taxation is that profits should be allocated between the various companies of a group on what is known as an arm's-length basis. An alternative approach is adopted by some countries called the unitary or combined reporting system. Under that, broadly speaking, one amalgamates the profits of a whole group and allocates them on an arbitrary basis between the various subsidiaries so that the country in which the subsidiary operates receives what it regards as a fair tax but the group may not be so satisfied with it.

That principle has not been generally approved by those countries that adhere to the OECD model and certainly not by Britain. It has not been approved by the federal authorities in the United States. In order to cover that precise point, article 9(4) was inserted in the original double tax convention that was approved in January 1977.

Article 9(4) then prevented either the federal authorities of the United States, any state in the United States, or the United Kingdom Government, from applying the unitary or combined reporting system to any group or company resident or emanating from the other country. That was satisfactory, although I emphasise that it was not by any means the only or most important provision of the double tax convention. A whole range of other provisions were examined and debated in January 1977.

Matters progressed thereafter. In 1978, when the convention was considered by the Senate Foreign Affairs Committee—since it was considered to be an aspect of United States foreign affairs—after a keen debate a reservation was entered on the basis that article 9(4), in so far as it applied to individual states, constituted a potential infringement by the Federal authorities of states' rights. On that basis, rapidly it became apparent that the necessary two-thirds majority would not be available in the full Senate to approve the convention.

Like the last Administration, we have a certain distaste for the unitary system; on technical grounds because it does not comply with the OECD model and, more specifically, because it is an arbitrary method of arriving at the tax liability of subsidiaries operating in the countries which choose to apply that system. The compliance cost can also be considerable.

I take an example. Let us suppose that there is a group of companies, the parent company of which is based in the United Kingdom and one of the subsidiaries operates in California. I cite California because that is one of the principal states in the United States that operate the unitary system. To have to compute the whole of the group's profits on a Californian basis and then to make an allocation on a rather arbitrary basis to the Californian subsidiaries yields is, we feel, with all respect to the Californian franchise tax board, a rather arbitrary and capricious measure of profits.

Mr. Geoffrey Johnson Smith (East Grinstead)

With all respect to my hon. and learned Friend, why offer any respect? It is international robbery.

Mr. Rees

I know that there are strong feelings. They exist, possibly, on both sides of the House, but they are certainly present on the Government side. However, we must treat with a certain circumspection and delicacy the affairs of an individual state of a friendly nation. I shall demonstrate clearly that I have indicated what I conceive to be the feelings of the House, and certainly those of British industry, to the Californian franchise tax board. I was privileged to go to California in September 1979.

The unitary system is applied with any rigour only in three states of the United States, namely, Alaska, Oregon and California. There are not too many complaints by British companies operating in Alaska and Oregon. Of course, there are not many British companies operating in Oregon. In California there has been considerable concern. Many representations have been made by United Kingdom subsidiaries operating there. The matter has been taken up both in Washington and in Sacramento. I pay tribute to my right hon. Friend the Member for Crosby (Sir G. Page), who has paid a visit to Sacramento, and to the efforts of the CBI and individual companies which recently have been making representations to Sacramento and have been taking a certain part in legislation which is currently before the Californian legislature.

In consequence of the reservations entered into by the United States Senate, a third protocol was negotiated amending article 9(4). It made it clear that neither the United States federal authorities nor the United Kingdom Government would be in a position to impose the unitary system on any company based in one country but operating in the other country. However, it removed the provision that made article 9(4) applicable to individual states of the United States.

It was not possible for the House to consider the third protocol prior to the general election. The first moment that it proved practicable for the House to consider it was when clause 16 of the second Finance Bill of the summer of 1979 appeared for debate in July. I see behind me many of my hon. Friends who contributed to the debate in July.

As I indicated to the House in July, we were in no hurry to force through the convention. However, we felt it necessary to prepare the ground in case the House should feel it appropriate to approve the convention. I gave an undertaking that I would go to the United States in the autumn to sound out the position with the federal authorities in Washington and with the Californian state authorities in Sacramento, which I duly did.

After exhaustive consultations in Washington with all those who take an interest in the matter—with the chairman of the Senate Finance Committee, with Congress's Ways and Means Committee, with Senator Mathias, who has a Bill on the stocks to prevent the spread of the unitary system, and with Representative Conable, in the lower House, who has a similar bill—I reached certain conclusions that may not accord entirely with those of my right hon. and hon. Friends, especially my right hon. Friend the Member for Crosby and my hon. Friend the Member for Surrey, North-West (Mr. Grylls), who have visited the United States along with other of my right hon. and hon. Friends. I dare say that certain Opposition Members have made the trip to take their own soundings. I present my conclusions as my personal conclusions. I do not wish to be dogmatic.

My conclusion is that there is little chance of legislation in the Senate or in Congress on Capitol Hill—at any rate at this side of the presidential election—to rule out the spread or to preclude the imposition of the unitary system in the United States by legislative action. It is a delicate constitutional issue—not simply a fiscal matter—touching on states' rights. One has to approach those internal domestic constitutional matters with a certain circumspection.

It was also pressed upon me that it might be possible to circumvent the Senate's reservation by Executive action. I have talked with members of the Executive in the United States, with the federal authorities, and in particular with Under-Secretary Lubick. I reached the conclusion that Executive action was out of the question, because in a politically sensitive year in America it is unlikely that the Executive would want to circumvent the legislature. I am sure that my right hon. and hon. Friends can see an analogy here. We would be equally sensitive if the Executive were to attempt to bypass this House on a constitutional matter. I therefore report to the House, with regret, that we cannot expect action, at least in the short run, at the centre in Washington.

It was necessary to consider how far litigation might limit the rights of individual states to impose the unitary system. I am sure that my right hon. and hon. Friends who follow these matters closely will have in mind the case of Japan Lines, in the county of Los Angeles. The best advice that we received was that it would be extremely unlikely that there would be a case so exactly in point that it would be held by the Supreme Court that the unitary system was unconstitutional.

We then had to consider whether a further delay by the Government in the ratification of the convention would materially affect the prospects in California or Washington. I did not form that impression, nor do I believe that in the long run it will be possible to conduct relations between Britain and the United States, or between individual taxpayers on cither side of the Atlantic, without a more up-to-date double taxation convention.

Although California is the seat of the troubles—it is the state where there is the greatest measure of British investment and where the unitary system bites hardest—it does not only bite on subsidiaries of British groups. There is a considerable Japanese and other foreign investment in California. California is sensitive to the effects of the imposition of the unitary system on foreign investment. A Bill is currently being promoted in the Californian legislature by Representative Floyd Mori, which is making progress. It seems possible, paradoxically, that the unitary system may be outlawed for foreign companies that are not in the energy field. It is not for me to speculate how far that measure will go, or in what form it is tied up with certain measures of Mr. Howard Jarvis—who is perhaps known to the House in a different context.

My conclusion is that although it is important to convey across the Atlantic our misgivings, reservations and doubts about the unitary system, we would be unwise to chart our legislative course on the progress of legislation in America.

I emphasise that strong representations have been made not only by myself but by my right hon. Friend, by the CBI and various other individual companies, and by companies in other countries.

Mr. Tim Rathbone (Lewes)

Will my hon. and learned Friend confirm that part of that pressure could emanate, and has emanated, from companies that are seriously considering withdrawing from the Californian market because of the threat of taxation—to the detriment of the economy of California?

Mr. Rees

I absolutely take my hon. Friend's point. It would not, of course, be appropriate for me to make their case to the Californian authorities. But there was an open hearing on the Hughes/Mori Bill in Los Angeles in November, and strong representations were made to that effect by various British companies and by the CBI, which played a prominent role. I have no doubt that when my right hon. Friend paid his visits subsequently he made the same point. Indeed, I am sure that exactly the same point has been made by Japanese companies, but again it would not be appropriate for me to make their case here tonight.

The only point that I am trying to convey to the House is that we have not been supine on this side of the Atlantic. I hope the House will accept that the Administration have not been supine on the point. We have made the strongest possible representations in Washington and in Sacramento.

Returning to the double taxation convention, I emphasise to the House that although latterly and rightly the question of article 9(4) has assumed prominence, a wide range of other matters has been covered by the convention. These were very thoroughly canvassed and debated. On the basis of that debate, the House gave its approval three years ago, in January 1977.

The considered view of the Administration, which I give to the House tonight, is that even without this amendment to article 9(4) there is a very fair balance between the interests of the United States and the interests of this country—and between the taxpayers of the United States and the taxpayers of this country—embodied in the convention.

One regrets, of course, that the original article (9)(4) cannot be restored, at least at this stage, in its whole pristine glory, but the practical message that I would convey to the House—my right hon. and hon. Friends may not reach the same conclusion, although I hope they do—is that to hold up the convention would be a mistake. It is already getting a little old; indeed, the point has already been made that it will be operative back to 1973, 1974 and 1975.

To those who remain concerned about the unitary question, I say that there is no disposition on the part of the Government to let the issue die. If the House approves the convention and if it is ratified thereafter, we shall be prepared to place on record, for all to see, our reservations on the unitary system. The Administration in the United States were left in no doubt by what I told them.

Between two sophisticated and old friends such as the United States and the United Kingdom fiscal matters are subject to continuing review, and I assure the House that there will be an annual review of the working of this double tax convention. It is absurd for it to be raised automatically every year, but when the moment is propitious we shall be prepared to raise it again.

The British ambassador in Washington at this moment is mustering the EEC ambassadors to see what kind of common demarche can be made on the subject. Depending on the outcome of the Hughes/Mori Bill in California, we would be prepared to send a technical delegation to see whether any sensible guidelines can be worked out for the application of the unitary system. I say that it depends on the outcome of the Hughes/Mori Bill because, in the event of that Bill becoming law, the problem for this country will almost totally evaporate. I emphasise that the Hughes/Mori Bill specifically excludes companies operating in the energy field, but, leaving those aside, the Hughes/Mori Bill, certainly in regard to California, would largely solve our problems. If, by any mischance, it were not to become law, we would be prepared to send a technical delegation to Sacramento to see whether guidelines could be worked out to ease the compliance costs in relation to British companies within the net.

I hope that on that basis the House will accept that the convention strikes a fair balance, that the Government have not been supine in making the British case against the unitary tax system, and that the House would be well advised to approve the double tax convention and the three protocols.

10.45 pm
Mr. Denzil Davies (Llanelli)

I am sure that the House is grateful to the Minister of State for the detailed way in which he has, as always, dealt with this difficult and complicated matter. We are grateful to him for going through the background again, especially the problems of article 9(4).

We are debating an order that in some ways is rather strange, because we have already approved the treaty. We approved the treaty and the first protocol in January 1977 and we approved the second protocol in June or July 1977. Presumably, whatever the House were to do tonight, those orders would stand. Therefore, in reality, all that is required is that the House should look at the third protocol which amends the original protocol.

Perhaps in winding up the debate the Minister will tell us why it was necessary to bring forward this order again. In theory, I suppose that the House could vote down the first order and the two protocols. What would then happen to the original ratification I do not know. It is an unusual procedure. Therefore, I ask the Minister to tell the House why it has been done in this way.

As the hon. and learned Gentleman said, there has been a delay in the ratification or in bringing forward the third protocol, which amends article 9(4), as a result of Congress not approving that article.

As I said in the previous debate, it was a matter for the Minister's judgment whether he felt it was necessary to go to Sacramento and Washington in the summer to put the British case. I do not question his judgment. But there has been some delay. Whether that delay has improved matters I know not, but clearly one must say that the Americans are now probably more aware than they were at the time of the strength of feeling in this country. From that point of view, it is only right that the Minister of State should have made the representations that he made. Whether some revenue was lost as a result of that delay I do not know, and would not wish to ask him. However, I accept his judgment entirely in deciding to go and put the British case.

Before coming back to article 9(4), perhaps I might point out that the main reason for the treaty, apart from the fact that the previous one was getting old, was the introduction of the imputation system of corporation tax by the previous Conservative Government as a result of the approval of that system by a Select Committee of the House. The Select Committee was impressed by the arguments that the imputation system would save some money for this country on the balance of payments. I seem to remember that we were swayed by the figure of £50 million—which at that time was thought to be a lot of money—on the balance of payments. Things have since changed. But that, as much as anything, was why the Select Committee approved the imputation system.

I always thought it unrealistic to believe that the imputation system could remain completely unsullied in international negotiations. In theory, it was all very well, but in practice, as was proved when trying to apply it to a United States-United Kingdom double taxation treaty, it was optimistic to believe that it could remain entirely unsullied, and it did not, because there are credits for both port- folio and direct investment. Because of the weight of money flowing between our two countries, that concession had to be made, and that concession has been followed by other concessions in other treaties. So the imputation system does not now remain as wholly as it did.

A balance had to be struck. We had to strike a balance between greater dividends flowing out of the country as a result of the credits given for portfolio and direct investment and the greater benefit to the country because of greater investment coming in, because investors could see that they could repatriate some of their profits. It is a difficult balance to strike, but it is about right. I think it is right—especially in view of the importance of the United States in terms of inward investment into this country—that that balance should have been struck in the way that it has been struck.

Coming back to article 9(4), I have always had sympathy with the United States argument that if the unitary system is to be outlawed—I think that it should be outlawed—it should be done by Congress. I do not understand the technicalities of the argument, but I think that it is not entirely satisfactory in a treaty to try to change domestic legislation; that should be done by the domestic legislature.

Having said that, we must make it clear to our American friends that we have little sympathy for the unitary system. It is arbitrary, extremely complicated, imposes a lot of extra work on companies, and is patently unfair. Now that we have accepted that Congress has power to put this matter right, Congress should try to achieve that. I understand the problems of bringing legislation forward, but I hope that Congress will now see the sense of outlawing the unitary system. American companies will suffer at the end of the day, other countries will copy—as they are thinking of doing—the unitary system, and I should have thought that that would affect American investment in those countries.

It is a question not just of British companies seeking to obtain an advantage but of international investment in general. The United States has as much to gain as any one else from that kind of investment. Quite apart from the California situation, I hope that Congress can find time to put this matter right and accept that the unitary system is not in the interests of British or American companies.

I do not want to detain the House. These matters have been discussed before. However, I have one or two questions to put to the Minister of State. If the Bill in California does not go through and British companies have to pay Californian tax on the unitary basis, so that presumably a greater amount of tax would be paid than would otherwise be the case, would they be able to credit that tax and obtain unilateral relief in respect of it against United Kingdom corporation tax? That is an important point. My understanding is that they would. I hope that the Minister can clarify that point. Clearly that would not be the best solution, but companies should know what their position would be if it came to that.

I notice that in article 12(3) royalties from films are excluded. Perhaps the Minister could tell us why. Most other royalties are covered. In article 28 there are various dates for the operation of the treaty and for the benefit of those who have to operate the treaty. Perhaps the Minister can explain why those dates are different.

Double taxation agreements do not in themselves stimulate international investment; they help it and give some certainty to taxation provisions. International investment is encouraged by a fairly stable economic climate. I do not wish to enter upon an economic debate at present, but I hope that the Government will see the error of their ways and improve confidence in our economy. I also hope that problems of international finance—the dollar, other currencies and gold—will be solved or at least alleviated, so that investment and trade can begin to flow better than at present.

We negotiated this treaty. I do not believe that the third protocol is any different from the one that we would have brought forward. I understand why the Minister of State wished to delay the matter, but I am sure that the House will want to approve all these orders.

10.53 pm
Sir Graham Page (Crosby)

It was about four years ago that the House gave a blessing—or almost gave a blessing—to the convention that is now set out in the schedule to the draft order that we are considering. If the House approves this draft tonight it will enable the Government to ratify that convention and to bring considerable tax benefits to many enterprises in the United Kingdom, from insurance to entertainments, from shipping to mixed marriages, and many others. So there are great benefits to be drawn from the approval of this order and the acceptance of the convention.

I said that four years ago we had approved the order and given it a blessing, "almost". There is a clause missing now, as has been explained by my hon. and learned Friend the Minister of State. It is that provision which was in the original convention prohibiting the States in America from using the unitary taxation on a world-wide basis, a system which, as my hon. and learned Friend has explained, is very damaging to British companies which have subsidiaries or even any kind of business within some of the States in America.

Here I must, perhaps, declare an interest. Some of the companies in this country thought the matter so important that they were kind enough to pay my expenses and an honorarium to go and talk to Congressmen in America in order to explain how we felt about it here. I went backed by 130 signatures of my colleagues on an early-day motion in the House, with my hon. Friend the Member for Surrey, North-West (Mr. Grylls). We followed, as it were, in the footsteps of the Minister, who had very ably been putting the Government's case, Government to Government. We thought that perhaps we could supplement that by putting the case from Parliament to Congress. Therefore, we discovered, by talking to a great number of Congressmen and Senators, exactly the feeling there.

Before we set out, I had certainly thought that the right thing to do was to try to get this provision put back into the convention. But we quickly found that that was not the right way to tackle the matter. Those Congressmen and Senators to whom we talked and who were anti-unitary tax and were all in favour of outlawing it did not wish to do it by means of the treaty. They thought that the right way to do it was by federal legislation.

My hon. Friend the Member for Surrey, North-West and I were happy that before we left Washington in the autumn two Bills had started there, one in the House of Representatives and the other in the Senate, both outlawing unitary taxation on a world-wide basis. Both Bills had been backed by quite a number of Members of each House respectively.

I am sure that this House will know that the procedure in the Congress and the Senate is a little different from ours. They go through a number of committees with their legislation before it reaches the House or the Senate. So we were eager to get each Bill started on its stages through its committees—committees of revenue and taxation, of ways and means, and even a rules committee, before it ever reaches the Floor of their House. We endeavoured to get undertakings from the chairmen of those committees that they would start committee hearings. We got some fairly firm assurances that, the Bills having started, committee hearings would be fixed as soon as possible, as soon as their schedule would allow. We came away in the autumn feeling that at least we had put the case from this House to Congress, and that there was a good chance of at least the Bill in the House of Representatives starting off its committee hearings.

Time passed between the autumn and Christmas, and so far as I could ascertain the legislation process in Congress was not moving very fast. I thought it worth while to talk to those chairmen of committees again to see whether we could hasten it. I went after Christmas and I found that the attitude against unitary taxation had strengthened very much. They were really determined to proceed with legislation, and because California had apparently decided to outlaw that form of taxation there was not that feeling between the states and the Federal Government as there had been before. In the centre, they now did not mind attacking the states on this subject, because the leading state—California—had itself attacked and decided to abolish it.

We had some fairly firm undertakings in January that the hearings would proceed with that federal legislation. Even more important, I was able to go to California to find out how the legislation there was proceeding. Incidentally, I arrived with the earthquake, and I thought it very kind of whoever does that to announce my presence with an earthquake. I found that the Bill had just completed all its hearings in the House of Representatives. Just after I left it went to the lower House, and all those concerned with it seemed quite sure that it would go through the Senate and that there would be no trouble. In fact, they were sure that whereas the energy companies had been excluded, they would be reinserted in the Senate and that a comprehensive Bill would get on to the Californian statute book.

We are now almost dead certain that California has outlawed this tax. California was the leading state that imposed the tax. It has found that it is losing over it and that it is driving enterprise away, and it has therefore decided to abolish it. I gather that Oregon is following in step and that it is no longer pressing for unitary taxation. Alaska has never been terribly eager to do anything about it, and the fourth state—Maryland—uses it only in a limited sense.

If we approve this draft order tonight, it means that we are relying on our friends in America who, generally speaking, think the same way as we do on this unitary tax question. We are relying on them to complete their legislation and to abolish this grossly unfair tax there. I feel some confidence that they will do so eventually.

My hon. and learned Friend is right in saying that the federal legislation will not be completed before the American election, but, if it has proceeded through a number of its committee hearings, the information that I was given was that it would be revived in the next Congress with little difficulty, because when a Bill has been seen to go through quite a large amount of its legislative procedure it seems that it will be successfully revived.

Although I have been extremely hesitant throughout about approving the draft order, which seems to omit a provision prohibiting unitary taxation on a worldwide basis by the states in America, I now feel that we are justified in approving it, first, because of the assurances that I have obtained from those concerned in the United States and, secondly, because of the very great benefits that other parts of the convention give to United Kingdom enterprises.

11.4 pm

Mr. Michael Grylls (Surrey, North-West)

Like my right hon. Friend the Member for Crosby (Sir G. Page), I was asked to help in this matter by a number of leading British companies. I have been with him to the United States on a number of occasions during the past nine months to try to assess the possibility of legislation. I also have an interest to declare.

In 1978 the Senate considered the convention and the so-called Church reservation was put in. That was a setback for the British Government. A major part of that convention had been shot out. The Government found themselves obliged to accept the convention, with a major part that was of great importance to British companies removed. Perhaps we can learn a lesson from that.

It has not been a partisan debate, and I hope that the right hon. Member for Llanelli (Mr. Davies) will not take my comments amiss. Since 1978, certainly in the first year, the Government appear to have done little to put the matter right. It appears that they accepted the situation and took no great diplomatic initiative to put it right.

Many of our most important companies operating in the United States were at great risk as a result of article 9(4) being removed from the convention. They are subjected to the vagaries of that extraordinary and unfair taxation system throughout the United States.

At present EMI is involved in a court case in California. It was asked to produce figures for its business in England. Part of that business concerns defence and is covered by the Official Secrets Act. EMI wrote to California saying that it could not disclose that information on penalty of imprisonment, because of the Official Secrets Act. California nevertheless imposed a 25 per cent. tax penalty for non-disclosure. That is an illustration of what British companies are subjected to.

The world-wide reporting basis is not only unfair, as my right hon. Friend described, it has been perceived by the Californians to be counter-productive. British and other companies that are subjected to the tax will, at the end of the day, withdraw.

It is important that we should understand a little of the detail of what companies are subjected to. One of the factors considered in the world-wide reporting basis is the inconsistency of the property factor. Great confusion is caused by inconsistencies between states. I shall quote one of the five property factors. Goods in transit are included in the numerator for the destination state in 14 states but excluded from the numerator and denominator in four states. Wisconsin treats such goods as if they had already arrived at their destination. That is just one of many complications that companies have to deal with in trying to assess the world-wide reporting system. The administrative cost in coping with such problems is unfair.

The right hon. Member for Llanelli was concerned with the problem for a time. We should all learn the lesson. When something appears in the convention that is not right, the Government have a duty to take prompt action to rectify it. When the Church reservation was first entered in June 1978 the Government should have stated that they did not like the convention and discussed improvements. They could have mounted a campaign. Very little was done.

The Government should protect not only their citizens but their great trading companies. They are a considerable asset to the country.

Our investments in the United States amount to $7,000 million. It is in British interests to see the matter put right.

My right hon. Friend the Member for Crosby described the good news from California, but the House should be aware that there are other states—Oregon, Alaska, Maryland and Vermont—where this is happening. If this matter is not resolved quickly British companies operating throughout the United States, even if they have only distribution depots in one of these states, will be subjected to the vagaries of a world-wide reporting system. What has happened to the Mobil oil company in Vermont could happen to a British company. That company, with a distribution depot in Vermont, was taxed on all its foreign source income going into its headquarters in New York. That was lumped on top of the profit made solely in Vermont. That crazy situation is liable to affect British companies operating throughout the United States.

It is good to see the progress that has been made and that, we hope, will be completed when Bill 525—the Hughes/Mori Bill—goes through the Californian Senate. That will he a step forward. As my hon. and learned Friend the Minister of State said, it is an important advance. I pay tribute to my hon. and learned Friend, who has dealt with this matter in an active way since taking office. He realised that there was a real problem. He was there just before my right hon. Friend and me. I know how hard my hon. and learned Friend worked to try to convince opinion formers in Congress and in California of the need to put this matter right.

My hon. and learned Friend said tonight that the House is taking on trust our friends in the United States Congress to get the matter put right. We have to rely on them absolutely. I have some good news. When my right hon. Friend and I were there in January we had meetings in Congress with Congressman Rostenkowski, the leader of the task force, who considered the whole question of taxation in 1977 and produced the report saying that the unitary system should be outlawed. In nearly three years since the report there has not been any action.

As my right hon. Friend said, we met chairman Ullman, the influential chairman of the Ways and Means Committee, who said that he would look at the matter and see whether some hearings could be brought forward. I am able to tell the House that last week, on 13 February, I talked to chairman Ullman on the telephone, as had been arranged when we saw him in January. He gave me an assurance, agreeing that I could so inform the House tonight, that hearings will be scheduled this spring on Bill 5076, the Bill in the House. We can therefore see that there is to be real progress in Congress. As soon as the convention is ratified, dates for the hearings will be announced. Chairman Ullman gave me the clear assurance last week that these would take place during the spring.

I am sure that the promise is copper-bottomed. It it essential that this should be so. It is crucial for business relations between two countries as close as Britain and the United States that this matter should be resolved. Otherwise we risk generating friction not only between our business enterprises but between our countries. We explained to people in Congress, as fellow parliamentarians, the real problem that existed and that the change they had made in the treaty had created a problem for us. We appealed for their help to try to solve it.

One cheerful factor is the comment of the United States Supreme Court that counters the argument of those who stress the delicacy of matters related to state rights. The Supreme Court said: The United States must speak with one voice regarding such international activities. It is not right for individual states to speak with different voices on matters of international business. We are relying on them. Britain has the biggest investment of any foreign country in the United States. We are the closest of friends. I am sure that we want to go on investing and expanding business there. I am sure that this also benefits the United States.

It will be a tragedy if the matter is not put right in California, Oregon and the other states and dealt with in a proper federal way, so that we can go on investing there. Their system of taxation is dangerous and short-sighted. Indeed, it is increasingly being seen by the states as a short-sighted policy and a mistake. Many countries have made mistakes in taxation and they are wise if they change.

We hope that there will be legislation and we have an assurance from the chairman of the Ways and Means Committee that he will start hearings in the spring. That is a step forward, and the message from the Back Benches tonight should be that we accept the treaty and the convention and rely on our friends to sort out the thorny problem so that United States—United Kingdom relations can return to a fair and friendly basis.

11.16 pm
Mr. Nicholas Baker (Dorset, North)

I am grateful for the opportunity to raise a point that does not relate to the unitary basis of taxation. I share the views expressed on that matter and am happy to support the order on the basis outlined by my hon. and learned Friend the Minister of State.

It has come to my attention that a new form of capital gains tax is likely to be passed in America. Two Bills are going through the House of Representatives and the Senate. The tax would be levied on citizens, whether resident in the United States or not, in respect of real property transactions within the United States.

The tax would apply to disposals made after 31 December 1979 but would not override conflicting treaty provisions for five years thereafter. The existing convention between the United Kingdom and the United States conflicts with the proposed tax because it provides that, as a general rule, a resident of the United Kingdom is to be exempt from United States taxes on gains from the sale of capital assets such as real property.

The proposed convention that we are discussing does not conflict with the proposed tax. Article 13 of the convention says: Except as provided in Article 8 (Shipping and air transport) of this Convention, each Contracting State may tax capital gains in accordance with the provisions of its domestic law. If the new capital gains tax is enacted, as I gather from American friends is likely, and the proposed convention is ratified, residents of the United Kingdom will be fully within the scope of the new tax.

Our general rule is that we do not tax, on the basis suggested in the proposed American tax, non-United Kingdom residents on sales of real estate. If we ratify the convention and the Senate's proposals are carried out in their present form they will bear unfairly on residents of the United Kingdom who realise capital gains from the disposal of United States real estate.

I draw the point to the attention of my hon. and learned Friend. He may already be aware of it, but it is certainly a matter that he should consider in his annual review.

11.20 pm
Mr. Keith Wickenden (Dorking)

I wish to draw the attention of my hon. and learned Friend the Minister to the issue that was raised by my hon. Friend the Member for Dorset, North (Mr. Baker). I do so with both trepidation and confidence—trepidation, because it is a bold man who raises an issue on any form of tax convention, let alone a double taxation convention, especially in the presence of one so skilled in these matters as my hon. and learned Friend, and confidence, because it directly affects the affairs of the company of which I am chairman. The registered office of that company is at No. 1 Camden Crescent, Dover, which will not be unknown to my hon. and learned Friend.

As I understand the position, capital taxation was specifically exempted from the convention because at the time that it was negotiated the rules of both countries were that non-residents were not subjected to capital taxation outside their own countries. That was a reasonable assumption to make at the time, but since then there has been an attempt within the American Senate to introduce legislation that would tax capital gains by foreign residents, especially on real estate and agricultural land.

The provisions were of special importance to individual Senators because of what was judged, in the United States, to be the minor scandal of Arabs buying large areas of agricultural land in highly sensitive agricultural areas, realising huge gains within a short period and avoiding taxation.

I corresponded with my hon. and learned Friend last October on the matter. At that time it was believed that the measures then before the United States were unlikely to become law. Since that time, as my hon. Friend the Member for Dorset, North said, a United States Treasury Bill has been introduced—Bill No. 2247—which effectively taxes overseas companies or individuals resident outside the United States who realise capital gains arising from transactions inside the United States.

Since the convention before us specifically excludes capital gains it follows that double taxation relief is not available to United States companies. Furthermore, there is an element of retrospection in the United States Bill. The date from which the measure will apply is not yet known. That is a matter of considerable concern. Neither is it known what transitional arrangements will take place.

We do not know that the Bill presently before the United States Senate will become law, but it is confidently believed that it will. If it does, I hope that my hon. and learned Friend will take the opportunity to review the position in the future to see whether the convention that we are being asked to approve can be amended. It affects not only my company but many other British companies.

11.23 pm
Mr. Roger Moate (Faversham)

I am rather disappointed that my hon. and learned Friend the Minister felt it necessary to bring the motion before the House, although I fully understand why, after a long period, he felt it necessary to do so.

In deciding whether to vote for the motion, I am influenced considerably by the remarks of my right hon. Friend the Member for Crosby (Sir G. Page), who, I appreciate, has done so much in connection with the matter. I endorse the remarks of my hon. Friend the Member for Surrey, North-West (Mr. Grylls) about the efforts of my hon. and learned Friend, who has contributed an immense amount of expertise and energy to solve this very real problem.

I am disappointed that the motion is before us, for a number of reasons. As has been said, if the treaty is ratified we shall depend immensely on the goodwill of our friends in Congress and in certain states of the United States to carry out what we consider to be their side of the bargain. They are our close friends, and we are entitled to feel a great sense of trust and goodwill towards them.

However, when dealing with business matters we find that it is a hard world. I feel that we should depend more on our votes than on fine words. In a sense, Parliament is expressing a degree of impotence by accepting the treaty in its present form. It was not so long ago that Parliament expressed its approval of a different version of the double taxation relief treaty. That was our expressed view.

We have no powers to amend such a proposal in the House. It is a different matter in the United States Senate; it has powers to amend. Therefore, the treaty was changed. The power of the vote was exercised there. It was sent back to us and we accepted the amended version, although it was generally accepted that that amendment was detrimental to British interests.

I would much rather that we used our votes to express our feelings on this issue, therefore. I have a feeling that such a move would concentrate enormously the minds of our friends across the Atlantic. It might produce much quicker results than any other form of action. I, too, hope that federal and Californian and other state legislation to deal with the matter will be passed. But I am not sure that we should depend upon hope and trust. I would rather we did what we seldom do in this House, and that is to use our votes effectively.

Nevertheless, I must be guided by my right on Friend the Member for Crosby, who has had much more contact with those involved in these negotiations. I am disappointed for a number of other reasons. It is a bad international precedent for the British Government or any other nation to have to look to perhaps 50 states in the United States for an understanding of the way in which we are to conduct our international tax affairs. That cannot be right. I am sure that the United States understands that that is a grossly unsatisfactory situation.

It is a bad international precedent, because of the damage that it could do to all world trading nations. In the earlyday motion we urged the Government to do their utmost to ensure that any contrary arrangement be rectified so as to avoid a harmful international precedent and serious consequences for both British and United States companies with overseas interests. If the United States fails to thwart the unitary tax threat in the United States, and if treaties of this kind are seen as examples to be followed elsewhere, might not other countries such as Nigeria adopt similar practices and endanger the trading activities of all companies with worldwide interests?

The United States has as much to lose as the United Kingdom if treaties of this kind proceed. There is an OECD model double taxation treaty that does not allow unitary taxation. How much better it would be if our treaty with the United States were to follow that model agreement. I therefore express my disappointment for that reason.

We should be a little hesitant about seeing this matter as a great constitutional issue, in the United States, of states' rights. I understand the delicacy of the matter, but history does not show that it has given rise to great argument between the states and the federal Government.

When the Church amendment was proposed the original proposal failed to get through by a very narrow figure. The treaty was approved by 49 votes to 32, but because it was a treaty it failed to proceed by not securing the necessary two-thirds majority. At no stage has there been any indication that there has not been a majority either in the House or in the Senate for federal legislation preventing unitary taxation. There is quite clear evidence in the United States that what we are saying in this House also commands a majority on that side of the Atlantic.

I hope, therefore, that if we agree to the motion tonight, and if the Government proceed to ratify the treaty, those in the United States Senate will understand that we are doing so on the basis of trust and are placing an immense amount of faith in the proposals about which we have heard and in the Senate's determination to rectify what is a grossly unsatisfactory situation.

11.30 pm
Mr. Tristan Garel-Jones (Watford)

I came to the House this evening with some trepidation because a number of substantial firms have made representations to me about the immense damage and intolerable burden caused by the unitary taxation system in California. The House owes a debt of gratitude to the Minister of State and my right hon. Friend the Member for Crosby (Sir G. Page), both of whom, ploughing different furrows, have winkled out a substantial degree of reassurance. The bulk of my remarks have been circumscribed by the reassurances.

It is important for the Minister to make it clear that we have no intention of letting this issue die. The right hon. Member for Llanelli (Mr. Davies) summed up the unitary taxation system when he said that it was arbitrary, costly and unfair. Difficulties are placed upon British firms. I have in my possession the guidelines issued by the California franchise board for companies operating under that taxation scheme. It makes terrifying reading. Much of the information asked for is totally irrelevant to trading in California. If the debate had not progressed as it has I intended to read out some of the requests—but that is no longer necessary. It is a ridiculous document for British companies to comply with.

Another interesting recent development is the refusal by the United States federal tax court to hear the case of EMI against the constitutionality of the California unitary tax system. That is doubly disturbing for the United Kingdom, in view of the favourable treatment given to a similar case by Japan Line over a year ago. One is dealing with friends, but one is tempted to believe that there is discrimination against the United Kingdom.

Given the assurances, I find no difficulty in supporting the order. However, it is worth reminding ourselves that the type of British companies that operate in California and the United States tend to be leaders and innovators in their fields. They tend to be the companies upon whose success the economy of Britain depends. I urge the Government to ensure that British companies upon which we depend so much are given fair treatment in the United States.

11.34 pm
Mr. Peter Rees

With permission, I shall respond briefly to the important points raised in the debate. The right hon. Member for Llanelli (Mr. Davies) asked why we are not merely debating the third protocol. For various technical reasons the original order and the protocols had to be embodied in a new order. Because of the lapse of time, it was necessary to tie up the new order with the small legislative changes that have taken place since the original order was recommended to the House three years ago.

The right hon. Member for Llanelli also asked whether, if the Hughes/Mori Bill did not become law, British companies would get double taxation relief in respect of Californian unitary tax. The answer is "Yes". This comes about under section 498 (6) of the Income and Corporation Taxes Act 1970. Relief will be given in respect of United States federal taxes and Californian tax, but only, of course, up to the level of British taxes.

I was asked why royalties on films were singled out for different treatment. This is because they are taxed on a profit basis under article 7 rather than article 10 (3). The right hon. Member also asked about article 28, and why there were different dates for the coming into force of the double tax convention. This is because the effective provisions relate to a variety of taxes and they have to be geared—in the case of dividends to a year of assessment; in respect of income tax to a financial year; in respect of corporation tax to a slightly different financial year—that beginning on 1 April—and in respect of petroleum revenue tax to chargeable periods, which normally start on 1 January, although one can have a six-month period. The differences arise only because the convention is tailored to the various taxes that it is designed to cover.

I come now to the speeches of my right hon. Friend the Member for Crosby (Sir G. Page) and my hon. Friend the Member for Surrey, North-West (Mr. Grylls). They have laboured so hard and long in this field that it would be otiose for me to commend their efforts or to deal with the general principles that they have canvassed, here, in Washington, and elsewhere. I recognise that they have made a deep impact on legislative minds on the other side of the Atlantic. They and the various companies with which they are associated, and the CBI, have brought about a considerable shift in the climate of opinion on the other side of the Atlantic. I hope that the House will think it appropriate for me to congratulate them and thank them for their considerable efforts.

My hon. Friend the Member for Dorset, North (Mr. Baker) asked a specific point, as did my hon. Friend the Member for Dorking (Mr. Wickenden). Dare I say to my hon. Friend the Member for Dorking that even if the principal place of business of the great company that he represents had not been in Camden Crescent his point would still have been valid and important, as was recognised by my hon. Friend the Member for Dorset, North. It is true that there is a new, special, capital gains tax on the disposal of realty by foreigners wending its way through Capitol Hill. It is not for me to speculate about the shape in which it will emerge. It is likely that there will be considerable technical problems to be faced before it can reach the statute book. It is not for me, as a British Minister standing at the Dispatch Box at Westminster, to speculate about the course of that piece of American legislation.

All I can say is that, as we currently understand the Bill, there would be relief against United Kingdom capital gains tax on the same transaction in respect of any tax charged in the United States. It would be misleading for me to go more deeply into the problem, because we cannot foresee the form that the Bill will ultimately take when it becomes law. We are watching it closely. If my hon. Friends have any worries, once the measure has reached the statute book and they feel that such worries have not been adequately met by this or any other form of double taxation relief that may be available to British taxpayers, I shall be happy to look at the problem again. We are aware of this problem.

I say to my hon. Friend the Member for Faversham (Mr. Moate) that we all recognise that it would be nice to strike an attitude, to make a gesture, to record our disapprobation of the unitary system in California and, indeed, in the other states. Ultimately we are faced with a practical dilemma. Would we achieve more for British companies by those means? Although we have rightly concentrated tonight on the question of unitary taxation, the double taxation convention and at least two of the protocols cover a whole range of other problems.

It is important for British taxpayers generally, whether they be companies, individuals or partnerships, that the convention is enacted into our law. I recognise the sentiments that led my hon. Friend to intervene and to advance his argument. However, I hope that at the end of the day the House will feel that even with this slight imperfection—my hon. Friend the Member for Surrey, North-West described it as a considerable blemish—the package is one that we should adopt.

My hon. Friend the Member for Faversham was disposed to question the statement—I do not know whether I should claim its paternity—that this is a great constitutional issue in the United States. I am not over-concerned to debate that. However, the issue has been simmering for quite a few years, and long before the double tax convention ever saw the light of day. Unitary taxation concerned groups of companies resident and based in the United States long before it affected any of our companies.

The system of unitary tax was originally devised to cover the United States railway companies, which were formed in one state and whose operations inevitably carried them over to another state. When I was in the United States I discovered that it is not one narrow issue affecting only the United Kingdom and the Japanese; it goes much wider than that. If it is not a great constitutional issue, it is a wide constitutional issue in the United States. If we expect that by withholding or conceding our vote in this instance we shall necessarily fundamentally shift opinion on the other side of the Atlantic, that is attributing rather more than we are entitled to the House and its deliberations.

Those in the United States who are focusing their attention on the issue are now well aware of what we feel. They are well aware of the impact that the spread of the unitary system will have on foreign investment in the United States. I found in California that they were sensitive to the issue. The Japanese have been as effective as we have been in bringing the argument home to the Californian administration.

My hon. Friend the Member for Watford (Mr. Garel-Jones) made some valid comments on the general principle. At the end of the day my hon. Friend, like so many of my hon. Friends, has come to realise, as I did after first-hand acquaintances with the problem in the United States, that this is not a problem that we can let die. We do not propose to bury the issue if the House gives its approval to the convention and the three protocols. I have indicated the various ways in which we propose to pursue the issue in the years to come.

I hope very much that the problem will be solved for us in large measure by the Hughes/Mori Bill. If it is appropriate for me to do so, I wish it well. I am sure that my hon. Friend the Member for Surrey, North-West appreciates that we are concerned principally with California. To demonstrate the complexity of the issue, a great United Kingdom-based company in Alaska has argued for the imposition of the unitary system in Alaska. It found that in its circumstances the system advanced its interests. We must not make any snap, dogmatic judgments. It is necessary closely to study the facts to ascertain where the balance of advantage lies.

If we detach the convention from the issue and consider the package as a whole—I hope that nothing that I have said has led my right hon. and hon. Friends, or the Opposition, to consider that I underestimate the importance of the issue—that which is before us strikes a fair balance between interests on both sides of the Atlantic. It is not for us to claim, on a narrow, nationalistic basis, that we should have the greatest advantage and the United States should have the lesser advantage. We are concerned to ensure that it is a fair balance of advantage between United States federal authorities, the United Kingdom Inland Revenue, United States' taxpayers and United Kingdom taxpayers. I must pay tribute to whatever role the right hon. Member for Llanelli may have had—it may have been a principal part—in negotiating the original package.

I hope that after a thorough examination—I venture to say that no other double tax convention that I can recall has had such a thorough and prolonged examination in the House—the House will feel able to approve this measure.

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 and Protocols set out in the Schedule to the draft Order entitled the Double Taxation Relief (Taxes on Income) (The United States of America) Order 1980, which draft was laid before this House on 31 January, an Order be made in the form of that draft.