§ The Financial Secretary to the Treasury (Mr. John Moore)I beg to move,
That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Sweden) Order 1984 be made in the form of the draft laid before this House on 20th January.It might be for the convenience of the House if we take this order and the three other income tax orders on the Order Paper together.
§ Mr. George Foulkes (Carrick, Cumnock and Doon Valley)On a point of order, Mr. Speaker. I do not wish to be objectionable [Interruption.] Hon. Members may be asking why I am changing the habit of a lifetime. If the Minister is to make a substantive statement about any of the orders other than that on the Falkland Islands, I believe it would be for the convenience of the House to take the orders separately, so that we have at least an hour and a half to debate the Falkland Islands order.
§ Mr. SpeakerWhen the House agrees otherwise, they must be taken separately. The orders will be taken separately.
§ Mr. MooreIt might be for the convenience of the House if I make a brief comment on the first order, as some questions have been raised in relation to Sweden, and then proceed to the other orders. if that is for the convenience of the House, I shall be delighted to do so.
The Swedish convention, like the others, will replace the existing convention. The new arrangements are, broadly speaking, a consolidation of the earlier convention and protocols, but with a general updating of their provisions to bring them into line with the developments in the United Kingdom's policy and practice as reflected in our most recent double taxation convention.
The convention on Sweden is comprehensive and designed to cover all the various forms of income which arise in international trade and investment. It is based largely on the OECD model double taxation agreement, with appropriate modifications to take account of the requirements and interests of the United Kingdom and Sweden. By laying rules for the taxation of income between countries and by fixing maximum rates of tax which may be applied by the country of source to certain types of income, the rates will remain unaffected by any subsequent domestic increases in each country. The purpose of double tax conventions is to contribute to the creation of a stable framework for the development of mutually beneficial trade and investment.
There has been some criticism by some Swedish nationals resident in Great Britain on two aspects of the new convention. I shall first briefly describe the effects of the relevant articles and then turn to the points of criticism.
Sweden has formally reserved her position on the article dealing with pensions in the OECD model agreement. This means that she insists on taxing private pensions arising in Sweden in the same way as she is entitled under the OECD rules to tax Government or social security pensions arising there. The United Kingdom would normally follow the OECD principle in relation to occupational pensions, which provides for them to be taxed only in the state in which the recipient is resident, but in this case article 18 of the agreement provides that Sweden should tax 919 occupational pensions flowing to residents of this country. But, to take account of the higher Swedish tax rates, the convention provides for a deduction of one fifth of the pension in computing the Swedish tax liability. This means that, broadly speaking, the amount of tax payable is about the same as it would have been if the pensions had been taxed by the United Kingdom. The amount of tax involved here is small and the provision does not affect pensions paid by United Kingdom bodies.
On capital gains tax, a provision has been included at Sweden's request, which will, subject to certain conditions, allow Sweden to tax Swedish nationals resident in the United Kingdom on gains arising from the sale of shares in Swedish companies. That provision is aimed at countering a form of tax avoidance which can arise when an individual changes his country of residence immediately before the disposal of large shareholdings. The result can be that no tax is payable in either country because of the manipulation of the dates of sale of shares and the change of residence. One of the objectives of double taxation conventions is to prevent international tax avoidance, and in meeting Sweden's request we were acting in accordance with accepted policy and practice. Broadly similar measures have been included in several of our more recent conventions.
I can understand the feelings of those members of the Swedish community who are concerned about these two provisions. Nevertheless, I think the criticisms of these features are exaggerated, and they fail to take account of the place of the two articles in the agreement as a whole. Any negotiation has to take account of the interests and priorities of each side. For the United Kingdom a major interest was in oil-related activities—where we secured substantial benefits, with which I will deal more fully in a moment. For Sweden, a major priority was the way in which Swedish nationals abroad were taxed on private pensions and could seek to avoid their capital gains tax. In the give and take of negotiation, we had to recognise the strength of the Swedish Government's feeling in relation to pensions, and m relation to capital gains.
Against that background, I consider that the criticisms of the pensions article are ill-founded. I should emphasise that the broad effect of the provision on the group of individuals concerned is that their tax bill in relation to their pensions should be no higher than if the existing convention had continued in force. This is the result of the one fifth deduction in the amount of pension subject to Swedish tax in article 18(i) of the convention. I do not think the criticisms of the article do sufficient justice to the effects of this one-fifth deduction. Nor do they do sufficient justice to the efforts the United Kingdom Government made to secure it.
The Memorandum circulated to hon. Members criticises the Government for failing to fulfil the terms of an assurance given by the then Chancellor of the Exchequer in March 1982 that
every effort will be made to ensure that the terms of the proposed Convention will prove satisfactory both to the persons directly affected by them and to the interests of the United Kingdom".It also suggests that the Government failed to take account of the representations that had been made by members of the Swedish community.920 In fact the contrary is true. Following the former Chancellor's assurance, the United Kingdom renegotiated the pensions and capital gains tax articles, and secured substantial concessions from Sweden in both respects. On pensions, we persuaded Sweden to agree to the 20 per cent. deduction in the taxable amount of private pension paid in Sweden to Swedes resident in the United Kingdom, where there had been no such deduction in the first-stage negotiation. The 20 per cent. deduction achieved the objective of ensuring that those receiving these pensions would suffer no more tax under the agreement than they would have experienced if their pensions had been taxed by the United Kingdom. If there were no pensions provision in the new agreement those concerned would have to pay tax on their pension at the full Swedish rate.
There was also a substantial improvement in relation to capital gains tax. There are 20 countries where our treaty includes an anti-avoidance capital gains tax article on the line of the United Kingdom—Sweden provision, so it is not correct to say that this is an exceptional provision. The only difference between the Swedish and other agreements is in the period for which this anti-avoidance rule runs. Normally it is five years. In the first stage of negotiation, Sweden insisted on a 10-year period. After the former Chancellor's assurance, we re-opened negotiations on this point also and secured a reduction to seven years. This represents a substantial improvement.
As I have said, the relatively minor concessions on occupational pensions and capital gains have to be seen in the context of the convention as a whole. A major benefit here is in the taxation of oil activities. The new convention, for the first time, covers the continental shelf, and contains an article enabling a state to tax exploration and related activities taking place on its continental shelf, even where those activities are not carried on through an actual permanent establishment. Whilst the provisions are, of course, reciprocal they will be of special benefit to the United Kingdom. Oil activities on the Swedish continental shelf are, of course, not as large as those on the United Kingdom shelf, and the involvement of Swedish enterprises in exploration of the United Kingdom continental shelf is growing.
Without these new provisions, the potential tax loss to the United Kingdom Exchequer could run into some millions of pounds. On dividends, the withholding rates to which Sweden has agreed are very favourable for United Kingdom investors and, under our existing policy, this enabled us to make available the United Kingdom tax credit to Swedish portfolio and direct investors in this country.
There has also been some complaint that the text of the convention has been officially available for discussion in Sweden for some time, whereas it has not been so available in the United Kingdom. The reason is simply the effect of the difference in parliamentary conventions in the two countries.
In Sweden, the agreement is available for public inspection as soon as it has been formally approved on behalf of the Government. In the United Kingdom, it is a breach of parliamentary privilege for the text of the agreement to be published until an order has been laid before the House.
§ Dr. Alan Glyn (Windsor and Maidenhead)Surely anyone could have obtained the text in Sweden, as it was freely available there.
§ Mr. MooreMy hon. Friend is right. In his capacity as chairman of the British-Swedish Parliamentary Group, he has been deeply involved in this issue and has made sure that all the relevant arguments were made. He has played an active role in this matter.
I trust that the information I have given shows why, despite the criticisms, we regard this as a balanced and worthwhile convention, and I commend it to the House.
§ Mr. Jeff Rooker (Birmingham, Perry Barr)I shall be equally brief, perhaps even shorter than the Minister. I believe that in his remarks the hon. Gentleman has met the substance of the complaint in the notes circulated yesterday to all hon. Members by the Committee for Swedes Living in Britain.
This must obviously be a cultural shock for Swedes living in Britain—an extremely closed society—given that Sweden has had freedom of information legislation for more than 200 years and that individual tax returns are open and available for public inspection. Therefore, Swedes must have a considerable problem coping with our arrangements.
As the hon. Member for Windsor and Maidenhead (Dr. Glyn) pointed out, I imagine that Swedes living here are in touch with their fellow citizens in Sweden. I therefore suspect that the text of the agreement could easily have been obtained, as a result of which I do not think that their complaint holds much substance.
Page 2 of the note states that in excess of 25,000 Swedes and their families are living in Britain and
Many of these are of retirement age".Exactly how many? How many are affected by the change in the pension arrangements? This a perfectly acceptable change given that they will not be called upon to pay any more tax than they would have paid had the agreement not been changed in view of the 20 per cent. tax deductible element.Double taxation agreements have two functions—to stop an individual or a company from paying double tax and to stop what can sometimes be tax avoidance on a massive scale. I understand from the notes that were available with the order in the Vote Office that the United Kingdom could not have taxed the capital gains. Therefore, it is necessary for the Swedish Government to levy tax. Otherwise that massive loophole could have been exploited by tax avoidance experts who abound in this country, mainly on the Conservative side of the House — [HON. MEMBERS: "Oh"] If anyone wants to challenge that, I am happy to debate it, and we shall no doubt do so in the weeks ahead.
The oil and continental shelf aspect of the agreement is of benefit to the United Kingdom. There must be compromise in coming to these arrangements. As I have said, I believe that the arguments advanced by the Committee for Swedes Living in Britain have been met, but I should like to know how many pensioners are affected, if that figure is available.
§ Mr. Robert Rhodes James (Cambridge)I thank my hon. Friend the Financial Secretary for his statement. The basis of the order is an agreement between Her Majesty's Government and the Swedish Government relating to the Swedish community in this country. That raises much 922 wider implications for other communities resident in this country, who thought that they were here under different arrangements from those that were subsequently made.
I say to my hon. Friend with respect that, given the fact that we wish to encourage people from abroad to work and live in this country, we should be careful about making arrangements, after they have come here, that could possibly affect the attraction of this country to the very people and investment that we need.
§ Mr. Eric Deakins (Walthamstow)I should like to ask the Minister three questions.
First, how many other double taxation conventions have similar provisions in relation to pensions in which the United Kingdom is involved? Secondly, will the Minister comment on the allegation in the memorandum that we have given way on the pension provisions at the request of the Swedish Government after negotiations, whereas the Swiss, French and perhaps other Governments in western Europe have not done so, and have refused to concede to Swedish demands? Thirdly, will the Minister comment on the suggestion in the memorandum that there may be an infringement of rights that could give rise to litigation before the European Court in respect of non-Swedish nationals resident in Britain who would be covered by the terms of this agreement?
§ Mr. Mark Wolfson (Sevenoaks)I should like an assurance from my hon. Friend the Financial Secretary about the actions proposed in the order. It departs from the normal OECD arrangements about people being taxed in the country in which they reside. The principle involved appears to be a departure from the situation in other similar treaties.
As I understand it, part of the negotiation was concerned with achieving a rate of tax on pensions for Swedes resident in this country that was no higher than they would have paid in Sweden. Hence, as the Minister described, there is the one fifth factor taken into account before payment of tax. How is that affected by possibly increased rates of taxation in Sweden in future, which might put residents here at an unfair disadvantage?
§ Mr. MooreI shall try to respond to all the points that have been made. If I can, I shall come back to some aspects in detail.
It is extremely difficult to be precise about the numbers, but according to the note that we received there are approximately 25,000 Swedes in the United Kingdom. I am advised by the Swedish Government that the numbers of those receiving pensions could not be over approximately 250. That figure is on the high side, so that is the sort of figure that we are discussing.
With regard to benefits, I thought that I stressed that the renegotiations mean that for the benefit as per the 1960 existing double taxation rate as opposed to the rate that supersedes it, the arrangements were maintained. However, conditions changed, with the discovery of oil in the North sea and the development of our continental shelf. When there are such developments, every nation has constantly to update its tax treaty arrangements. That is accepted and regarded as perfectly normal, especially in this instance, where the citizens resident here are not disadvantaged.
923 The aspect of pensions is outside the normal provisions of the OECD. I explained that in my speech. I said that it seemed that there was a need for a balance of national interests to the extent that one sought at the same time to protect foreign citizens who are resident here, and welcome. I thought that that had been achieved. That is an important point.
I cannot comment on the suggestion about litigation. That supposition is made by those who sought to write to hon. Members. I shall confirm it in writing to my hon. Friend the Member for Sevenoaks (Mr. Wolfson), but in my experience the United Kingdom Government have not given arrangements to other countries that are similar to the pension requirements of the Swedes.
I cannot make assumptions about what other nations do, and I have not investigated the attitudes of the Swiss. However, many of the arrangements relate to the timing and the position of their existing double taxation arrangements. They may have a more up-to-date arrangement, or it may be in process of renegotiation. My hon. Friend is right to draw attention to the fact that, in terms of the debate, this is an acceptance of a Swedish requirement. The basis of these arrangements is to seek to negotiate reliefs from taxation. If there were no such arrangement, the citizens in question living here would be even more disadvantaged. My hon. Friend asked about the situation if there were to be a higher rate of taxation 924 applying in Sweden. I can only say—I will confirm this in writing—that we are talking about existing pensions. The mitigation negotiated by the Government was a diminution of the existing pension by 20 per cent. and therefore is not affected by Swedish tax rates. Swedish tax rates can go up and down, as can those of the United Kingdom. That is an accepted feature of double taxation agreements.
If I have not answered any points in full, I will seek to do so by writing to the hon. Members concerned.
§ Question put and agreed to.
§
Resolved,
That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Sweden) Order 1984 be made in the form of the draft laid before this House on 20th January.
§ Address to be presented by Privy Councillors and Members of Her Majesty's Household.