§ The Minister of State, Treasury (Mr. Peter Brooke)
I beg to move,That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Mauritius) Order 1986 be made in the form of the draft laid before this House on 5th December.I suggest that it will be for the convenience of the House if we also discuss motion No. 3:That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (France) Order 1986 be made in the form of the draft laid before this House on 5th December.The House might find it helpful if I begin by saying a few words about double taxation conventions generally before turning to the orders themselves.
The United Kingdom has an extensive network of bilateral double taxation treaties. Their purpose is to give relief from the burden of international double taxation which would otherwise result when income arises in one country, flows to another and is taxed in both.
Broadly speaking, and depending upon the nature of the income and laws of the country concerned, relief is usually provided by the country in which the income arises, reducing its rates of tax, and in some cases giving up the right to tax altogether. In addition, where income remains taxable in both countries, the country in which the recipient is resident will give credit against its tax on that income in respect of the tax paid in the country of source, or will give relief from double taxation by exempting that income from tax in the country of residence.
Double taxation agreements, amongst other things, lay down rules for the taxing of income flowing between the two treaty partners. They also provide rules for taxing a resident of one country who carries on business in the other country.
Another important function of a double taxation agreement is to fix maximum rates of tax that may be applied by the country of source to certain categories of income—for example, dividends, interest and royalties. These rates will remain unaffected by any subsequent increase in domestic tax rates in either country. Double taxation conventions help to create a stable fiscal framework within which international trade and investment can develop to the mutual benefit of the two countries.
We already have comprehensive double taxation conventions with France and Mauritius. The protocol with France adds an entirely new article to the existing provisions, setting out clearly defined rules for taxing certain offshore activities. The protocol with Mauritius amends the existing convention by substituting a new article covering the taxation treatment of dividends. I shall deal with the main provisions of each order in turn, starting with France. This order concerns the taxation of income from offshore oil and gas activities on the continental shelf.
It is generally recognised by countries around the North sea and English channel, and many others, that special rules are needed to take account of the special circumstances arising in offshore exploration and development. France, although having little offshore oil of its own to date, agreed that the terms of the existing convention needed to be modified to take these special considerations into account.
482 This offshore protocol is not to be confused with another protocol which deals, inter alia, with certain tax matters relating to the Channel fixed link. The terms of this protocol have been agreed in principle, but the final text is still being discussed. My right hon. Friend the Financial Secretary announced these arrangements on 10 July 1986 in reply to a parliamentary question.
The protocol before us follows the pattern of similar amendments made in recent years to conventions with Canada, Finland, the Netherlands, Norway, Sweden and the United States. Basically, the general rule is that an enterprise of one country carrying on activities relating to mineral exploration or exploitation on the continental shelf of the other country may be taxed in that other country on profits from those activities. Any double taxation is to be relieved by credit in the country of residence. The taxation of profits from the transportation of supplies or personnel, however, follows the normal rules which apply to the taxation of international shipping. These provide for taxation solely in the country of residence of the operator.
This protocol is not essential for the taxation of profits from offshore oil and gas production, which are taxable in the producing country under the normal rules. The reason it is needed is to overcome uncertainties surrounding the tax treatment of the various exploration, service and support activities of contractors engaged by the oil companies, particularly where these activities take place on board, or from, mobile vessels. The provisions of the present convention were not devised with these activities in mind.
The protocol will have effect in the calendar year following that in which it comes into force. It cannot come into force until both countries have notified one another of the completion of their legislative procedures.
I now come to the order with Mauritius. This contains the text of a protocol which amends the existing dividends article in the convention. The 1984 Mauritian Finance Act introduced substantial changes to the taxation of company profits and dividends. An unintended consequence was that the provisions of the dividend article of the existing convention effectively prevented Mauritius from charging tax on dividends flowing to the United Kingdom. Mauritius requested an amendment to the existing convention so that their taxing rights could be restored.
In the new dividend article, Mauritius has agreed to rates of tax which are not excessive and which compare favourably with those contained in broadly similar agreements that the United Kingdom has with other developing countries. The rate for direct investors is 10 per cent—that is, where the beneficial owner of the dividends is a company controlling at least 10 per cent. of the voting power of the company paying the dividends. In all other cases, Mauritius will be able to apply a rate not exceeding 15 per cent. of the gross amount of the dividends.
The protocol will have effect in relation to dividends paid on or after 1 July 1986. In practice, this means that dividends paid to a United Kingdom resident would be taxed in Mauritius only from the year of assessment beginning 1 July 1987. Mauritius has forgone its taxing rights on dividends flowing to the United Kingdom until the protocol takes effect.
I commend these two draft orders to the House on the basis that they strike a fair balance between the interests of the various countries concerned and the United 483 Kingdom, and, indeed, between the interests of the residents of those countries and those of the United Kingdom. I shall be happy to deal, so far as I can, with any points on them which may concern hon. Members. Subject to that, I hope that the House will approve the two orders.
§ Mr. Tony Blair (Sedgefield)
The purpose of the double taxation conventions is to ensure, first, that there is no double taxation of an unfair nature, and, secondly, that there are no opportunities for fiscal evasion.
I shall deal first with the order in relation to France. The order inserts effectively a new article in the convention of 1968. I can be brief in dealing with it, but there are one or two minor points that I should like cleared up.
The new article 29A does a number of different things. First, in paragraph 1, it ensures that where an enterprise of one country conducts offshore activities under the jurisdiction of the other, it is deemed to be carrying on business through a permanent establishment in that other country. The effect would be that if a United Kingdom company were conducting offshore oil exploration in French territory it would be liable for tax in France.
I want to make sure that the effect of the new article 29A, taken in conjunction with the articles that already exist, will ensure that there is double taxation relief for the liability to French tax of that United Kingdom company. The effect of article 29A will be that the United Kingdom company exploring on French territory is treated as liable for tax in France. Presumably, under the other articles of the convention, relief is given for any double taxation element.
Secondly, paragraph 3 of the new article 29A provides that independent professional activities carried on in connection with the oil or gas exploration or exploitation in the other contracting state is deemed to be performed from a fixed base in the country where those activities are carried on. In other words, it is similar to offshore activities in connection wth oil or gas exploration. I assume that, for example, canteen facilities on a French oil rig provided by a United Kingdom company would be liable for French tax.
As the Minister said, the exception arises in circumstances where profits are derived from the transportation of supplies or personnel. That follows the normal rules of international shipping and they are taxable only in the state in which the taxpayer is resident. I assume that a United Kingdom helicopter company transporting personnel to a French oil rig is still taxed as a United Kingdom resident. I simply wanted confirmation that I have understood the effect of the order relating to France.
The protocol in the order relating to Mauritius amends the 1987 convention with Mauritius on double taxation. As the Minister said, it follows changes in the law of Mauritius on the taxation and distribution of company profits and distributions. Therefore, in principle, since it involves changes in the law, or is consequent upon changes in the law of Mauritius, I assume that, in principle, the treatment of dividends flowing from a United Kingdom company to a Mauritius resident or shareholder is unchanged.
As I understand it, at present, dividends coming from a United Kingdom company to a Mauritius resident or shareholder will be taxed in Mauritius. The Mauritius resident is entitled to a tax credit in the United Kingdom.
484 But where he is entitled to a tax credit, he is also taxable in the United Kingdom on the aggregate of the dividends and the tax credit, but at a rate not exceeding 15 per cent.
I notice one slight change. To be entitled to a tax credit in the United Kingdom, the Mauritius resident under the new article 10 must, in order to be entitled to a tax credit in the United Kingdom, bethe beneficial owner of the dividend",whereas previously I think that the words weresubject to tax in Mauritius".I assume that that is merely a technical change and has no significance.
The main item in the order relating to Mauritius is the change in the treatment of dividends coming to United Kingdom residents from a Mauritius company. I have one point that I should like the Minister to elucidate because I have not entirely understood the effect of the order. As I understand it, previously, under the old paragraph 4 of article 10, for which the order substitutes a new paragraph, where a United Kingdom shareholder received a dividend from a Mauritius company and corporation tax was charged in Mauritius, the dividend would be taxed in the United Kingdom, but there would be no tax on the dividend in Mauritius. What has happened now is that the United Kingdom shareholder who receives a dividend from a Mauritius company will be taxed in the United Kingdom, but also in Mauritius—up to 10 per cent., if the United Kingdom shareholder is a controlling company of more than 10 per cent. of the voting power of the Mauritius company, or otherwise up to 15 per cent.
This is important in case there are any consequences to United Kingdom residents. I rather assumed that Mauritius might previously have applied a sort of classical system of taxation and dividends would be distributed on the after-tax profits of the Mauritian company, and had changed to some sort of imputation system so that dividends were distributed through the pre-tax profits, as with our advance corporation tax, and that that was why it was necessary to introduce an ability to tax dividends in the United Kingdom and in Mauritius. If I am wrong about that, perhaps I could be told.
In general terms, can the Minister tell us what the implication will be for United Kingdom residents? Has he any financial estimate of the order's implications? Will the United Kingdom's revenue be adversely affected? The same applies to the order relating to France. Can the Minister tell us in general terms what the revenue implications will be? Will they be adverse for the United Kingdom tax holder?
I am aware that these are complicated measures. I do not need to detain the House further, but since the orders are before us I thought it right to raise these queries.
§ Mr. Brooke
With the leave of the House, I shall be delighted to respond to the questions of the hon. Member for Sedgefield (Mr. Blair).
The hon. Gentleman asked about double taxation relief on the French order. I can give him a complete assurance that there will be no change in the relief available against United Kingdom tax on the same income under article 24 of the convention. Similarly, in the hon. Gentleman's example of a United Kingdom company transporting personnel to a French oil or gas rig, I can confirm that that would be taxable in the United Kingdom along the lines that he suggested.
485 On the Mauritian order, the hon. Gentleman made a correct assumption about the situation before 1984. The Mauritian element has come in because, as I said, of the changes that Mauritius made to its domestic tax law in 1984 when, inadvertently, it precluded itself from taxing dividends that were flowing to the United Kingdom.
Before the changes that were made in 1984, dividends were allowable as deductions in computing a company's chargeable profits, and were treated as taxable income in the hands of the shareholders—whether or not such persons were residents. Rates of Mauritian tax have varied, but at the time of the change a public company was taxed at a rate of 50 per cent. and a private company at a rate of 60 per cent. In addition, a surcharge of 10 per cent. of the tax payable was also imposed, making the effective rates 55 per cent. and 66 per cent. respectively. Individuals were taxed progressively, and in some years the maximum rate was as high as 80 per cent. The terms of the existing convention allowed Mauritius to apply its domestic rates without restriction. Since 1984, dividends have not been treated as allowable deductions. There is no provision for withholding tax when dividends are paid, and so dividends are taxed like any other income, but where a non-resident company derives dividends from a resident company, Mauritian tax is payable by the shareholding company at a rate of 35 per cent. Where a shareholder is an individual, tax is applied on a progressive scale, ranging from 5 per cent. to 35 per cent.
I do not want to go through an elaborate arithmetical calculation but, before the 1984 changes, a subsidiary of a United Kingdom company in Mauritius, which wished to remit profits entirely as a dividend, would have nil taxable profits in Mauritius. The Mauritius income in the United Kingdom was charged so that in total the dividend after Mauritius tax was 45 per cent. of the original profit of, say, 100. In the United Kingdom the foreign dividend of 100 was charged at 50 per cent., according to United Kingdom tax law in 1983.
There was a further overseas tax of 55, of which 5 was unrelieved because of the Mauritian tax of 55 per cent. Therefore, the United Kingdom tax payable was nil. 486 Under the post-1984 changes under the convention, as amended by this protocol, the subsidiary of the United Kingdom company in Mauritius will have a Mauritian income of 65, after the deduction of 35 of Mauritian tax. But there will then be a Mauritian tax at the treaty rate of 10 per cent. Therefore, there will be a further 6.5 per cent. of tax, producing a net income of 58.5 per cent.
In the United Kingdom the foreign dividend would be grossed up for underlying relief. If one assumes a United Kingdom tax of 35 per cent., the overseas tax on the dividend will be 6.5, as I described a moment ago, and the tax on the profits will be 35. Of the overseas tax, 5 was unrelieved because of the Mauritian tax of 55 that I have described. Whereas we previously had an unrelieved figure of 5 per cent., we now have an unrelieved figure of 6.5 per cent. Again, no United Kingdom tax will be payable. Those are complicated figures and I shall not take the House through what would have happened if we had not amended them. It will be clear to the House that the changes are not of great significance but they are helpful to Mauritius. The flow of finance between Mauritius and the United Kingdom is traditionally confidential, but we are not talking about large sums of money.
§ Question put and agreed to.
That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (Mauritius) Order 1986 be made in the form of the draft laid before this House on 5th December.
That an humble Address be presented to Her Majesty, praying that the Double Taxation Relief (Taxes on Income) (France) Order 1986 be made in the form of the draft laid before this House on 5th December.—[Mr. Brooke.]