HC Deb 23 March 1979 vol 964 cc278-80W
Mr. Stallard

asked the Chancellor of the Exchequer if he will make a statement about the proposed new double taxation convention between the United Kingdom and the United States of America in the light of the third protocol to be signed on 15 March.

Mr. Joel Barnett

The third protocol to the new double taxation convention has been signed today. Copies of the text of the protocol are available in the Library. The essential purpose of the protocol is to redress the balance of the new convention which was altered by the United States Senate reservation on article 9(4). It is considered that the revised arrangements produce a fair and balanced agreement between the two countries and so is welcomed by Her Majesty's Government.

It is, nevertheless, a matter of concern to Her Majesty's Government that the convention as amended by the protocol does not now deal with the very real problem to which article 9(4) was originally directed. That article would have prohibited the application of the unitary basis of taxation by both the Government of the United States and by individual States to United Kingdom businesses operating in their territories through affiliates. Following the Senate reservation, article 9(4) now applies only to the United States Federal Government and not to States. The United Kingdom, recognising the difficult constitutional problem in the United States which the application of article 9(4) to individual State taxes posed and the compensatory offer which the United States has made, has acquiesced in the Senate reservation but has done so only with the greatest reluctance.

The unitary basis is incompatible with the accepted principles recommended by the Organisation for Economic Co-operation and Development of which both our countries are members. Unless the same basic rules for computing taxable profits are generally followed by the main trading countries, we cannot achieve the essential objective of providing a consistent and coherent international tax framework for trade and investment. The unitary tax basis, whether applied nationally or by sub-divisions of a partner country, gives rise to a form of double taxation which often cannot be relieved, or is relieved only by States which follow the generally accepted rule bearing an unfair burden of relief. The basis also greatly increases the compliance costs for non-resident companies which are subjected to it.

Her Majesty's Government have no doubt that both in principle and in practice the normal arm's length basis of charge for non-resident enterprises is fairer and more certain than the unitary basis and provides a much more satisfactory background for international trade. This is important, not only between our two countries, but as a possible precedent for third countries. Our disappointment with the Senate reservation will be shared by other countries involved in international business with the United States.

Her Majesty's Government therefore very much hope that a solution to the serious problem of the unitary tax basis can soon be found in the United States now that it is demonstrated that the matter cannot be dealt with under double taxation convention arrangements.

The third protocol will be considered first by the United States Senate and, assuming that the Senate approves it, it will come before the House for consideration in due course.