Clause 29.—(Transitory Provisions for Company Dividends Paid to Non-Residents.)
Mr. MacDermot
I beg to move Amendment No. 239, in page 32, line 31, after “order” to insert:
“contained in a statutory instrument” .
The Amendment remedies a fault in a technical definition. The Clause restricts United Kingdom tax on dividends paid by United Kingdom companies to residents of certain countries specified in Schedule 8. The provisions apply only for the years 1966–67 and 1967–68, and the Treasury may extend that period by order. We failed to provide in the Bill that the order should be published as a Statutory Instrument, which will ensure that all interested parties may find out where they stand.
Amendment agreed to.
Question proposed, That the Clause, as amended, stand part of the Bill.
Mrs. Thatcher
A matter has been raised with me by one of my constituents and it was the subject of Amendment No. 99. It refers to subsection (1), which begins:
“This section applies to dividends paid in the period comprising the years 1966–67 and 1967–68 …”
The question is whether the word “paid” should be read to include “deemed to be paid” . I doubt whether that interpretation would be correct.
Some serious consequences would follow if it does not include “deemed to be paid,” because the United Kingdom subsidiary of a non-resident parent company which had paid dividends in 1965–66 in excess of its standard amount would apparently be required to account for Income Tax at 8s. 3d. on the excess deemed to have been paid at April, 1966. If, however, the dividend had been paid at that date, the tax under Schedule F would have been at a considerably reduced rate. [column 523]
If the words “deemed to be paid” need to be inserted, I have no doubt that the hon. and learned Gentleman will do so on Report. I should be grateful for some clarification. If the hon. and learned Gentleman is not in a position to give clarification now, perhaps he could give me the information by letter.
Mr. MacDermot
I will gladly take advantage of that final suggestion. We were a little mystified as to exactly what the Amendment in question was aimed at. The hon. Lady has explained it very clearly. May I consider the point and let her know?
Question put and agreed to.
Clause, as amended, ordered to stand part of the Bill.
Schedule 8 agreed to.
Clause 30.—(Transitory Provisions For Interest And Royalties Paid To Non-Residents.)
Mr. MacDermot
I beg to move Amendment No. 240, in page 34, line 39, after “order” to insert:
“contained in a statutory instrument” .
This is exactly the same point about publication of an order by Statutory Instrument.
Amendment agreed to.
Question proposed, That the Clause, as amended, stand part of the Bill.
Mr. Patrick Jenkin
Subsection (2) is a slightly odd provision. The Clause is intended to relieve from tax chargeable under Schedule F certain interest and royalties which fall within the definition of Schedule 11 of the 1965 Act. It seems that this must imply that, because certain interest and royalties are included as distributions in Schedule 11, the non-resident treaty relief from United Kingdom companies with such interest and royalties is somehow circumvented.
If this proposition is valid—it is a supposition rather than a proposition—all the other interest which has to be treated as a distribution under Schedule F will be denied treaty relief—for instance, bonus and convertible securities and other such securities. Subsection (2) is concerned only with treaty relief. In all the relevant treaties interest and [column 524]royalty are generally defined, so that it is not a question of having regard to the national law as to whether this will qualify for relief.
It seems doubtful whether it is right that a country should seek to withdraw or imply the withdrawal of relief on certain forms of income passing between the two countries if the Convention expressly says that there should be relief. If the supposition is correct, people will place rather less faith in the Conventions than presumably is the intention of the Treasury when drawing them up. The whole point is based on a supposition or an implication which is to be drawn from the subsection. It may not be justified. If it is not, the whole point falls. If it is justified, it has some implications which it would be right for the Financial Secretary to explain.
Mr. MacDermot
I am assured that the hon. Gentleman's point is based on a misunderstanding, but I do not pretend that I have an understanding of the misunderstanding. I can seek to explain to the hon. Gentleman what the purport of the Clause is if that is what he wants, but I think he appreciates the general purport. Perhaps the hon. Gentleman will allow me to write to him, giving him a full explanation.
Mr. Peyton
Originally, I had no intention of intervening in this debate. I do not do so out of any desire to prolong the proceedings unnecessarily. I am not sure that when we are debating complicated matters it is right that such explanations as are available should be made by letter passing between a member of the Government and an Opposition Front Bench spokesman. This seems to me to be a complete denial of what the proceedings of this Committee are for.
I do not wish to be unreasonable. I have every sympathy with the Financial Secretary in his difficulty in understanding exactly what is at issue between us. I ask him not to regard my intervention—my second tonight—as frivolous. But it would be much more satisfactory if he amended his undertaking and promised to give a clear exposition of what is involved when we reach the Report stage. Merely to say that the matter can be resolved by letter is wholly inadequate.
[column 525]Mr. Patrick Jenkin
I am sure that my hon. Friend the member for Yeovil (Mr. Peyton) is right on this, as he was in his previous intervention. It was only my desire not to submit the Committee to the exposition which I am sure the Financial Secretary would have given us on Schedule 6, dealing with the three-year surplus, that I was prepared to accede to the hon. and learned Gentleman's suggestion in that instance.
In this case, it seems quite possible to put down an Amendment on Report to allow the matter to be raised then. Clearly, I have raised a point to which the hon. and learned Gentleman does not immediately have the answer. I do not blame him, for these are complex matters. But my hon. Friend the Member for Yeovil is right. The point can well be explained to the House on Report. I suggest that, whatever may happen between the hon. and learned Gentleman and myself, that would be the right thing to do constitutionally.
Mr. MacDermot
I agree with what has been said. There is no question of trying to conceal any matter from the Committee or of failing to give a public answer where it is required and would be helpful. But on Finance Bills it is common practice, in these technical matters, for the Government to make available an answer to an hon. Member who has raised a point. If it is a matter which he wants on record publicly, then, obviously, we can make suitable arrangements by putting down an Amendment from one side or the other in order to air it on Report if that is the right and necessary course.
Question put and agreed to.
Clause, as amended, ordered to stand part of the Bill.
Clause 31.—(Transitory Provisions For Double Taxation Agreements Having Retrospective Effect.)
Question proposed, That the Clause stand part of the Bill.
Mrs. Thatcher
This is an extremely difficult Clause to understand. I think that Niall MacDermotthe Financial Secretary will know what I mean when I say that the mischief at which a Clause of this nature is intended to strike should be apparent from the wording of the Clause, but it is [column 526]impossible to know the circumstances which brought the Clause into the Bill merely by reading it.
Not only is this impossible for hon. Members, but it is, it appears, also impossible for those who are accustomed to handling double taxation agreements and those who are accustomed to putting out commentaries on Finance Bill Clauses. The only thing one can deduce from it is that it makes retrospective provision for withdrawing relief which had been given retrospectively. The circumstances which gave rise to it are nowhere apparent, however.
One therefore goes to James Callaghanthe Chancellor's Budget speech to get a clue of what the Clause means and the only thing one can link it with is that it has something to do with the Swiss double taxation agreement. One tries to get hold of a copy of the agreement. I have not succeeded in getting one but I have succeeded in getting a little bit of intelligence about it. I ask the Financial Secretary to tell me whether my interpretation is roughly correct.
I understand that, under this Clause, royalty payments have been allowed twice. Quite how that came about I am not quite sure, except that some people have told me they were allowed first against Income Tax and Profits Tax and then the same payments were later allowed against Corporation Tax.
Quite what that has to do with double taxation agreements and why we need to alter an agreement retrospectively, I do not know. I should have thought we could have done that by a Clause in the Bill unrelated to a double taxation agreement. However, my complaint is that on the face of it one cannot begin to interpret the Clause, and I hope, therefore, that as it is an important one, giving very extensive and wide powers to the Government to put clauses in double taxation agreements which have retrospective effect—that is to say, they withdraw relief retrospectively—the Financial Secretary will give us a very full explanation of what it means.
Mr. MacDermot
I will give as full an explanation as the Committee can bear at this hour. May I make clear, first, that it is an enabling Clause, that it is a machinery provision, which does not [column 527]itself alter anybody's rights at all. The point is that at the moment there is no machinery by which the House can give approval to a double taxation agreement or a protocol amending one which involves retrospective withdrawal of a relief, and the new protocol signed with the Swiss Government which has just been laid before Parliament——
Mrs. Thatcher
Which day?
Mr. MacDermot
I think on Monday—does contain such a provision. We shall have an opportunity to discuss that, of course, and the full details of it, when we consider that protocol, which will require approval. This Clause is merely laying the basis for the House to be able to consider it at all.
No doubt the Committee would like to know why it is there is such a provision in the agreement. It does deal, as the hon. Lady said, with withdrawal in the protocol of a relief related to payments of interest and royalties by a United Kingdom concern to residents of Switzerland. The interaction of the existing convention and the Finance Act, 1965, produced the anomaly that relief may be given twice in respect of the same payment. This point was overlooked when the 1965 Bill was being drafted; it was a case of a manifest error.
The general rule for Corporation Tax purposes is that a company which pays interest and royalties will be entitled under the Finance Act to a deduction for the payment against its total profits, but no Corporation Tax is due for interest and royalties paid before 6th April, 1966. If it were, a company would get effective relief for its payment twice over, as against. Income Tax liability for the year of assessment in which the payment was made, and again against Corporation Tax charged on the profits arising during that year.
The double taxation convention with Switzerland contains a provision that interest and royalties paid from a United Kingdom source to a Swiss resident subject to Swiss tax on them are exempt from United Kingdom tax, and that the United Kingdom payer is to be allowed the payment as a deduction for Profits Tax purposes. Consequently, if the United Kingdom were to remain bound by the terms of the convention we should get [column 528]the highly anomalous result following: United Kingdom companies which paid interest or royalties to Swiss residents would get Corporation Tax relief for payments made before 6th April, notwithstanding the fact that in effect they had already had relief from Income Tax. There is a quite substantial amount involved here with this anomalous relief, a total of about £3½ million.
As I say, the protocol has now been signed and is now before Parliament, and we shall have an opportunity to consider it in detail. What this Clause does is to give us the power to consider it.
Mrs. Thatcher
I am very grateful to the Financial Secretary for that explanation, but before we leave it I must point out that the Clause goes much wider than that explanation. We must look very carefully at the powers which it gives and we shall do so on Report. If the right hon. and learned Gentleman had had the experience, as I have had, of trying to construe how wide the Clause could go, without knowing the specific circumstances to which it was directed, he would be very alarmed at the wide powers which may be given. If need be, we shall return to this matter on Report.
Mr. Peyton
One of the reasons why I have stayed to this hour of the night is that I have a lively curiosity about the meaning of the Clause. The Financial Secretary will not take it too much to heart, I hope, or regard it as a personal insult, if I say that I am not all that much wiser now. I realise very well that enabling provisions seen from the Government Front Bench are rather convenient and acceptable but, seen from where I am standing, are altogether less attractive and are objects of suspicion.
The mere word “retrospection” , when incorporated in a Finance Bill, arouses suspicions. One always has a feeling that year after year the Treasury tries to get a ration of retrospection into every Finance Bill just to keep it alive, so that Parliament will not be too rude when there is retrospection in the next year's Finance Bill when the Treasury will always be able to say that there was some retrospection in the previous year, thus trying to get away with it again by saying that there is nothing in retrospection which Parliament will not swallow in principle. [column 529]
I would like the Financial Secretary to say to what extent the Clause is made necessary by double taxation agreements which have not yet been made. As I understand it, the Clause is necessary simply because of intended future agreements, and I imagine that the Swiss agreement is the chief of those. If that is correct, I do not understand why the Clause should not wait until such time as the agreements have been made and properly considered by Parliament.
Mr. MacDermot
The agreement has been made and a copy can be obtained from the Vote Office. It has been formally laid before Parliament. The trouble is that under its own rules Parliament cannot consider that agreement and decide whether to approve it without a provision such as that in the Clause. The existing machinery for considering double taxation agreements does not allow for a situation where the agreement withdraws the relief retrospectively. If it grants a relief retrospectively, that is covered, but it does not cover this situation which has obviously not arisen before, or it would have been covered and we would have an enabling provision of this kind.
Mr. Peyton
From what the Financial Secretary has just said, it seems that the rude remarks which I would wish to aim at the idea of retrospection are comments which I should save until we discuss the agreement.
Mr. MacDermot
It is not for me to tell the hon. Gentleman when he is in order, but I think that he has here, quite legitimately, a double barrelled rifle. He is entitled to shoot a general bullet at the whole principle of retrospection here and, having made his protest, then to aim a more specific bullet at the specific retrospective provision when we come to it.
Mr. Patrick Jenkin
The whole Clause is very disturbing. As drawn, it is nowhere near limited to dealing with the particular Swiss problem about which the confusion has arisen, the double relief on royalties. As I understand the matter, with the Convention that has been passed, perhaps years ago, granting a relief, it is open now to the Chancellor to come along and say “I think that this [column 530]has been such a tremendously favourable position to a particular class of taxpayer that we are going to take this relief back for, let us say, six years.” It would be open to him, under this Clause, to make an Amendment which would require the taxpayer to repay a tax for which relief has been granted. If that is not so, would the Financial Secretary be good enough to point to the provision in the Clause which makes that limitation?
The last few lines at the bottom of page 35 are completely general:
“… notwithstanding that the relief so withdrawn is for periods which include periods before the making of the arrangements.”
That is to say, that one can go back for an unlimited period of time. Is not the right thing to do to put in some much more limiting provision so that it is only in very limited circumstances—the sort of circumstances that have arisen in the Swiss case that the Clause should grant this power?
Mr. MacDermot
There is nothing in this Clause which would enable the Chancellor unilaterally to bring forward proposals to withdraw retrospectively a relief provided for in a double taxation agreement. First of all, he has to get the agreement of the other country, and that is a very important condition. It would only be in exceptional circumstances that two countries would agree to the withdrawal of a relief retrospectively. I have explained what the circumstances are here—that it is owing to an oversight in the drafting——
Mrs. Thatcher
Someone made a mistake.
Mr. MacDermot
Yes, someone made a mistake. Because of the manifest error in the Bill last year an anomalous result has been produced in that the same relief could be given twice over. Our Swiss friends readily recognised that this applies. Even then all that this Clause does is to enable the matter to be brought before Parliament and Parliament can say that it is not prepared to agree to the withdrawal of the relief.
Question put and agreed to.
Clause ordered to stand part of the Bill.