§ Mr. Mitchison
I beg to move, in page 12, line 42, to leave out from "country" to "and" in line 45.
1450 The effect of the Clause as a whole, as I understand it, is to remove the ban there has been hitherto on what I shall for the moment call local taxes when they are sought to be set off against British taxation under the arrangements about unilateral taxation. The local taxes in question are mentioned in the passage we are now considering, and they arepayable under the law of a province, state or other part of a country or levied by or on behalf of a municipality or other local body.For the sake of raising the question we have taken the latter category, local authority taxes, because it is tolerably clear that tax levied by a province or State may have a character very much nearer to that of a tax levied by the central Government. Not long ago, Income Tax used to be levied in Australia partly by the States and partly by the Federal Government.
The effect of this proposal, as I understand it, would be that the local taxes would be available for set-off subject only to the safeguard depending on their character, for to be capable of set-off they must correspond to Profits Tax or Income Tax in the United Kingdom.
This matter was considered by the Royal Commission. I offer my personal and respectful thanks to the right hon. and learned Gentleman for giving us the key and telling us which crib to look at, indicating the right section of the Royal Commission's Repart. It saved people quite a lot of trouble, and it was kind of him to do it. The relevant section is paragraphs 697 to 701, paragraph 701 being the one which embodies the conclusion.
The Amendment follows the recommendations of the Royal Commission and removes the ban I have indicated, leaving the sole test to be the corresponding character of the tax. It is fair to point out at the same time that this was one of the matters on which the minority dissented. Those right hon. and hon. Members who do not carry all the paragraphs in their heads will discover that at paragraph 171.
The real point, in our opinion, must depend on the extreme difficulty of applying the test of "corresponding". Obviously, there are a good many rough analogies between Schedule A or Schedule B Income Tax, on the one hand, 1451 and rates levied by a municipality, on the other. It is hard to say that there is a radical difference between the character of Schedule A tax and rates if one puts aside for the moment, as we are asked to do under this Clause, the body which levies the taxes in question and the use to which the taxes are put. If we get rid of that, we are obviously confronted with a fairly close parallel.
I have been looking at some of the municipal taxes. The results are very curious. I propose to take an instance which the Committee might, at first sight, think was clearly an instance of a tax which did not correspond with income tax on profits tax. I refer to dog tax, which is levied by municipalities in most European countries. It is not done in this country or, apparently, in Japan. I found a very illuminating passage about the dog in his relation to profits in a summary of the Netherlands tax.
I refer to a symposium on Local Government Finance and its Importance for Local Autonomy, published under the auspices of the International Union of Local Authorities at The Hague in 1955. I am told that The Hague is in Holland and, therefore, they ought to know about the Dutch taxes. The answer appears to be given by competent people.
It is stated:The dog tax originated from an endeavour to keep the number of dogs within reasonable limits.That is a matter of history.The act merely stipulates that a lower rate of levy shall be applied for watch-dogs and dogs used for work than for dogs kept as pets, or that no tax at all be levied on the former category.I invite the attention of the Committee to the fact that we are now in the realm of dogs used for work, dogs which, as it were, are plant for tax purposes—mobile plant, but, nevertheless, plant.Accordingly, the tax is usually so much per dog.We are here considering dogs which are used for work.
The document continues:In some municipalities, however, the tax has assumed something of the character of a consumption tax owing to the fact that the local authority has made the rate dependent on the owner's means (rate based on house or income).1452 There is a very puzzling tax. At first sight, we might say that it could not possibly correspond to Income Tax or Profits Tax, or to anything to do with them, but when we realise that the dog is a tool of trade and a working dog, and that the rate at which he is charged varies accordingly, it is not so certain. Then we almost immediately get into the difficulty that there are some taxes whose nature is a little doubtful.
I suppose that a company operating in, let us say, Belgium might find itself confronted with one of a very long list of taxes with which I would not wish to bother the Committee. One of them is a rain-spout and drain-grating tax. That might be related to matters of income or regarded purely as a tax in the nature of a peculiar kind of rate.
A whole page of this book is occupied with describing the character of local taxes in Belgium. Throughout the various instances that are given, including the dog tax and the rain-spout and drain-grating tax prevalent in Belgium, there runs the difficulty that the taxes are either on specific things or levied on a particular activity—that is one kind—or they are levied straight on income, sometimes directly by the municipality, sometimes by some sort of allocation from the central Government. I think that that would be covered by the words in the Clause.
Or, yet again, they are real taxes whose nature it is extremely difficult to distinguish. One cannot say whether they correspond to the rates in this country or whether they are in the nature of Schedule A or Schedule B tax. If an undertaking is carried on in one of these countries, it seems to me that that question will arise in the most baffling form and that the answers will be inconsistent and anomalous in different countries.
The existence of the working dog as distinct from the pet dog may not be so well recognised in countries less logical than the Netherlands. I can visualise the Inland Revenue authorities being sadly put to it to distinguish between what does and what does not correspond with Income Tax. I believe that it was for that sort of reason that these local authority taxes were originally excluded from unilateral relief. It was a good practical working arrangement 1453 to exclude them. When the Royal Commission wished to eliminate the distinction and to rely solely on the test of what was and what was not corresponding, I do not believe that it thought out the difference between rates and Schedule A, to take the most obvious instance, or between taxes of local application and those of more national importance.
The Report gives me the impression that the provincial and State taxes were, in some cases, fairly clearly distinguishable in principle from the central Government taxes—as, for instance, in the Australian case that I mentioned. Having done that, the Royal Commission was lured one step further, and it swept away the distinction about municipal taxes and thereby involved itself in a quagmire of niceties and a shifting sand of uncertain functions and uncertain uses. If only it had consulted the invaluable work to which I have referred, or some of the people who contributed to it. We do not want this to happen. If it does happen it will be a matter not merely for the Inland Revenue, but for those who live abroad or have an office abroad. They will be in very great uncertainty about the law.
We tabled the Amendment to elicit the Government's answer which, I suppose, will be that which the Royal Commission gave, namely, if we do this at all we must include the whole lot, because otherwise it will not be worth while. That may be so. The question is: when we have done it, will it be even more workable? The difficulty will be a different one. Will we not have an enormous number of cases in the courts in which the function of dogs and the wealth of their owners in the Netherlands will fall to be considered, and the questions whether it is a real tax or an Income Tax and whether the matter should be decided by English law or by the law of the country involved will be considered and will give rise to difficult distinctions?
I therefore suggest that the Government should give us a very full explanation of why they have chosen at this moment to eliminate a distinction which appears to have worked with municipalities, at any rate, in the past, and should let us know what complaints have been made about it. I appreciate that the provinces and States are on a slightly different footing. 1454 It may be that our Amendment is not quite right and that we should have stood against the Clause as a whole or eliminated some larger category. However, I think that it serves to raise the point, and I hope that it will secure the desired result of eliciting a clear explanation from the Government of what sort of muddle they propose to put is into by this Clause.
§ 6.30 p.m.
§ The Economic Secretary to the Treasury (Mr. Anthony Barber)
The hon. and learned Member for Kettering (Mr. Mitchison) has explained the purpose of the Amendment with his usual clarity and with one or two graphic illustrations. As I think the Committee will now be aware, the purpose of Clause 16 is to extend unilateral relief from double taxation. The existing law, which is contained in Section 348 of the Finance Act, 1952, excludes from relief two categories of tax. The first are taxes levied by a municipality or other local body whether in or outside the Commonwealth. The second are taxes levied by a province, State or other part of a non-Commonwealth territory. Taxes imposed by a province of a Commonwealth country are eligible for relief quite apart from the provisions of the Clause. The Clause as drafted gets rid of both those exclusions.
As the hon. and learned Member for Kettering has made clear, the object of the Amendment is to limit the extension to taxes imposed by non-Commonwealth provinces, States and other parts of the countries concerned and to exclude from unilateral relief taxes imposed by municipalities or other local bodies. In other words, it seeks to preserve the first exclusion which I mentioned: that is to say, the exclusion concerning taxes levied by a municipality or other local body.
The hon. and learned Member has very fairly referred to the Royal Commission's views on this matter and has pointed out that there was some difference of opinion between the majority and the minority Reports. The majority came to the conclusion that the test of recognition for overseas taxes should depend solely on the nature of the tax and not on the status of the authority which imposed or administered it. It is on this basis, as the hon. and learned Member again 1455 rightly said, that the Clause is put forward for the consideration of the Committee.
I do not wish to delay the Committee by reading long passages from the Royal Commission's Report, but I should like to read a few lines at the end of paragraph 701 of the majority Report, which states:We also recommend that taxes imposed by municipalities should likewise be enabled to go forward for consideration on their merits; for in a case in which the law of an overseas territory permits a municipality to impose a tax that is framed as a charge on profits comparable to the United Kingdom taxation against which credit may be given the central government of the territory must be taken to be resigning in favour of the municipality a part of the field of income and profits taxation.The minority did not take the same view. The Government consider that the view of the majority is reasonable and should be put into effect in the Clause. There is, however, one thing which I should say about the minority Report, which, I have no doubt, the hon. and learned Gentleman and other hon. Members have available. The minority did not distinguish between taxes which were imposed by a province and those imposed by a municipality. The Amendment seeks only to exclude from relief taxes imposed by a municipality or other local body.
I rather gathered, however, from what the hon. and learned Gentleman said that he was considering the matter from a wider view and that he considered that the same principles would apply to taxes levied by a province or State or other part of a country which was not a member of the Commonwealth, otherwise I find it difficult to appreciate why he has selected for exclusion from the Clause only taxes levied by a municipality or local body.
§ Mr. Mitchison
I did it in this form because municipal taxes are the clearest case and, of course, it is open to us either to support the Amendment or to vote against the Clause as a whole. Voting against the Clause as a whole would carry out the intentions of the minority Report.
§ Mr. Barber
While it may well be true that, in general, taxes of one form ox another imposed by a municipality or other local body are further removed 1456 from United Kingdom Income Tax or Profits Tax, I would have thought that it follows therefrom that they are more easily distinguishable from United Kingdom Income Tax and Profits Tax and, therefore, in many cases at least, it would be easier to say that they do not correspond to United Kingdom Income Tax or Profits Tax. I appreciate, however, that the hon. and learned Gentleman may take a different view.
Whether one is considering taxes imposed by a municipality or by a province—these are the two categories in which the hon. and learned Gentleman seeks to make a distinction—if one is considering the nature of the tax, as was recommended by the Royal Commission, both the majority and the minority, I should have thought that it was no more difficult to decide whether a tax imposed by a municipality is a tax corresponding to United Kingdom Income Tax or Profits Tax than it is to decide whether a tax levied by a province or state so corresponds if one is considering solely the nature of the tax. This is the basis on which the Clause is drafted.
There is one way in which I might be able to help the hon. and learned Gentleman. It has been pointed out to me that there was a particular reason why provincial, but not municipal, taxes in Commonwealth countries are allowed under existing law. The reason is a purely historical one. I learn that they were allowable under the old Dominion Income Tax relief system which existed before unilateral relief was introduced. It was not desired that the substitution of the new unilateral relief system should have the effect of disallowing relief on taxes for which relief had previously been given. I hope that what I have said on that point, and I had not appreciated it before it was pointed out to me, may help the hon. and learned Member in making up his mind whether the Amendment should be pressed to a Division.
The hon. and learned Member referred to local taxes and he was literally correct in doing so. The Committee should, however, bear in mind that the Clause does no more than remove the general disqualification which was previously imposed on local taxes. Local taxes are still required to correspond to United Kingdom Income Tax and Profits Tax 1457 and, therefore, there is no question of admitting for unilateral relief a tax imposed by a municipality which is similar in nature to rates in this country.
I hope that the Committee will take the view that to limit the extension of unilateral relief in the way proposed in the Amendment would not be desirable, and perhaps it is not too much to hope that in the light of what I have said and the information which I have been given and which I have passed on for the benefit of the Committee and the hon. and learned Member, on this occasion he will not think it necessary to press his Amendment to a Division.
§ Mr. Diamond
Will the Economic Secretary explain a little more carefully how he maintains that the Clause carries out the recommendation of the majority Report of the Royal Commission that one should judge by the nature of the tax and not by the body which levies the tax? As the Clause is drawn, it is not a positive, but a negative, approach. It merely states that the taxation shall not be treated as not corresponding merely because of a particular circumstance. Can the hon. Gentleman tell us how this correspondence is ascertained?
§ The Temporary Chairman (Mr. John Arbuthnot)
It seems to me that that would be more in order when discussing the Question "That the Clause stand part of the Bill".
§ Mr. Mitchison
The Economic Secretary repeated the recommendations and the reasons of the Royal Commission with a felicity of expression which is rare in Blue Books, and I congratulate him upon it. He did not, however, answer, because I had not really put to him, the point from the minority Report that these municipal taxes are, in many cases, not allowable as a charge against income in their own country. I do not wish to develop that now. The hon. Gentleman gave the answer I expected him to give. I do appreciate that there are anomalies likely to continue unless some removal of this sort is made. I hope, therefore, that I may be allowed to study carefully what he said. Meanwhile, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Motion made, and Question proposed, That the Clause stand part of the Bill.1458
§ Mr. Julian Ridsdale (Harwich)
I hope that the Chancellor will pay attention to the plea that I wish to put forward now, because it is a plea to help our export trade. When I was in Iran, last summer, I was struck by the fact that our contractors were not on the same basis for taxation as contractors in the United States and Dutch contractors as well.
Local contractors in Iran carrying out contract work are subject to a contractors' tax as provided for in Article 11 of the Iranian income tax law which was effective from 21st March, 1956. In the case of American contractors doing contract work in Iran, the United States Internal Revenue Bureau permits contractors' tax in Iran as eligible for full tax credit in the United States against American tax on the same profits.
It follows that an American contractor, in quoting for contract work in Iran, can afford to ignore entirely the Iranian contractors' tax which he has to incur but which he recovers in full as a credit against the United States tax liability on the same profit. A Dutch contractor is in exactly the same position.
§ The Temporary Chairman
I think that the hon. Member is getting a little far from the Question "That the Clause stand part of the Bill." This is not in the Clause.
§ Mr. Ridsdale
I was endeavouring to give details in support of the plea I was putting forward that the Clause should be a means to help our contractors in Iran. I have made the point that the Americans and the Dutch are helped, and I hope that if the substance of the Amendment which I put down—
§ The Temporary Chairman
Order. On this Question "That the Clause stand part of the Bill", the hon. Member can discuss only what is in the Clause.
§ Mr. Ridsdale
I will leave it at that, Mr. Arbuthnot, in the hope that my hon. Friends may be able to develop the points that I have made.
§ Mr. David Price (Eastleigh)
I am in a slight difficulty in that two Amendments in my name and in the name of my hon. Friends have not been called, 1459 which I regret, because they deal with a major point which, I think, is lacking in the Clause, but I am not certain whether it is lacking, and I want to know from the Treasury Bench whether the drafting of the Clause as it stands will give relief to local taxes, particularly provincial taxes, which are of a capital nature. It is not quite clear. It would seem to me that they probably are not covered, but in view of the fact that certain items which some countries regard as of a capital nature get caught, there is no reason why under our interpretation they should not come under Profits Tax or Income Tax.
I wonder whether my hon. Friend could give me any answer, at a later stage if not today, on whether, for instance, the Quebec tax of a charge of 2 per mille on capital annually would benefit under the relief proposed in this Clause. There is a number of similar provincial taxes in certain countries in which our firms operate. It has been represented to a number of us that this is a burden upon British firms, and if the benefits which were envisaged to flow from Clause 15 are to flow we hope that the interpretation of the Clause will include those taxes of a capital nature.
§ 6.45 p.m.
§ Mr. Mitchison
I wanted to ask the Economic Secretary a similar sort of question. A perusal of these taxes has led me to the conclusion that those who say that there is no alternative to rates have not looked far enough. There are more alternatives to rates within the covers of this book than any person could invent by himself. A combination of international ingenuity in varying local conditions certainly has some remarkable results.
I, in another form by reference to Turkey, put the question which the hon. Member for Eastleigh (Mr. D. Price), if I understood him rightly, was putting just now. Turkey is not always recognised to be a progressive country, but in this country we say stoutly that though municipalities must pay compensation to the full they should not get betterment. On the other hand, in Turkey there appears to be a tax on the augmented value of property due to municipal public works. I do not know how long it has been going on. It is a 1460 revaluation charge repayable in five instalments, which is on the margin between a capital tax and income tax. It is another of those capital gains about which we hear so much. Is that a tax corresponding to Income Tax, or is it not?
I find, I would say, not only in Turkey but in other countries that they find it much easier than we do to collect betterment from those who are profiting out of increased value of property not attributable to their own efforts.
§ Mr. Diamond
The difficulty of knowing whether to support the Clause or not is that one does not know to what extent it will open the door undesirably. I accept immediately that it is a difficult problem. The Royal Commission described it excellently by saying:The range of possibilities varies through an infinity of gradatus and so does the extent to which political sub-divisions of a territory may be expected to exercise taxing power.We cannot make a general rule. Wherever we draw the line we are likely to be in very considerable difficulty.
I come to the question I was attempting to ask earlier and put it now in a different way. As this Clause is not going to allow of these payments to be treated as taxation but is merely going to stop them being disallowed solely for the reason they are paid as described in the Schedule, what is the net effect expected to be in terms of cost? If the hon. Gentleman has an idea of what this Clause will cost it will give hon. Members some notion of the extent to which the door will be open.
If the door were to be open widely I must say I would reach the conclusion that my hon. and learned Friend the Member for Kettering (Mr. Mitchison) has very nearly reached, that, on the whole, the simpler and more reliable method would be to vote against the Clause, not to have the Clause, which would be to adopt the recommendation of the minority Report. The majority Report, after all, did not say that these payments should be allowed. It merely said regard should be had to the nature of the payment, and that is a possible and reasonable alternative. I hope that, perhaps, the hon. Gentleman will supply that information.
§ Mr. Barber
I think that when we considered the Amendment in the 1461 name of the hon. and learned Member for Kettering (Mr. Mitchison) both he and I went into some detail in explaining what the Clause was intended to do. Therefore I do not think I need worry the Committee by explaining it again other than to say that its sole object is to extend the scope of unilateral relief from double taxation.
The suggestion was made by my hon. Friend the Member for Harwich (Mr. Ridsdale) and my hon. Friend the Member for Eastleigh (Mr. D. Price) that there might be some doubt whether or not in framing the Clause we had gone wide enough. They asked me as I understand them, because I must also try to keep in order, two specific questions. The first question put by my hon. Friend the Member for Harwich concerned a tax which is levied by the Iranian Government and which is in form an Income Tax levied as a percentage of gross receipts. I happen to know this because my hon. Friend has been in correspondence with my hon. Friend the Financial Secretary about the matter. I am therefore able to tell him that this tax will not qualify for unilateral double taxation relief under Clause 16.
My hon. Friend the Member for Eastleigh asked me about taxes of a capital nature. I can tell him that in general these taxes will not qualify for unilateral relief from double taxation. In each case the reason is that the taxes do not correspond to the Income Tax or the Profits Tax in the United Kingdom, and this is the test which depends on the nature of the tax and which determines whether or not relief is available under the Clause.
In fairness to my hon. Friends and to what has been said by hon. Members opposite, I ought to explain why it is that the Government have maintained the view that the criterion should be the nature of the tax. I think that the whole Committee would agree that in cases where one is providing for relief from double taxation on a unilateral basis, there must be severe limitations on the kind of overseas taxes that qualify for credit against United Kingdom tax. To take an extreme case, no one would suggest that credit should be given for an overseas tax which corresponds to the Customs and Excise duties in the United Kingdom or to Purchase Tax. 1462 Although I have given an exaggerated example, that basically is the reason why under our law credit is given only for overseas taxes which correspond to United Kingdom Income Tax and Profits Tax, and that is the basis on which the Clause is drawn.
I take it from the questions put to me by my hon. Friends that they have some doubt whether the Clause goes as far as is desirable. I have already mentioned in connection with the Amendment, and I repeat the point now because it is very relevant to the matters drawn to our attention by my hon. Friends, that it was the view of the Royal Commission—
§ Mr. Barber
No, it was the unanimous view—there was no minority view on this point—that there should be no change in the present rule whereby the governing test was to be the nature of the tax, in other words whether it corresponded to United Kingdom Income Tax or Profits Tax. I believe that is right. I need not take up the time of the Committee by reading again at length from the Royal Commission's Report, but I should refer the Committee to the last few lines of paragraph 700 of that Report because they give the gist quite fairly.
They read:…we think that a general provision for unilateral relief must deal with broad categories only; a limited exception to the rule of correspondence for the purpose of meeting this situation would involve insuperable difficulties of demarcation.This is why, basically, I think we are following the right line in maintaining the simple rule of correspondence to our own Income Tax and Profits Tax.
As the Committee will realise, I cannot answer the questions put to me by one or two hon. Members about individual taxes, such as the Quebec tax to which my hon. Friend the Member for Eastleigh referred. But this gives some indication that as drafted this is a very useful Clause because one thing that it will do will be to remove an anomaly which exists at present, in that credit is not due for taxes on income imposed by individual States of the United States of America. Hon. Members who have spent any time in the United States will appreciate that these are a comparatively 1463 important sector of local taxes on income in the United States. They are not covered by the double taxation agreement we have with the United States because it is impracticable for the Federal authorities to enter into agreements with foreign Governments about State tax. Therefore this will be one very beneficial consequence which will flow from the Clause.
The hon. Member for Gloucestershire (Mr. Diamond), and the hon. and learned Member for Kettering in relation to Clause 14, asked about the cost of these various proposals. I am sorry to have to tell them that it is simply not possible to estimate the cost of the relief but the Inland Revenue considers that the cost is likely to be small. This, therefore, is a matter which we might consider on merits regardless of the cost, and that is something which my right hon. and learned Friend can rarely do.
I am sorry if the Clause does not go as far as some of my hon. Friends would have liked. I hope that I have made them appreciate that there are cogent reasons for limiting the extension of the relief in the way I have shown and I hope that they will take the view that the Clause as it stands can only work to the advantage of taxpayers and that consequently they will have no hesitation in supporting it.
§ Mr. Mitchison
My hon. Friends and I have listened with great care to what the hon. Gentleman has said. We still feel rather doubtful about the Clause. We have had a very interesting but in some ways a rather incomplete discussion and we must reserve such rights as we have to return to the matter later if need be.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.