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Income Tax (Double Taxation Relief)

Volume 933: debated on Monday 20 June 1977

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11.40 p.m.

I beg to move,

That an humble Address be presented to Her Majesty, praying that on the ratification by the Government of the United States of America of the Protocol set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (The United States of America) Order 1977, a draft of which was laid before this House on 16th May, an Order may be made in the form of that draft.

The Double Taxation Relief Order before the House today concerns a proposed second amending protocol to the new convention with the United States of America which, together with a first amending protocol, was approved by the House on 12th January. This further protocol provides two modifications to the convention: one of them is about the domicile position of certain American women, and the other is about the treatment of income paid out of trusts.

The domicile point arises in connection with the tax treatment in this country of investment income—arising outside the United Kingdom—of American women who are resident in this country and whose husbands have United Kingdom domicile. Under the Domicile and Matrimonial Proceedings Act 1973 a woman marrying on or after 1st January 1974 no longer automatically acquires her husband's domicile. She is treated as an independent person for these purposes, and this means that she can have a different domicile from that of her husband. For United Kingdom tax purposes the concept of domicile is a significant one because while individuals resident in the United Kingdom are generally liable to tax here on their world income, wherever arising, there is a different rule for people who, although they are resident here, are nevertheless not domiciled in the United Kingdom: their foreign source investment income is not taxable here if it is not remitted to this country.

In the debate in the House on 12th January on the Double Taxation Relief (United States of America) Orders—that is to say, the convention and the first amending protocol—hon. Members drew attention to the differing treatment which could apply to American women married to men with a United Kingdom domicile dependent on whether or not their marriage took place before or after 1st January 1974. I undertook to look into this further to see whether anything might be done, within the confines of the convention, to bring American wives married before 1st January 1974 on to the same tax footing as those who married on or after that date.

I am glad to be able to tell the House that we have felt able to meet the concern of the House about this matter and the protocol provides that American women who before 1st January 1974 married men with United Kingdom domicile will be treated as if they married on 1st January 1974 when it comes to determining their domicile for United Kingdom tax purposes within the meaning of the Convention.

The second matter with which this protocol is concerned is the treatment under the convention of income paid out of trusts and is not concerned with the point about domicile. This primarily concerns income from discretionary trusts. Payments out of discretionary trusts have, since 1973, been treated for United Kingdom tax purposes as items of income in their own right. As such this income would fall within the scope of Article 22 of the convention, which provides a rule for eliminating double taxation on income which is not expressly dealt with in other articles of the convention. This would mean that the country of residence of the beneficiary would have sole taxing rights over income paid out of discretionary trusts, and this was not what was intended by either country when the convention was negotiated. What was intended was that the country of source of the income would have taxing rights also, and this is what the protocol provides. Double taxation will be avoided, as is normal in these cases, by the country of residence giving credit for tax charged by the country of source, and where doubts or difficulties arise about this the respective tax, authorities will be able to reach a solution under the mutual agreement procedure provided for by Article 25 of the convention.

I commend the terms of this protocol and I hope that the House will see fit to approve it.

11.45 p.m.

As the Minister said, this protocol is another interim stage towards ratification. The progress that the Minister has reported to the House, particularly in respect of American wives, is good. I congratulate the Minister on carrying out his undertaking and on not only looking at the position of American wives of United Kingdom citizens but actually doing something about it. While not all American wives will not be satisfied about this, their dissatisfaction will arise from the high levels of tax in this country rather than from particular distinctions artificially drawn against them—distinctions between those American wives who married before 1974 and lived in this country and those who came here and were married after 1974. There was no possible justification for that distinction. The House is grateful to the Minister for the progress that has been made in that direction.

However, I am left with a question in mind about the position of American males married to British wives. I take the example of a retired American male married to a British citizen here, who is domiciled in the United States but who is resident here. Will he be taxed on a remittance basis only—as is the case with American wives married to British subjects? If so, that is obviously acceptable. However, if that is not the case, it is strange that it is not included in the protocol, in which only wives are mentioned. Perhaps the Minister could clear that point up for us.

What is the position of the American woman who is working here, for example, for a United States corporation? As the House knows, the position of the American male working for an American corporation or any other business here is that if he stays here less than nine years only half of his income arising in this country is subject to tax at all and the rest only on a remittance basis. I take it that that is also the position of an American woman working for an American corporation, but I should be grateful if the Minister would tell the House whether it is so.

All these devices—and, indeed, the one that is currently being discussed in Committee about relief on overseas earnings—are simply a reflection of the crazy level of tax in this country. None of these negotiations would have been necessary if tax here were not so high.

I am also grateful for what the Minister has said about Article 22 of the original convention and about discretionary trusts. I do not have any particular questions to ask him on that. I understand they are to be taxed under the relevant domestic law where the discretionary trust resides. However, what happens, for example, in the case of a discretionary trust which is resident in the Bahamas? Which of the taxing authorities—Britain or the United States—will be able to impose the tax?

Finally I turn to the most important problem that still arises in this convention and that is what one might briefly refer to as the California problem. We discussed this during our last debate on this double tax agreement. It arises because of the California tax which, I am told, is a unitary tax for the application of the California State franchise tax to subsidiaries of multinational companies located in that State. I understand that this means that the California authorities attempt to tax the subsidiaries of multinational companies on income that arises outside the State of California.

It is serious enough that this should be done in one State, but I understand that Oregon, Alaska, Illinois and Louisiana are moving in the same direction. Unless California's activities can be curtailed, as proposed in the convention, other States will follow suit. The California authorities have estimated that the prohibitory clause will entail a loss of revenue of $125 million for them, but this indicates only the severity of the tax that subsidiaries of United Kingdom multinational corporations will have to pay in California if the clause is not allowed to go through.

What stage has the process reached? I understand that the Senate External Affairs Committee is considering the matter, and any views that the Minister of State can bring to bear will be welcomed by the House. This is a matter of great importance. I do not think that the House could ratify an agreement that allowed one State to tax income arising from anywhere in the world for the purposes of that State's own revenue. If the precedent were accepted, many other countries would be interested in such a form of tax.

I hope that this will not occur, that the American Senate will pass the convention as it stands and that we need not be troubled about it. The House will be anxious to learn whether the Minister has anything to report.

11.53 p.m.

I join my hon. Friend the Member for Horsham and Crawley (Mr. Hordem) in thanking the Minister for the small concession, Natural justice cried out that he should have given it, and it was monstrous that we should ever have thought that we could get away with it in the first place.

Can the Minister of State clarify two points for me? First, am I right in assuming that an American male who came here to work and was married to a British female would be taxed only on a remittance basis, where as an American female who is married to a British male would, unless she goes through the process of proving that she has or wishes to have another domicile, be taxed on the full amount of her income, whether she remits any or not?

I may be wrong, but it seems that the American female is not being treated equally with the American male. If that is so, can the Minister give any justification for that situation?

My second point concerns the Domicile and Matrimonial Proceedings Act 1973. I declare an interest as my wife is American. The Act says that after it comes into force the domicile of a married woman:
"shall, instead of being the same as her husband's by virtue only of marriage, be ascertained by reference to the same factors as in the case of any other individual capable of having an independent domicile."
I assume that she then make the choice—"I am married to an Englishman but I decide that my domicile should remain in the United States". If that is the decision that she makes, I assume from the drafting of the Act that very few people would quarrel with it, and that for all intents and purposes she establishes by that simple declaration that her domicile remains in the United States.

However, Section 2 states that where a woman is married before 1974 and
"had her husband's domicile by dependence, she is to be treated as retaining that domicile (as a domicile of choice, if it is not also her domicile of origin) unless and until it is changed by acquisition or revival of another domicile either on or after the coming into Force of this section."
I am not a lawyer but I assume that the section is stating that if a marriage took place before 1974 the wife is not in the same position as her sister who married after 1974. It seems that an American woman or a French woman, for example, has to prove in some way that her domicile is in some other place. That does not apply to someone married after 1974.

To avoid the full penal burden of taxation in this country, an American woman married before 1974 presumably has to go through the whole process to try to show that her domicile is elsewhere whereas her sister does not and the American male does not. There is no question of being taxed only on what she remits here. Such matters all hang on this domicile business. It does not matter if the money has been created exclusively by French people or American people. I restrict my references to Americans because my wife is an American.

Anyone in this country who was married before 1974 will find that every cent comes under British penal taxation if he cannot prove that his domicile is elsewhere. Leaving aside whether this country's taxation is penal, which is a matter of some dispute, although less and less of one between many of us on both sides of the House, the question of natural justice arises. I do not see what right a country has to tax the income of a person who does not bring income here, although I can see the right that we have to tax income which is brought here.

It seems that the concession that has been made tonight, although welcome, is modest and does not meet in toto the natural justice that I consider should be met.

11.58 p.m.

I deal with the three issues of substance that have been raised. The first is domicile and the effect of the Domicile and Matrimonial Proceedings Act 1973. Leaving aside double taxation treaties, the general law is that if a person is not domiciled in this country a worldwide income, as it were is not taxable here unless remitted into the country. That is what I understand to be the general law.

Before the Divorce and Matrimonial Proceedings Act 1973 a married woman took the domicile of her husband. Irrespective of whether she could prove an independent domicile of her own, she automatically took her husband's domicile. If an American lady married a person domiciled in this country, she became of British domicile even though she might be able to prove that she was still domiciled in the United States. Having "acquired" British domicile before January 1974, her worldwide income was taxable in this country even though it was not remitted. It is towards that mischief that the protocol is being introduced.

The general law of domicile was that after 1st January 1974 if the same American lady were to marry the person domiciled in this country she would not automatically acquire British domicile although she might have British domicile. If she is married to somebody with British domicile living in this country, it may be decided on the facts of that case that she has given up United States domicile and has acquired domicile in this country. But, because of that Act, she is not automatically presumed as having acquired United Kingdom domicile. After 1st January 1974 she may be able to prove that, despite the fact that she is married to a person domiciled in this country and may be bringing up a family here, she is still domiciled in the United States of America. If she could show that, she would not, under our general tax law, pay United Kingdom tax until the income was remitted.

The object of the protocol is to bring American ladies who were married before the 1973 Act came into force into line with those who married after 1st January 1974. They will now be given the opportunity to prove that they are of United States domicile and to get the benefit of the remittance basis in relation to their income. I think that is a fair provision. It goes as far as we were asked to go. There is now no discrimination between one group and the other regarding the pre- and post-1st January 1974 situation.

It may be that this does not apply to the hon. Gentleman's Department, because the Act was concerned with domicile, not taxation. However, I should have thought that the wording of the Act made it clear that there was no need for proof after 1974, whereas there was need for proof before 1974. That makes a difference, does it not?

No. I think that there is still need for proof. Domicile is a question of fact. The Act provided that there was no automatic presumption that because someone married a person of British domicile that person was also of British domicile. The person concerned still has to state what her domicile is. The Act cannot change that.

The hon. Member for Horsham and Crawley (Mr. Hordern) asked, as he did last time—and I did not answer satisfactorily—"What about this trust in the Bahamas?" I am not sure about the trust in the Bahamas. I understand that the protocol is based on where the income arises. If the income arises in the United Kingdom, the United Kingdom, as a result of what I hope the House will approve tonight, gets first bite, as it were, of the tax, but credit for that may be given to a United States' resident by the United States authorities. If the original convention were to stand, in that situation the United States authorities would have the primary taxing power and the United Kingdom authorities would have no power to tax at all. The object of the protocol is to apply what is generally considered to be the conventional rule, that the country in which the income arises has the first bite of tax and that the other country can give tax credit.

Perhaps the Minister will let me know the answer to the question that I have put to him on two successive occasions about the trust in the Bahamas. I think that it would be of more general interest if I were to table a Question and he were to answer it later. Will he now deal with the position of the American male married to a British woman living here? What is his taxation basis for income remitted or not remitted here? Is it on all fours with that of the American woman?

Happily, we are not concerned tonight with the American male. If he is domiciled in the United States although living in this country, this does not affect him. The protocol deals with the specific problem which arises partly as a result of the Domicile and Matrimonial Proceedings Act 1973.

I understand from the Minister that an American male need not prove his domicile. Is it correct that if he were domiciled in this country he would be taxed on his American income whether he remits it or not?

If he is domiciled in this country it is only fair that this country should claim his tax. But the expression "American male" is not applicable. If he is American he is an American citizen.

On the question of trusts, we are concerned with where the income arises and not with where the trust is situated. I was also questioned about the California unitary basis of taxation. I understand that the Senate foreign affairs committee will be considering the whole treaty in the middle of next month. These matters will be decided according to rules and procedures. What happens in the light of what is decided will be considered. We must await the outcome.

Question put and agreed to.


That an humble Address be presented to Her Majesty, praying that on the ratification by the Government of the United States of America of the Protocol set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (The United States of America) Order 1977, a draft of which was laid before this House on 16th May, an Order may be made in the form of that draft.

To be presented by Privy Councillors or Members of Her Majesty's Household.