§ Mr. MacDermot
I beg to move, Amendment No. 116, Schedule 15, in page 208, line 48, at the end to insert:4A.—(1) Subject to sub-paragraph (2) below, where a company resident in the United Kingdom is charged to tax under Case I of Schedule D in respect of any insurance business carried on by it, and that business or any part of it is carried on through a branch or agency in a territory outside the United Kingdom, then in respect of dividends referable to that business which are paid to the company by companies resident in that territory any tax payable by those companies in respect of their profits under the law of that or any other territory outside the United Kingdom and any United Kingdom tax so payable (whether income tax or corporation tax) shall, in considering whether any, and if so what, credit is to be allowed under Schedule 16 or 17 to the Income Tax Act 1952, be taken into account as tax so payable under the law of the first-mentioned territory is taken into account in a case falling within paragraph 9 of Schedule 16.(2) Credit shall not be allowed to a company by virtue of this paragraph for any financial year in respect of a greater amount of dividends paid by companies resident in any overseas territory than is equal to any excess of the relevant fraction of the company's total income in that year from investments (including franked 218 investment income and group income) so far as referable to the said business over the amount of the dividends so referable which are paid to it in the year by companies resident in that territory and in respect of which credit may apart from this paragraph he allowed to it for tax not chargeable directly or by deduction.(3) For purposes of sub-paragraph (2) above "the relevant fraction" is, in relation to any overseas territory, the fraction of which the numerator is the company's local, and the denominator the company's total, premium income in the financial year so far as referable to the said business, and premium income shall be deemed to be local premium income in so far as it consists of premiums under contracts entered into at or through a branch or agency in that territory by persons not resident in the United Kingdom.This is an Amendment which we undertook to bring forward, if we could, on Report to meet a point which was raised by the hon. Member for the City of Chester (Mr. Temple) in Committee. I am glad to say that we have been able to resolve the difficulties and bring forward an Amendment which I hope will be acceptable.
The effect of the Amendment is that it will enable an insurance company to get a measure of relief for underlying tax on dividends that it receives from any overseas country. The relief will be limited to a proportion of its world income from investments determined by reference to the proportion of its business which the company does in the overseas country concerned. This will ensure that the competitive position of the United Kingdom insurance companies is not damaged by the general withdrawal of relief for underlying tax on portfolio investment overseas.
Hon. Members will remember that this problem arises particularly because insurance companies carrying on business abroad are required, sometimes by law and sometimes by practice, to hold a substantial portfolio investment in the country abroad, and it is argued, and I think with reason, that this cannot strictly be regarded as pure portfolio investment in the ordinary sense. It is a form of trading investment which these companies have to make. Provided that is the purpose of the investment, it would be right to grant this relief.
The difficulty was to find the right kind of formula to limit the scope of the relief. We did not think it right to try to limit it to the legal requirement of the country 219 concerned because that often falls short of what is needed in practice. We thought, therefore, that it was right to relate it as a proportion of the company's total world investment income to the premium income from that particular country. This relates it directly to the business that the company is doing in that country. I hope this will be found to be a workable and acceptable formula. If the House wishes me to go into any further detail I shall be glad to do so, but I hope I have said enough to commend the Amendment to the House.
§ Mr. Temple
I am glad to congratulate the Government on appreciating the fundamental point with regard to insurance that there is a difference between a trade investment and a portfolio investment. Equally, I am glad that the Government have been able to bring forward this Amendment on the Report stage. It shows what an extraordinarily good thing it is that we have such an alert Opposition in order to bring to the attention of the Government the fact that their Bill as originally drawn would have done such great damage to British worldwide insurance. Having said that, I should like to congratulate the Financial Secretary upon the extreme courtesy with which he has been able to deal with a number of Amendments which I have put forward, and indeed his colleagues as well. Perhaps it will not be inappropriate to mention, because it has shortened our proceedings considerably, that the head of the Board of Inland Revenue has been extraordinarily helpful behind the scenes in giving certain clarifications and assurances in regard to the very complex matters surrounding this particular Amendment and other Amendments as well.
The Financial Secretary has referred to the formula which underlies this particular Amendment. I am glad to confirm that the formula is straightforward, fair and extremely comprehensible, which will be an advantage to all concerned. I believe that, thanks to this Amendment being brought forward at this stage, British insurance overseas will at least be able to hold its position in bad times and I hope that in better times it will be able to expand its worldwide business.
Mr. J. T. Price
I intervene only to ask whether the Treasury has made any effort to estimate what this concession has cost.
§ Mr. MacDermot
Yes. I think the immediate cost of the Amendment, it is anticipated, will be of the order of £1 million a year. It is possible that later when the relief for underlying tax on portfolio investment in the Commonwealth and elsewhere is withdrawn, the cost may be several times greater than that.
§ Amendment agreed to.
§ Mr. Peter Emery
I beg to move, Schedule 15, in page 209, line 7, at end insert:6. A company resident in the United Kingdom which has more than one source of foreign income may elect that in computing the credit for foreign tax to be allowed to it for any financial year all the foreign taxes payable in respect of such sources of foreign income shall be aggregated and the credit shall be allowed against the due proportion of the corporation tax chargeable on the profits of the company attributable to the aggregate foreign income of the company from such sources.The occupants of the Treasury Bench will realise that during the Committee stage they did say that they had received many representations on this matter of aggregation. The Financial Secretary said in column 1663 of the Official Report of 22nd June, that there was some considerable force in some of these arguments, and he then went on to say:I want to make clear that I am not giving an undertaking that I will bring forward Amendments, but I shall be glad to consider the matter further."—[OFFICIAL REPORT, 22nd June, 1965; Vol. 714, c. 1664.]We are sorry that he has not been able to bring forward any Amendments. This Amendment is here because it is a definite advance on the Amendment which we had down on the Committee stage. It meets two of the points put by the Treasury bench during the Committee stage, and I think it states clearly that a United Kingdom company with more than one source of foreign income may elect to be assessed by the method most favourable to it so that in computing the credit for foreign tax for any year all the foreign tax paid from any source may be aggregated and credit may be allowed against the proportion of Corporation Tax on the profits attributable to the aggregate foreign income.
221 I realise that there are certain companies who would not wish to use aggregation, and I know that the Treasury is aware of this. There are companies trading where the loss, if aggregation were compulsory, would be such as to show that none of the operations was profitable. Obviously it would be wrong to have aggregation in those instances. There are examples which were given during the Committee stage and which I do not intend to go over again, but about which the Treasury Bench will know. We therefore tabled the Amendment to see whether the Treasury considered that there is any way in which aggregation could be elected and which would help a certain number of companies trading in a number of different foreign countries which are finding that their degree of foreign tax varies considerably.
§ Mr. MacDermot
We do not rule out on principle legislating on this subject. As the hon. Member for Reading (Mr. Peter Emery) has said, I indicated in Committee that if we could find a satisfactory way of dealing with what appear to be at least the more meritorious parts of this problem we should be glad to do so on Report, but I made clear that I could not give any undertaking and that it might prove impossible to do that. On looking further into it we do not feel it right to try to bring forward an Amendment at this time. The problem is complex and it would not appear to be right in principle to single out a class. In any event, there are many difficulties to be overcome. There is no doubt that pooling provisions could not only offer scope for avoidance in the strict tax sense but might have undesirable economic consequences in serving as an inducement to companies in certain situations to invest abroad rather than in this country when for other reasons it might be better for them to invest here.
I am sure that the House would not want me to go into detail at this stage but I ask hon. and right hon. Members to accept that there are problems here. The Amendment seeks to meet the problem of losses by making the concession optional. This is done under United States law but it is a moot question whether that solution would not be overgenerous. But apart from the general question of principle, awkward technical 222 problems are involved and the Government have decided not to legislate on this matter this year but to look carefully into all the implications during the coming year.
§ Sir E. Boyle
In view of what the Financial Secretary has said and the fact that the Government do not rule out legislation—and indeed we hope it might be another Government which will have to take the decision—I am sure that my hon. Friends would wish to withdraw the Amendment rather than it should be settled by the voice of the House.
§ Amendment, by leave, withdrawn.