§ Mr. Patrick Jenkin
I beg to move Amendment No. 291, in page 36, line 23, at the end to insert:(3) 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.This will be the last discussion that we shall have this evening—[HON. MEMBERS: "This morning."] In HANSARD it will appear as yesterday. I approach this Amendment confident that we will be able to wend our way to our beds filled with the glow of satisfaction, not only work well done on the Bill as a whole, up to this point, but on this particular Clause.
This Amendment covers an important point, which was viewed with considerable favour by Ministers, both in Committee and on Report last year. The point is that the effect of the limitation of double tax relief on companies, which operate through a large number of branches, not subsidiaries or separate companies, but branches, operating in overseas territories, will cause great difficulty to those companies. The remedy which has been put forward, and is contained in this Amendment, is that these companies should be permitted to lump the profits, and the overseas tax charged on those profits, of all the branches, into one great dollop.
The advantage of this is that it would preclude the situation, which arises at present, where some branches, because of the high rate of tax charged in the countries where they operate, do not get full relief for the tax which has been charged against United Kingdom tax, and other branches, operating in countries with a different tax system get the relief and still have something over. For a great many of these companies, particularly the banking companies, it is quite unrealistic to take each branch separately. The proper way to deal with these businesses is on one world-wide basis.
532 3.45 a.m.
Some of the banking companies which the Amendment would help to carry on their business in overseas territories operate as many as 30 or 40 different branches in different territories, and in one case the figure is more than 40. One can thus see the complexities that inevitably arise through the necessity to have to perform a separate computation for each branch, and the great simplicity and ease of working, for both the company and the Inland Revenue, if they were allowed to submit, as it were, one computation covering all the branches.
As well as simplicity, it would have the effect of allowing the company to average out the relief from the double taxation, and would allow it to take greater advantage than at present of the relief available against those profits earned in branches where the actual tax charged overseas is at a fairly low rate.
It must be remembered—this is really the economic case for the Amendment— that many of the overseas branches operate in direct competition with the indigenous institutions, banks or whatever they may be. Anything which imposes on the British banks operating overseas penalties of a fiscal or any other nature to hinder their operations must be to the disadvantage of not only the firms but also the country. Elsewhere, rather less than 24 hours ago, I was arguing about investment grants, particularly for computers in these overseas countries, but I got no change from the President of the Board of Trade.
I am encouraged to think that the Government may well go some way towards meeting this point, because when Mr. Peter Emery, former Member for Reading, who played such a notable part in the debates on the Finance Bill last year, moved a similar Amendment in Committee, the Financial Secretary saidI 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.]Being a man who is always as good as his word, this is what he did, and when he came to the Report stage he said:We do not rule out on principle legislating on this subject. … On looking further into 533 it we do not feel it right to try to bring forward an Amendment at this time.At the end of his reply he said:… 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."—[OFFICIAL REPORT, 12th July, 1965; Vol. 716, c. 221–2.]I am sure that the Chancellor and his advisers have done this. A strong case can be made out for it. It is a very limited form of grouping, not a grouping of companies but of profits, recognising the situation that exists, that it is one business which is carried on in a variety of territories all over the world.
These businesses, particularly banking and other institutional businesses, bring immense value to the country in invisible foreign earnings and also play a notable part in the financing of our exports to overseas territories. The validity of the case was admitted last year, and I am certain that that validity is no less this year.
I hope that we shall be able to go our way tonight in the knowledge that the Government are now prepared to meet this case, and that, if they do not like the drafting of our Amendment, they will be prepared to do something themselves on Report.
§ Mr. MacDermot
I well remember the debates which we had on this subject last year. It is not quite right to say that we accepted the validity of the arguments, but we certainly accepted that there was much force in them and said that we would view the matter with sympathy to see whether we could find an acceptable solution.
I said on Report:The problem is complex and it would not appear to be right in principle to single out a class.That must clearly have been an allusion to the problem of the overseas bankers. I think that in Committee I had specifically acknowledged that their case was particularly strong.
But I went on to say: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 534 in this country when for other reasons it might be better for them to invest here."— [OFFICIAL REPORT, 12th July, 1965; Vol. 716, c. 221.]I undertook that we would look carefully into the matter, and this we have done. I regret to say that we have not got any farther. We have not found a solution which would overcome the difficulties. It behoves me, in spite of the hour, to give a little fuller explanation of why we have reached this conclusion.
First, I reiterate the point I made last year, that we do not feel that it would be right to single out a special class of companies for extension of double taxation relief on the lines proposed and to grant it to them alone. This would lead to complaints by other companies which it would be difficult to resist. One must look at the whole class of companies.
Next, the economic consequences. In some circumstances, the scheme proposed could provide an incentive to a company to invest abroad in a low tax country rather than to invest at home. For instance, a company already operating in a high tax country could get no relief for any excess of the overseas country's tax level compared with our own, but that excess could be used to reduce its overall tax bill if it invested in a third country where the rates were lower than in the United Kingdom. Equally, for companies operating in a low tax country, the disincentive to invest in a high tax country would be reduced.
As I said last year, there are obvious tax avoidance possibilities. A concern operating in both the United Kingdom and several countries overseas, in some of which the tax rates were relatively high and in others of which they were relatively low, could avoid United Kingdom taxation by switching profits from a United Kingdom branch or subsidiary to its branches or subsidiaries in low tax countries. I do not want to make too much of this. I take the point which hon. Members have made several times during our debates, that we have an obsession about tax avoidance. But there is here a case in which the mere existence of tax avoidance possibilities presents a formidable administrative problem.
While those possibilities existed, inspectors would have to investigate the amounts for relief put to them with an 535 eye to seeing whether the arrangements had been made in order to exploit those possibilities. In view of the very great burden which is put on inspectors, we do not feel that it would be right to impose an additional burden of this kind in consequence of a measure which, at best, is of doubtful merit.
Bearing in mind, also, that this is a field in which our balance of payments is affected, we do not think it right to introduce a measure which would result in giving fiscal incentives to some companies to invest in low tax countries overseas rather than at home.
I hope that, after this rather fuller explanation, the Committee will understand that there is a difficult problem here and that it would not be right to try to solve it by picking on a specific solution favourable to one class of company, in particular the banks, which, I agree, are harshly affected.
§ Mr. Patrick Jenkin
Has the Inland Revenue had any consultations with representative bodies, the Overseas Bankers' Association or other bodies of that kind? I understand that the suggestion is that they have. I wonder if it would be any use in trying to follow this up. The banks in particular feel that they are being placed at a disadvantage.
§ Mr. MacDermot
Last year I made it clear that we have had representations on this subject and there have been discussions at the Inland Revenue.
§ Amendment negatived.
§ Clause ordered to stand part of the Bill.
§ Mr. Callaghan
I beg to move,
That the Chairman do report Progress and ask leave to sit again.
I thought that there was another Schedule. I am delighted and relieved that there is not. The erudition, knowledge and research which has been soaring around my unwitting head during the last few hours has left me in the usual state of knowing more at the end than I did at the beginning.
Some hours ago the right hon. Member for Enfield, West (Mr. Iain Macleod) 536 suggested that we should reach Clause 32, but as everyone seems to be so fresh I wonder whether that is right and whether we should not push on. However, as the right hon. Member suggested it, and I agreed, I am sure that we must keep to that arrangement. I hope you will report Progress, Mr. Irving, and that we will meet again very soon.
§ Question put and agreed to.
§ Committee report Progress; to sit againthis day.