§ The Solicitor-General
I beg to move, in page 63, line 36, to leave out "the standard period," and to insert "a standard year."
This Amendment is purely consequential on the Chancellor's proposal to allow concerns to select an Excess Profits Levy standard based on half the profits of any two years from 1947 to 1949 instead of the average of the three years.
Amendment agreed to.
Motion made, and Question proposed, "That the Clause, as amended, stand part of the Bill."
§ Mr. E. Fletcher
Surely the Committee will not part with this Clause without a further explanation. I assumed that one or other of the hon. Members who had put down an Amendment in page 64, line 27—the hon. Member for Altrincham and Sale (Mr. Erroll), the hon. Member for Langstone (Mr. Stevens) or the hon. and gallant Member for Down, North (Sir W. Smiles)—would have risen in his place to move that Amendment. It came as a complete surprise to me to find that what I regard as an important Amendment, put down by three Government back bench supporters, was allowed to go by default.
This is an entirely novel and, I think, discourteous way to treat the Committee. It means that any discussion of this Clause will have to take place on the Question that it stand part of the Bill. It is an important and complicated Clause, which takes up three pages of printing, and I am particularly anxious to hear what the Financial Secretary has to say about it.
When we were discussing this matter yesterday, in answer to the hon. Member for Darwen (Mr. Fletcher-Cooke)—who is not in his place—on Clause 45 of the Bill the Financial Secretary, as reported in yesterday's HANSARD, said that that was a matter which would be considered when 1185 we came to Clause 60. Now we have arrived at Clause 60 and, therefore, this question, which was postponed from Clause 45, ought to be considered now.
This Clause has attracted a great deal of attention in today's Press. It deals with the whole question of relief which should be given from double taxation of profits or income. As the Financial Secretary is aware, this arises both on Clause 45 and on Clause 60. I am sure it would be the general wish of the Committee that they should understand this Clause before they part with it. After all, these provisions to avoid double taxation are designed to promote international trade. They are for the benefit not only of their own particular community but of all foreign companies who are trading here and all English companies who are trading abroad. Therefore, it is very important that we should make quite sure that the provisions designed to protect companies from double taxation—both British taxation and taxation in the country where they carry on operations—should be sensible and efficient.
I hope we shall get an explanation of what is intended by this Clause. I can understand that the taxation laws of different countries vary to a considerable extent. I can understand that if an English company pays taxes in France, Italy, the United States of America, South America or anywhere else, there must be carefully designed provisions to see how that taxation should be set off against the liability to taxation in this country.
As I understand, it was formerly set off against the liability, first, to Profits Tax and then to Income Tax. Now we have this grotesque three-tier system of taxation—the Excess Profits Levy, Profits Tax and Income Tax—and we have this complete change from last year's taxation, whereby Profits Tax is not allowed as a deduction from Income Tax. As a layman, I should think that it is necessary to introduce some complicated changes in the law.
I should like to ask the Financial Secretary whether I am right in assuming that the simple explanation of the intention of this very long Clause is somewhat as follows—that a double credit available against United Kingdom Tax shall be applied, first, in reducing the amount of the Excess Profits Levy chargeable in 1186 respect of the double-taxed income and, secondly, in reducing the Profits Tax attributable to the foreign income; the balance to be applied in reducing the Income Tax so attributable.
Am I right in assuming that the amount of the credit to be allowed against the Excess Profits Levy in respect of any income liable to foreign tax cannot exceed the amount of levy attributable to that income? Since this Clause can only be understood by a careful analysis of paragraph 8 of the Sixteenth Schedule of the Income Tax Act, 1952—which is the consolidated Measure to which everyone will have to refer to try to understand this complicated subject—am I right in assuming that that will now have to be changed so that what were previously references to Profits Tax shall in future be deemed to include references to the Excess Profits Levy?
I have done my best to try to state the position as I understand it, but I am sure that it would be for the general convenience of the Committee, and of the community who have to understand these things, if the Solicitor-General or the Financial Secretary, who have no doubt studied it much more than I have, would be good enough to try to explain in quite simple terms what the Clause is designed to secure.
§ Mr. Gerald Nabarro (Kidderminster)
Before my hon. and learned Friend replies, would he also deal with one point of principle which I conceive to be of considerable importance in connection with this Clause? If the amount of benefit derived by a company operating in the United Kingdom as a result of double taxation relief under former or current provisions in any future chargeable accounting period should exceed the amount of benefit so derived in a period which fell within the standard years for purposes of assessment of Excess Profits Levy, will the amount of the increase in double taxation benefit be assessed to Excess Profits Levy? If that be so, surely the bulk of the increased benefit so derived will be taken in Excess Profits Levy and little ultimate benefit will be derived by the English company.
§ The Solicitor-General
If my hon. Friend thinks that I can answer the very long question which he has put to me, I am sorry that I must disappoint him. Per- 1187 haps I may later be able to give him the answer which he requires. The hon. Member for Islington, East (Mr. E. Fletcher) asked for an explanation of the object and the effect of this extremely complicated Clause. I shall do my best to satisfy him in as short a space of time as I can. I entirely agree with him that it is extremely complicated.
The first thing that the Clause seeks to do—and this is a minor point—is to make the necessary adjustments because no longer is Profits Tax a deduction for Income Tax purposes. I think that is quite clearly stated in subsection (1) and I do not need to spend any more time upon it. Double Taxation relief takes two forms. One form may be the setting against the United Kingdom Tax bill, subject to appropriate limitations, of the amount of the overseas tax paid on income chargeable to the United Kingdom tax. That is an operation which is known as giving credit for overseas tax. The full overseas tax is set against United Kingdom tax and—
§ The Solicitor-General
I shall deal with that later. The full overseas tax is set against United Kingdom tax on the doubly taxed income where a double taxation agreement has been concluded with the country imposing a tax. Where there has been no such agreement, there is what is called a unilateral relief, and that varies in amount; if the territory concerned is within the Commonwealth it is, I think, limited to three-quarters of the United Kingdom tax and otherwise to one-half of the United Kingdom tax.
Subsection (2) applies the existing provisions of the law which now cover Profits Tax and Income Tax to the Excess Profits Levy, subject to the adaptation set out in that Clause. The general effect is that a given amount of overseas tax will for the future be available for credit not merely against the Profits Tax and the Income Tax, but also against the Excess Profits Levy.
Subsection (2, a) lays down the order in which that credit shall be given—and this is the answer to the specific question which the hon. Member for Islington, East put. He will see that credit is first 1188 of all to be given against the Excess Profits Levy. If there is a balance of credit remaining it goes against the Profits Tax, and if there is still a balance of credit, it goes against the Income Tax, until presumably by that time it may well be exhausted. That is the order. That is the question which the hon. Gentleman asked, and the reason why that order has been selected is merely for administrative convenience. That answers the specific question which he put to me.
Subsection (3), which again is a complicated question, deals with the adjustments necessary for the profits of the standard period as a consequence of allowing double taxation relief in respect of the chargeable accounting period. To arrive at the precise mathematical figure would be an extremely involved computation. I do not think I need take up the time of the Committee in trying to make it clear, but it is a most involved calculation which would put everyone to a great deal of work.
In dealing with that by subsection (3, b) we have sought to take a short cut and the short cut will, we think, result to the advantage of the taxpayer in that his standard profits will be slightly greater than those which would have emerged from an academically correct computation. The same difficulty of very complicated mathematical complications arises under subsection (4), which deals with the adaptation and computation of the chargeable profits necessary as a result of allowing double taxation relief. There, again, we have sought to take a short cut to arrive at somewhere near the right result, but in this case it may be that the result of taking that short cut, while relieving the taxpayer of a great deal of complicated work, will be slightly to his disadvantage.
On the other hand, the slight disadvantage under that subsection will be offset by the slight advantage under the previous subsection to which I have referred, so that, on balance, we think we have drawn a fair line and gained the advantage of making this complicated Clause considerably easier to understand than if effect had been given in statutory language to the mathematical calculations which it would have been necessary to make. I have tried to compress my remarks within a narrow compass because we have so much to do, but I hope 1189 that at the same time I have been able to help the hon. Member in some of the points which he raised.
§ Mr. Nabarro
I hope the Solicitor-General will reply to my point at a later stage of the Bill. It is a valid point and one of considerable substance. In particular, it must have a direct bearing on the interpretation of this Clause by hundreds of accountants who are concerned with the accounts of companies operating overseas.
§ The Solicitor-General
I do not know that there will be an opportunity of replying to my hon. Friend on that very technical point in the course of the debates on the Bill, but I will say this to him: I am not sure that I have fully grasped the complications of his extremely involved question, but if he will try to put it on paper I will certainly consider it and seek to give him an answer.
§ Clause, as amended, ordered to stand part of the Bill.