§ If Her Majesty by Order in Council declares that arrangements specified in the Order have been made with the Government of any territory outside the United Kingdom with a view to affording relief from the United Kingdom tax on income which has been relieved from tax payable under the laws of the territory concerned by specified concessions, the arrangements shall, notwithstanding anything in any enactment, have effect in relation to income tax, the profits tax, and the excess profits levy, in so far as they provide for relief from United Kingdom tax.—[Mr. Arbuthnot.]
§ Brought up, and read the First time.
The Deputy-Chairman (Mr. Hopkin Morris)
It may be for the convenience of the Committee if we discuss this new Clause together with the one on page 1743 —[Colonial, &c, territories, allowances.]—in the name of the hon. Member for Colchester (Mr. Alport).
§ Mr. Arbuthnot
The basis behind this new Clause is the first Report of the Royal Commission on the Taxation of Profits and Income—the Radcliffe Report. The Radcliffe Commission made out the case for this new Clause so completely that it is not really necessary for me to occupy the time of the Committee for long, but there are two points which I want to put forward.
The intention of the new Clause is to try to do away with the taxation injustice done to some small companies starting up in overseas territories when they are registered in this country. Several overseas territories give special tax concessions to encourage new companies to start up in those countries. Many are within the Commonwealth, and some are Colonial Territories, which have decided that they want to encourage industry to set up within their boundaries. To encourage industry to do so, they give special taxation concessions, possibly for the first five years in the life of the company.
1735 Where a company of that kind is registered in this country, the British taxation which that company suffers is such that it does away with the concession which the overseas territory intentionally tries to give to that company. There are two points of view from which we should consider this problem. The first is the point of view of the territory which is trying to encourage businesses to set up within its boundaries. These territories, finding that their efforts at encouragement are being nullified by the action of the Chancellor of the Exchequer, are, naturally, considerably annoyed. They feel that British taxation, in effect, is preventing them from giving the encouragement which they want to give to people to start up these businesses overseas.
The second point of view from which we should consider the matter is that of the companies themselves, because companies in that position are unfairly treated, as compared with their competitors which are not subject to British taxation but which operate in the same territory. It means that companies registered under a British registration find themselves competing under unfair conditions with their rivals in business in the same territory.
Therefore, for these two reasons, and for the reasons set out in the Report of the Radcliffe Commission, I hope that my hon. Friend will give a favourable answer and will be able to accept the new Clause.
§ 6.15 p.m.
§ Mr. C. J. M. Alport (Colchester)
The Committee has decided that it will be convenient to discuss this Clause and the one in my name together, and, therefore, I think I would be entitled to point out that, although there is a similarity, in some respects, between the proposal which my hon. Friends and I have put forward and those in the new Clause which my hon. Friend the Member for Dover (Mr. Arbuthnot) has just moved, in actual fact, the scope of, and in some degree the principle behind, our proposal, differ from his. We have made it quite clear in the wording of our new Clause that, if it were accepted by my right hon. Friend, its operation would be only in respect of Colonial and Trusteeship Territories. Indeed, the effect which it would have upon the revenue of the United Kingdom, and generally in the territories concerned, 1736 would be rather more limited, in some degree, than that proposed by my hon. Friend.
Our object is to relieve United Kingdom registered companies operating in Colonial and Trusteeship Territories from the disadvantages arising from the different basis of assessment of profits for the purpose of allowances in overseas territories, as compared with those operating in the United Kingdom. It may well be that, if I were permitted to move this particular new Clause, my right hon. Friend would have found it difficult to accept our wording, since we have drawn the Clause widely, but, nevertheless. I hope that he will accept the principle which we wish to establish, because, in our view, it has very great relevance to the question of providing the resources for British enterprise in the United Kingdom to play its proper part in developing backward territories overseas.
Let me reinforce the argument put forward by my hon. Friend, and say that United Kingdom registered firms have to face increasing competition from foreign firms in these overseas territories, and that the latter frequently enjoy the advantages of lower standard rates of taxation and a more generous system of allowances. The result is that the United Kingdom companies are compelled either to seek means of leaving the United Kingdom and registering in a Colonial or Trusteeship Territory overseas, or find themselves unable to withstand this competition and eventually go under.
A third possible result is that the resources of the territories concerned, which are essential both to the Colony and ourselves, remain undeveloped because no one is found willing to undertake the risk of such an enterprise with the disadvantages which exist under our present taxation law. All these three consequences, I submit, are directly contrary to the interests of the United Kingdom, and to our accepted policy of the expansion of British trade and enterprise and the full development of our resources overseas.
Our new Clause does not deal with the whole of a very complicated and many-sided problem, but I think that my right hon. Friend will agree that there are arguments for taking a number of bites 1737 at this particular cherry. Indeed, he has taken a couple himself in Clauses of the Bill which have already been debated and agreed to by the Committee.
Perhaps I may bring forward the particular points which we have in mind and try to illustrate them. In certain territories the accepted system of cultivation is a sort of shifting agriculture. To maintain the rules of good husbandry, land which is cultivated for a period and has become exhausted is subsequently left fallow for anything up to 20 years. The use of fertilisers to put new heart into that land is uneconomic, and only the processes of nature and the lapse of time can restore fertility. In place of that land, new land is brought under cultivation. In certain colonial legislation the cost of preparing the new land is a permissible charge for allowance purposes, just as, in the United Kingdom, the use of fertilisers to rehabilitate land is allowed.
The problem of the Minister arises directly from the totally different natural conditions existing overseas from those in this country. In our case, the proper course is to employ fertilisers to rehabilitate the land but, in the case of some Colonial Territories a term of prolonged fallow is required. We think of fallow in terms of one or two years, but they think in terms of some two years to 20 years. The object is the same, the maintenance of a wise and fruitful standard of good husbandry. In the United Kingdom, the Commissioners of Inland Revenue will allow the cost of the work on new land and of maintaining it up to maturity, but not the cost of clearing it. Our proposed new Clause will place upon them an obligation to do so.
I have taken my illustration from the sphere of primary production. Our Clause, and, indeed, the problem itself, cover industrial development and mining, where the computation of expenditure for allowance purposes under colonial taxation takes into consideration the peculiar hazards with which overseas development is faced. I have tried to illustrate my point and to make it as quickly as I can.
I should like to end by saying to my hon. Friend the Economic Secretary that although I am not moving the Clause to which I have referred I would very sincerely press on him consideration of the 1738 points which it contains. It would be a very unwise and unhappy state of affairs if we gave the impression that we were out to milk Colonial and Trusteeship Territories in the interests of United Kingdom revenue, and if our policy here in any way tended unfairly to handicap those territories.
I hope that the Chancellor when he is considering this point—I know it may not be possible for him to take action this year but I hope sincerely that he can do so next year—will bear in mind this matter and perhaps make an adjustment which will remove one of the handicaps under which British enterprise is suffering.
§ Mr. Albu
I am sorry that the hon. Member for Colchester (Mr. Alport) is not moving his proposed new Clause, because I should like to support it. I could not possibly support the Clause moved by his hon. Friend the Member for Dover (Mr. Arbuthnot) because it is altogether too wide and would encourage every type of investment in every type of company without any control whatever. In the last few years, even in the Commonwealth itself, there has been a substantial amount of investment which has been highly undesirable from the point of view of this country. It has been an export of capital which can only have had the effect of making our own balance of payments more difficult in the future. Most of us know the effect of a certain type of investment in Australia and other countries.
Where this takes place, the new Clause in the name of the hon. Member for Colchester is a very different kettle of fish. It is designed technically to deal with the problem which was brought up first at the Royal Commission, the problem of encouraging investment in the Colonial Territories, and particularly to ensure that the higher incidence of taxation—or, to put it the other way, the lower level of allowances—which might operate in this country as compared with some Colonial Territories would not involve our taking a part of the profits made in the Colonial Territories.
That is a highly desirable object. I am not quite sure whether the Clause of the hon. Member for Colchester is not too widely drawn, but I would have thought that it was a safeguard because, 1739 by the very definition, Colonial Territories are under some sort of control from their home Government. Therefore, there must be some influence on the levels of initial allowance in the taxation systems of the Colonial Territories.
The hon. Member for Colchester has a lot more knowledge of this matter than I have. His speech in support of the proposed new Clause was altogether admirable and I hope that the Economic Secretary will promise to give it sympathetic consideration. It is a very narrow Clause, dealing with territories only within the control of Her Majesty's Government but dealing to a very large extent with matters which are very important for the economic health of the Commonwealth as a whole. Though I could not support the proposed new Clause of the hon. Member for Dover, I would certainly support the other.
§ Mr. G. P. Stevens (Portsmouth, Langstone)
I can well understand the guilty conscience of the hon. Member for Edmonton (Mr. Albu) when he said that the proposed new Clause moved by my hon. Friend the Member for Dover (Mr. Arbuthnot) might encourage undesirable developments overseas. No doubt he had in mind the sponsorship by his right hon. Friend the Member for Dundee, West (Mr. Strachey) of the production of groundnuts. I think that was clear to all of us on this side of the Committee.
The taxation provisions of this country do not give to the United Kingdom developers in overseas territories the concessions which the legislatures of those countries feel should be given to new and expanding industries. The effect of Sections 347 and 348 of the Income Tax Act, 1952, laid down that the higher of the United Kingdom tax rate, or the Dominion, Colonial or foreign rate, shall be paid by the United Kingdom company. That is obviously, I should have thought, despite what the hon. Member for Edmonton has just said, a strong tax disincentive to pioneering overseas.
Many of us on this side of the Commit-tee are fond of talking about our vast Empire resources; here is a chance to do something concrete to help that policy along. It may be a good thing to help new businesses by providing that no taxes on income should be payable in the first 1740 five years of the business, or by providing that the initial plant and machinery shall be written off in two or three years. The fact is that many countries do it and we should be eager to take advantage of it.
As my hon. Friend the Member for Dover has said in introducing the proposed new Clause, the arguments are twofold and clear. The existing situation acts as a disincentive to United Kingdom developers to exploit natural resources overseas for the benefit of all. Secondly, it increases foreign incentive to do the same thing, provided the foreign country passes on to its nationals the benefits which the local legislatures see fit to grant.
§ 6.30 p.m.
§ Mr. Albu
This is extremely important because, from the way in which the hon. Member is developing his argument, it seems to me that he is supporting the new Clause in the name of his hon. Friend the Member for Colchester (Mr. Alport). He referred to Colonies, and legislatures, presumably of Colonies. I supported that. I said that I did not think it desirable to support every type of investment in other countries, for instance the building up of automobile engineering in the Argentine.
§ Mr. Stevens
I am glad to hear that the hon. Member was supporting my hon. Friend the Member for Colchester (Mr. Alport). So was I, and the hon. Member is now grumbling because I am supporting what he was supporting. I quite understand that.
Another point to bear in mind is that in general terms, before any United Kingdom company can export capital overseas for the development of new industries, Treasury sanction is required under Section 468 of the Income Tax Act, 1952— the "ring fence" Section. Last year I moved a new Clause to bring down that iron fence. The Chancellor, in reply, said that his Treasury advisers were bold pioneers and that so far there had been no case where the necessary sanction had been withheld. Let us be bolder still—as bold as they are already in the legislatures of West Africa and the West Indies.
It is true that this is a recommendation of the interim Report of the Royal Commission on the Taxation of Profits and 1741 Income. It is of interest that the Commission considered it to be so urgent that they have not left it for the final report which may not be along for a considerable time.
They say, in paragraph 59 of their Report:We regard it as urgent that the agreements we recommend should be entered into without delay.That Report was signed in February, and if it was urgent nearly four months ago then it is urgent now. I accept the urgency and importance of that recommendation. I hope that the Economic Secretary will be able to say that the Chancellor thinks the same and that he will be able to give us some hope of acceptance of the recommendation.
§ Mr. N. Macpherson
I do not think there is very much between my hon. Friend the Member for Dover (Mr. Arbuthnot) and the hon. Member for Edmonton (Mr. Albu). The hon. Member for Edmonton considers the Clause moved by my hon. Friend the Member for Dover to be very much more wide than it is intended to be, but, after all, the power to make the arrangement remains with Her Majesty's Government.
This is not unilateral relief which it is suggested should be given wide and large. Indeed, the Radcliffe Report recommends quite clearly that no such unilateral relief should be given, but that it should be given after negotiation with such territories as it would be to the interest of Her Majesty's Government in the United Kingdom to encourage in the development of industries.
That being so, I do not think that the strictures which the hon. Member for Edmonton passed on this Clause are in any way justified. As my hon. Friend the Member for Langstone (Mr. Stevens) has just said, the Radcliffe recommendations are absolutely clear and urgent. The Commission recognise that where a concession is made in the ordinary rate of taxation by a territory to encourage industrial or agricultural development in that territory, that concession should be reflected in United Kingdom taxation. I think that we all agree that it would be quite wrong that that should be done automatically.
We have to become much more Commonwealth-minded in our concep- 1742 tion of taxation as a whole. The idea that the United Kingdom Government should enter into negotiations on whether such concessions should be given or not is fundamentally right, because it means that the United Kingdom Government have a chance to say whether the industrial development in the territory concerned is to the advantage or otherwise of the Commonwealth as a whole.
That will bring influence to bear on tax relief by the territory and will cause United Kingdom capital rather than the capital of other countries to be invested there, provided that it is to the advantage of the Commonwealth as a whole that those industries should be established in the territory. That is the way in which we ought to start on these problems connected with the development of the Commonwealth.
The second new Clause deals with a rather different problem. The first new Clause deals with concessions in the normal rate of taxation. The second deals with the levels of taxation, that is the initial and annual allowances and any special allowances for climatic and other similar reasons, and ordinary rates which are lower than the similar rates in this country. My hon. Friend the Member for Colchester has so very clearly indicated the reason why such concessions should be made that I do not add anything to what he said.
The second new Clause is intended to cover a very wide range. It is intended to cover "industrial buildings or structures" and that involves a very wide range indeed. Under Section 271 of the Income Tax Act, 1952, it covers factories, buildings for the purposes of transport, dock, inland navigation, water, electricity or hydraulic power undertakings. It covers storage, mines, oil-wells, foreign plantations and ploughing or cultivating land.
On the other side, in which it seeks to give concessions, there is the clearance of land for agricultural and forestry purposes and the provision of machinery and plant for the purposes of mining, agriculture and forestry. Those are the purposes of the second new Clause. They are purposes which should be endorsed by the Committee and encouraged by the Commonwealth as a whole.
§ Mr. Bernard Braine (Billericay)
I am glad to support both these new Clauses, though I confess that I agree somewhat with the hon. Member for Edmonton (Mr. Albu) in that I should certainly have preferred to see the new Clause in the name of my hon. Friend the Member for Dover (Mr. Arbuthnot) confined to Commonwealth countries. I do not think that any of us in this Committee would dispute the dire necessity for investment in Colonial Territories, both to increase the production of food and raw materials for the sake of the world and to encourage the broadening of colonial economy for the sake of the colonial peoples.
By way of illustration, and in support of the general principles advanced in the new Clause proposed by my hon. Friend the Member for Dover, I should like to turn for a moment to the West Indies. There is no part of the Colonial Empire where the need for economic development is so pressing as it is there, where the population is increasing at such a rate that it is threatening to outstrip even the bare means of subsistence. If living standards are to be raised the means must come from some external source. It is coming through the medium of colonial welfare and development legislation. Nothing worth while can be done in the Colonial Territories unless something is done to eradicate disease and improve education; and how can those things be done unless the economy of the Colonies is expanded?
Yet the present high level of taxation here discourages the investment of risk capital in the Colonial Territories. It is perfectly natural, therefore, that the colonial governments in the West Indies and West Africa have sought to attract capital by making substantial tax concessions in respect of new industries. In Trinidad, for example, in the first five years after the erection of a factory, there is a tax holiday. In the sixth year the company is allowed to write off 40 per cent. of the original capital value of its plant and equipment and 10 per cent. of the value of its industrial buildings. It is allowed to import machinery, plant and equipment free of Customs duty.
As one would expect, in response to these concessions overseas capital has been flowing into the Caribbean Colonies. The interesting thing is that it has not 1744 been coming from this country, but from Canada and the United States. It has not been coming from here because current British Income Tax completely offsets the effect of these concessions. It is an unbelievably foolish policy which nullifies everything the Colonial Office is seeking to do, and has been seeking to do for some years. It puzzles and angers our friends in the West Indies. It operates not only against the best interests of the colonial peoples but the interests of this country too, because we are ultimately responsible for the well-being, good government and prosperity of the Colonial Territories.
Our colonial policy is designed to equip the Colonies to stand on their own feet in the conditions which exist in the modern world. But consider what is happening. On the one hand, during the last seven years the British taxpayer has been helping to build up a structure of social services in the West Indian Colonies which, it is hoped, will be sustained ultimately out of the resources of the Colonies themselves, but on the other hand, by this practice, which has gone on for a long time, we are deliberately discouraging the establishment of new industries and new productivity.
I have always expected consistency from Chancellors, even if their actions have never commanded much popular approval ever since I read about Chancellor Morton, who perfected the technique called "Morton's fork," by which he extracted from those who lived ostentatiously a tribute to the Treasury because their wealth was manifest and, at the same time, extracted a tribute from those who lived modestly because, quite obviously, the economy they practised accumulated great wealth for them. That was consistency of a kind. But where is the consistency in this case? The Treasury, insatiable for revenue, is following a policy which is designed to undermine everything which the Colonial Office is seeking to do.
I would hazard a guess that the Colonial Office—not only under this Government but under the previous Government, when the first rumblings of discontent on this subject were heard—have been making strong representations. I am only sorry that those representations have not been made more strongly. The burden of our complaint is not that the 1745 Treasury are collecting so much in tax as that they are denying to British enterprise benefits which the Colonial Territories, for reasons of their own, are prepared to confer.
It may be argued that a British company registered here but operating overseas can avoid all these unpleasant difficulties by setting up subsidiaries in the Colonies, but even then tax must be paid on profits remitted home. A vital principle is at stake here. The matter of control is fundamental. The only kind of development we shall see in the Colonial Territories with any risk attached to it is development by long-established companies already operating in the Colonies, who know something of the prevailing labour conditions and market possibilities. Such companies will not contemplate the idea of starting up subsidiaries if they are not to exercise control over them. It is unreasonable to expect them to follow that kind of policy.
I press the Economic Secretary to lend a favourable ear to these two new Clauses, even if he cannot accept them now, because so much depends upon what we are prepared to do in the next few years to accelerate the economic development of the Colonial Territories. There is so much to do. There is not much time left. Time is not our friend in this respect; it is our enemy. I therefore urge my hon. Friend to consider most favourably these two new Clauses.
§ 6.45 p.m.
§ Mr. Maudling
These two Clauses, which are being considered together, are concerned with matters of very great importance and, while they are different in certain important respects, some of the principles that underlie them are identical. I hope it will be convenient to the Committee if I deal with them both at the same time.
As the hon. Member for Colchesier (Mr. Alport) pointed out, there are important differences between his Clause and that which was moved by my hon. Friend the Member for Dover (Mr. Arbuthnot). In the first place, the former is confined to the Colonial Territories. I agree that if action on these lines is to be taken there is a very strong argument for taking it in the Commonwealth generally and in the Colonial Territories in particular.
1746 There are two other differences between the new Clause moved by my hon. Friend the Member for Colchester and that moved by my hon. Friend the Member for Dover. First, under the former the existing industries would get the advantage of the Clause on any capital allowances for which they qualified, as well as pioneer industries which I am not sure is an advantage; and, secondly, it refers only to a capital allowance and refuses relief for other allowances, such as the so-called tax "holidays," which would be covered by the new Clause moved by my hon. Friend the Member for Dover.
That illustrates the complexity of this problem, which is even further illustrated by the example which my hon. Friend the Member for Colchester gave, about the plantation activities. He was probably thinking of the sisal companies and the allowance given for the clearing and first planting of land in the Colonies, which is not given over here, but I am advised that his new Clause would not cover that matter. That only shows how complex is this problem.
To turn from the details to the principles, which are the important things, both these new Clauses are based on the interim Report of the Royal Commission. That interim Report was requested by my right hon. Friend in view of the urgency and importance of this matter of the taxation of profits and overseas earnings. That Report made three main recommendations, two of which—the first related to blocked overseas earnings and the other to unilateral relief from double taxation—my right hon. Friend has accepted.
The third, related to special overseas allowances and tax-free holidays, he has not been able to accept for inclusion in this Bill. My right hon. Friend has great sympathy with the principle, because of the arguments which have been put forward from both sides of the Committee. The arguments for the principle of this proposal are very strong, but there are certain practical difficulties which I must put to the Committee and which my right hon. Friend had to weigh up in considering whether or not to include legislation on these lines in this year's Bill.
For example, if an overseas territory gives an accelerated rate of allowance, under this proposal the United Kingdom 1747 taxpayer will be benefiting by being taxed at the overseas rate of allowance rather than at our rate but, since the allowance has been accelerated overseas, in later years it will be lower.
In those circumstances, is the taxpayer to gain both in the initial stages from the accelerated rate overseas and in the later stages from the continuation of what will then be relatively the higher rate in the United Kingdom tax system? That would mean, of course, that for the period of the life of the asset the taxpayer would get more than the total initial cost of the asset.
Obviously, some way would have to be found of getting over that difficulty, but I am advised that at present it would be almost impracticable to work out a system of taxation to deal with it. That difficulty arises especially in mining operations where depletion allowances are granted overseas and where equivalent relief is granted under our United Kingdom taxation, though not necessarily calculated on the same basis.
Another important point raised by the Royal Commission, and to which reference has not, I think, already been made, is to what extent, if any, the benefit of any such arrangement as this should be passed on to shareholders. I am quite sure that my hon. Friends have strong views on this subject. The Royal Commission did not feel ready at the time to give a considered view upon it, and decided to leave it over for inclusion in their final Report. But, of course, it would not be possible to legislate at the moment on the matter without deciding on the specific point of how schemes of this kind would affect shareholders, because, after all, it is most important to have regard to the interests of the people who are asked to invest their money.
Those are some of the practical reasons which my right hon. Friend had to weigh when considering whether or not to legislate on these lines this year. He has already done a number of things to assist overseas enterprises. The subjects dealt with in Clauses 19 and 24, to which I have already referred, are rather expensive concessions. In Clause 15, there is a reference to overseas pastoral companies, which my hon. Friend the Member for Colchester has in mind and which will be of some assistance. In addition, 1748 there are the general reductions in taxation.
Again, there are the initial allowances, the general 20 per cent. and the special 40 per cent. allowances for mining, neither of which, of course, will have been in the minds of the Royal Commission when they made their interim Report, because at that time the initial allowances had not been restored. These allowances will go a long way to meeting the points which my hon. Friends have in mind because it is by accelerating allowances that overseas Governments will, in the schemes they have in mind, try to give special consideration to pioneer industries.
My right hon. Friend faced this situation when he accepted two out of the three of the recommendations. The third presented quite definite practical difficulties in legislating. In the meantime, by his initial allowances in particular, my right hon. Friend has given very substantial assistance to overseas enterprises, a matter which could not have been known to the Royal Commission at the time they made their recommendations.
In all these circumstances, my Tight hon. Friend did not feel that he could include in this year's Finance Bill the complicated legislation which would be necessary to carry out the recommendations in the Report, and he also felt it would be of advantage to have the Royal Commission's further advice, particularly on the important point which they left over for their final Report.
I wish to make it quite clear that my right hon. Friend in no way rejects the principle which underlies the Report. Indeed, he greatly sympathises with it. He has not closed his mind on it, and will consider it again as soon as the Royal Commission have given it further consideration. In those circumstances, he hopes that my hon. Friends will not press him to include legislation of that kind in this year's Finance Bill, because he does not feel that he would be justified in so doing.
§ Mr. Arbuthnot
I thank my hon. Friend for the encouraging way in which he has replied to this debate, and, in view of what he has said, I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.