HC Deb 09 April 1957 vol 568 cc990-3

The second major commitment which I inherited was an undertaking to consider the taxation of United Kingdom companies that carry on business overseas. As the Committee well know, such companies when they are controlled and managed in this country, have to pay tax at our very high rates on their profits earned abroad, subject to a set-off against the United Kingdom tax bill for similar taxes paid overseas. This position has been much criticised over many years on the ground that the United Kingdom concern trading in an overseas country where tax rates are lower than ours is at a disadvantage as compared with local competitors. It was fully reviewed by the Royal Commission, under Lord Radcliffe's chairmanship, which reported in 1955.

The Commission put forward a novel idea for dealing with the problem which I propose, in substance, to adopt. The idea is that our law should recognise as entitled to special tax treatment a class of overseas trade corporations. Broadly speaking, these will be United Kingdom companies controlled and managed from this country, but having all their actual trading operations abroad. Concerns that qualify as overseas trade corporations will be exempted from Income Tax and Profits Tax on their trading profits earned abroad. Of course, when they pay dividends or other distributions to shareholders out of those trading profits those dividends will be liable to United Kingdom Income Tax and if they are received by a United Kingdom company to profits tax as well. In appropriate cases there would, of course, be relief for taxes paid abroad.

The companies to be covered by my proposals will include those wholly engaged overseas in mining, oil winning, agriculture, manufacture and processing, public utilities and distribution. I do not propose to include shipping, since I am proposing to deal with the industry in a different way, which I shall shortly explain. Nor do I propose the inclusion of financial activities such as banking and insurance, since I do not think that they could properly be brought within the underlying conception of the scheme.

I must also give some precision to the proposed treatment of selling activities overseas. The Royal Commission contemplated that some overseas trade corporations would be the exporting side of United Kingdom manufacturing busi- nesses, which would obtain merchandise from the United Kingdom and send it overseas for sale there. We must, however, be careful that this new relief has no possible suggestion of an export subsidy about it and the legislation will make it clear that to qualify as overseas trade corporations concerns dealing in United Kingdom goods must buy those goods "free on board" at a United Kingdom port at the price appropriate to a transaction between independent persons. Thus, only profits arising from that point onwards which can be seen to flow from selling activities outside this country will come within the exemption.

There doubtless are some concerns which already have all their trading operations outside this country and can qualify as overseas trade corporations immediately. But there are also many mixed businesses with their operations partly here and partly overseas. To secure the benefit of my proposals such concerns will have to "hive off" their overseas business into a separate company that fulfils the conditions for qualification as an overseas trade corporation.

These then are the outlines of my proposals on this matter. I am afraid that the legislation to put through a major reform of this kind will inevitably be long and complicated. I must ask the Committee to wait until the Finance Bill is published for details. As well as a close definition of this new class of corporation there will clearly have to be provisions defining distributions that are to be taxable, and the method of dealing with them, and possibly safeguards against abuse.

I commend these proposals to the Committee with confidence. I believe them to be a justifiable reform in our tax system and a legitimate help to companies that plough back their profits overseas in competition with those that operate under easier tax laws. Many of them operate in Commonwealth countries and in the Colonies. Under the impetus of this reform many more may well do so. As things stand at present a British company engaged in such overseas operations may be at a serious disadvantage compared with its competitors. We must seek to remove these disadvantages.

Moreover, under the existing law any such British company is a somewhat tempting object for a take-over bid by foreign buyers, who can often base their offer upon a future tax position more favourable than would be open to any British bidder. Although the remission of the tax will represent an initial loss to the balance of payments, these proposals are a step towards more investment, more trade, and more exports. I am confident that this is a sound measure which will bring us increasing rewards in future years. The cost to the Revenue will not be negligible. I cannot, of course, give precise figures, but I estimate the cost at £25 million this year and something over £35 million next year.

Forward to