Clause 23.—(DIVIDENDS PAID OUT OF EXEMPT TRADING INCOME: INCOME TAX CHARGE.) (Hansard, 27 June 1957)

§ Mr. Powell
I beg to move, in page 18, line 26, after "Schedule D", to insert: for the year of assessment in which the dividend becomes due". This is little more than a drafting Amendment. The subsection as it stands makes it clear that dividends will be charged at the standard rate for the year of assessment in which they fall due. It perhaps does not sufficiently make it clear that they will be charged in the year in which the dividend falls due at that rate. It is simply to clarify that that this Amendment, and the two which follow and hang with it, are put forward.

§ Mr. Mitchison
I am very glad to see that the hon. Gentleman is tidying up his drafting. I have to do mine from time to time, too.

§ Mr. Roy Jenkins
I beg to move, in page 18, line 34, to leave out subsections (2) and (3).
Unlike the previous Amendments, Sir Norman, this is more than a drafting Amendment. Were it carried out, it would have some fairly large consequences, and I am glad to see that its importance is recognised by the presence of the Government Chief Whip, the first time for quite a period in the course of our deliberations. The purpose of the 506 Amendment is to withdraw the exemption from Income Tax which the Bill gives to distributions of dividends to non-resident shareholders.
This is a fairly difficult issue and one about which, like some of the others that we have considered yesterday and today, the Royal Commission found some difficulty in making up its mind. I give it freely to the Financial Secretary that the majority, the rather doubtful majority of the Royal Commission which reported on this point, did come down eventually in favour of granting the exemption given under the Bill, but it did so with a good deal of hesitancy and the bringing forward of some arguments on the other side. I certainly think that the arguments on the other side are of some force, and ought to be considered by the Committee. We are, after all, putting non-resident shareholders in United Kingdom O.T.C.s in an extraordinarily favourable position when we give, as it were, this double concession.
To take the rather extreme but in no way impossible case of a shareholder resident in Bermuda holding shares in a company registered in London but operating in Kuwait, this shareholder, as far as I can see, would escape any tax of any sort on all the profits earned by the company and any distributions which were made to him. It is an extraordinarily favourable position in the modern world for anyone to be in, and it is a position, of course, that might well encourage certain large shareholders in O.T.C.s to emigrate.
8.0 p.m.
When the Chancellor introduced his Budget, the Surtax concessions were at times presented in such a form as to suggest that the Chancellor had had to introduce them in order to drag most valuable 507 members of the community out of the emigration queues where they were waiting to clamber aboard ships and aircraft leaving for Canada or wherever it might be; the concessions were introduced only just in time, it was suggested, apparently, in order to prevent this great wave of emigration which would, so it was argued, have been most damaging to the interests of this country.
It is a little curious that the same Finance Bill which enshrines these Surtax provisions, presented to a very large extent as having been brought forward in order to counter this move towards emigration, should contain a provision which, certainly so far as a shareholder in an O.T.C. is concerned, would give a very great incentive to undertake precisely that act of emigration which was regarded as so undesirable in the case of other Surtax payers. I do not know whether the Government would counter that argument by saying that, on the whole, in their view shareholders in O.T.C.s are not particularly desirable citizens whom they would particularly wish to keep in the country. It would be a possible argument, but I think a slightly dangerous one, and I should be a little surprised if the Financial Secretary were to use it. But if he is not prepared to use it, there seems to be a good deal of contradiction in the Government's approach to these matters.
Apart from those matters, it can be argued that there should be a certain liability—I am not for the moment discussing what it should be—to United Kingdom tax even where a company operates in Kuwait and the shareholder lives in Bermuda. After all, if someone wants to have a company registered in the City of London or elsewhere in this country and enjoy the benefits of British protection, the protection of British company law and, presumably, in certain circumstances, of British prestige, British influence and of the British Armed Forces overseas, there ought to be some liability to United Kingdom tax. To breach that principle completely and say that it is possible for a shareholder to draw dividends from a company registered in the United Kingdom but in no possible way incur any liability to United Kingdom tax is going altogether too far in the granting of exemptions.
No doubt, the main Government argument in favour of the exemption will be 508 that it encourages foreign shareholders to invest in United Kingdom resident O.T.C.s and thereby encourages the flow of capital, not perhaps towards this country, but towards United Kingdom registered companies. Precisely where does this argument lead? The difficulty is immediately apparent in my hesitation about saying "towards this country", because, if we want foreign capital to flow into United Kingdom companies, the question arises whether we want it to flow in exclusively to companies operating overseas. Do we want to give foreign resident shareholders an enormous incentive, if they are going to invest in a London registered company, to do it in one which on no account trades anywhere in the United Kingdom? Is there a case for giving to, shall we say, the United States shareholder an enormous incentive to invest in a company registered in London which owns cotton mills in India rather than in one which owns cotton mills in Lancashire? Yet that is the very thing which this new incentive is introducing by the Clause as it stands.
I am a little sceptical altogether about what is the advantage to this country of encouraging companies whose connections with this country are really so tenuous as to be almost non-existent. We are asked to embrace the principle that the existence and development of a company operating entirely overseas, owned, it is suggested, to as large an extent as possible—because we want to encourage foreign shareholders—by people almost entirely not resident in this country, is of enormous advantage to our economy. The only connection which such a company has with this country is that it happens to have its seat of control in London or elsewhere in the country. Curiously enough, when we get to that point, we are then told by the right hon. and learned Gentleman the Member for Kensington, South (Sir P. Spens) and by other hon. Gentlemen opposite that even that connection with this country is of itself of no importance and that the company should be quite free to move its seat of control if it wants to do so.
I am a little doubtful, as I say, about the advantage of encouraging companies whose connection with this country is so tenuous as really to be almost nonexistent. I hope, therefore that the Financial Secretary, when he comes to reply, will apply himself closely, as he 509 has done in all the debates in which he has taken part, I think, to the points put to him. I hope he will try to explain what is the reason for this excessively favourable treatment of non-resident shareholders. Why should he wish to encourage shareholders in O.T.C.s to emigrate? Why is it reasonable that someone should be in the position of paying no tax at all on the operations of the company from which he draws his income? Why is it desirable that there should be this incentive for foreign capital to go exclusively into companies operating overseas as opposed to those operating in this country? Is it reasonable that, in the case of a company registered in England and enjoying the protection of the laws of this country and of the power and prestige of the British Government, there should be no contribution, in all the circumstances, towards those services?

§ Mr. Chapman
I share with my hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) considerable doubts about this part of the Clause. I have one particular question which I shall put to the Financial Secretary, and I hope that he will be good enough to find an answer to it. Later in my speech, I want to come back to consider this question of encouraging the richer taxpayer generally to emigrate, and I shall have a few words to say about the sort of "Noel Coward" case which is in all our minds. There is, however, as far as I can see, another and a beautiful way of possible avoidance in this Clause, and, from my own researches. I cannot see that the existing legislation has a chance of stopping it. If it has, I shall be very glad indeed to know.
The Clause makes clear, and we know in any event, that in tax law a person is also a company; but it is made clear further that it is possible under the Clause for a foreign company to be exempt if it holds shares in an O.T.C. Just as a foreign resident is exempt from the payment of tax on the dividends distributed by an O.T.C., so would a foreign company be exempt from paying tax on dividends on shares in a British O.T.C.
In that case, if I were a rich taxpayer who wished to get the advantage of non-residence and to get tax exemption on my 510 holdings in an overseas trade corporation, what is there to stop me from, say, setting up a £50 private company in Bermuda which would, in effect, have my holdings of shares in an O.T.C.? Then, if I wished it could accumulate funds for me in Bermuda. They would never be remitted back here. Therefore, I should not be taxed on them on a remittance basis as I would if they were sent to this country. They could be accumulated for me there and I could still be a resident of this country—I should not be a non-resident person. I should not have personally to emigrate. I should merely have a private company which had emigrated on my behalf. I should then get all the benefits of the Clause.
It would be a very nice loophole, if it existed, for many rich men simply to deposit their securities abroad and get some nice tax-free dividends on them. I thought that this loophole would possibly be blocked by Section 36 of the 1951 Finance Act, which controls the emigration of companies, but try as I may throughout the whole of that Section, I cannot find that it covers the case.
As far as I can see, that Section, which prohibits the emigration of companies, does not prohibit, so to speak, the emigration of personal holdings to a foreign country, which would then be held abroad instead of being held in this country. I should be pleased if the Economic Secretary could tell me any more, but as far as I can see, the loophole still remains.
Let me now return to the general issues as set out by my hon. Friend the Member for Stechford. What is also very surprising is the definition of "emigration". My hon. Friend suggested that people would be tempted to emigrate, but that is not quite so, as, I think, my hon. Friend would be the first to agree. If I am a rich man who wishes to get the benefit of the Clause, I do not have to emigrate to a foreign country in any permanent sense. What I have to do is to keep myself abroad sufficiently under the Schedule D rules, which are quite clear on this matter. I should not come home for more than six months in any year. I probably should not maintain a permanent place of abode, or the Inland Revenue would become suspicious again. I must not even, in periods of less than six months of the year, make my visits too frequently. If I were to start coming home for three or four 511 months at a time in about four consecutive years, the Inland Revenue might begin to say that I was resident. These are not terribly difficult conditions to impose on these people.
If I were a rich man and wanted a beautifully easy tax-free set of dividends on which to live, I could very nicely winter every year in Bermuda or some pleasant foreign country. I could come home for at least two months every year to arrange my affairs, or possibly three months. I should miss a year occasionally in order to fulfil the requirements of the Inland Revenue. As far as I can see, like Mr. Noel Coward but, perhaps, in a more agile way, I should be avoiding tax and I should become non-resident for the purpose of the subsection.
8.15 p.m.
It is very bad indeed—I do not say this in any partisan class sense—that we should now be offering a tax-free bonus to the richer members of the community who can afford to winter abroad for nine months in every year and simply come home to arrange their business affairs for two or three months in most years. That is precisely what the subsection does. I do not have to emigrate or change my nationality. I simply have to be abroad for a sufficient portion of every year. The position is more dangerous, therefore, than even my hon. Friend pointed out. Emigration as defined within the meaning of the subsection is nothing very strong.
Then, there is the final and general point raised by my hon. Friend about the way in which persons who are investing in British overseas trade corporations are to some extent getting protection for their shareholdings and to that extent ought to be paying United Kingdom tax. The Royal Commission dithered on this issue, quite unjustifiably, I thought. Some of its remarks were really not very good arguments. As regards these non-residents and their holdings in British companies, the Royal Commission said, in paragraph 693: their source enjoys the benefit of United Kingdom protection and therefore the charge to domestic tax is justified as an equivalent for the protection. It is true that the investor in a United Kingdom company has the security of our domestic legislation which governs the administration of companies: and in another sense such a company can expect that its interests overseas will be the concern of Your Majesty's Government. 512 Those are quite formidable, tangible things.
We are encouraging a section of foreign nationals to invest in British companies. They invest in British companies precisely because of the security, stability and protection of our laws and the way in which our tax system and our political system protects any investment that is properly made. There is no likelihood of unjustifiable and arbitrary confiscation of their assets. All these benefits are British assets which we are to some extent conferring on these people. [Interruption.] Do hon. Members opposite not consider that they are tangible?

§ Mr. A. E. Cooper (Ilford, South)
Has the hon. Member read the Labour Party's manifesto on nationalisation?

§ Mr. Chapman
We are not talking about whether, in fact, there is nationalisation. When there is nationalisation, for example, there is proper compensation and a stable Parliamentary system by which it is carried through. If the hon. Member does not believe I am right, he cannot expect foreign investors to invest in British companies. He cannot have it both ways.
The justification for the subsection that is advanced from the other side of the Committee is that our British system encourages people to invest in British companies. Now, hon. Members opposite are saying that the British system does not encourage people to invest in British overseas trade corporations. Which way round does the hon. Member for Ilford, South (Mr. Cooper) want it?

§ Mr. Cooper
We are not saying anything of the sort. What we are saying is that in the event of a return of the Labour Party to Government, if the speeches of hon. and right hon. Members opposite are to be believed, investments in transport and steel will be taken over without any compensation whatever.

§ Mr. Chapman
I am quite willing to argue the facts of those cases at any time that the hon. Member cares to choose. What he must bear in mind, however, is that despite the fact that nationalisation takes place in this country, much to my satisfaction, it nevertheless has not been any substantial discouragement to foreign investors to invest in our overseas trade operations. That is because of the 513 stability that the House of Commons applies to the whole way in which the matter is effected, and because of the guarantees which the system gives of fairness of treatment. The hon. Member really cannot have it both ways. He cannot have the Government putting forward the Clause as a way in which foreign investments will be attracted and, on the other hand, say that our system is not likely to attract those investments anyway.

§ Mr. Mitchison
On the assumption that many people will read the observations just made by the hon. Member for Ilford, South (Mr. Cooper), I should like to say that they are quite untrue.

§ Mr. Chapman
I am grateful to my hon. and learned Friend the Member for Kettering (Mr. Mitchison), but I frankly admit that I am more interested in sticking to the Clause and the real arguments that are being put forward on both sides of the Committee than in going into the byways into which the hon. Member for Ilford, South would lead me.
After all, these non-resident shareholders are getting something quite tangible—a great deal of protection and a guarantee when they invest in a British company. It is quite proper and quite important that our fiscal system should say that these people who are getting these benefits should make some contribution through taxation towards them. Otherwise, why do not they invest somewhere else? If they do not want the benefits that Britain can afford them why do not they take their investments elsewhere?
When we come back to the argument about the justification of attempts to attract foreign capital into our overseas trade corporations, the final point is that it can still be done in a way that is quite satisfactory. It is a way that has been bothering the right hon. and learned Member for Kensington, South (Sir P. Spens) all through our debates. It is the way of attracting capital to these firms via an overseas registered subsidiary, and then they would be free from the British code of taxation.
As the right hon. and learned Member and I and other hon. Members have pointed out, a large part of this kind of attraction of foreign capital is going on through foreign registered subsidiaries and not through the sort of subsidiary 514 that is likely to be an overseas trade corporation within the meaning of the Bill. I see no particular reason for suddenly bringing them all back through the British fiscal system as overseas trade corporations, unless they are willing to pay to some extent for the stability, and protection that Britain affords them in making their investments here.

§ Mr. Powell
The general effect of overseas trade corporation status is that a company though registered in this country, is, for the purposes of the Income Tax Acts, treated as if it were non-resident. A shareholder, who is not a resident of this country, who has shares in a non-resident company does not pay any United Kingdom Income Tax. Therefore, prima facie, since we are according to overseas trading corporations the position of a non-resident company, the consequence to a shareholder who is non-resident should follow, namely, that he does not pay United Kingdom Income Tax on his dividends.
I was strengthened in the feeling that this is the natural consequence by one of the last remarks made by the hon. Member for Northfield (Mr. Chapman), who pointed out that what is attracting foreign investment into foreign registered companies as compared with companies registered in this country is the advantage they have of avoiding United Kingdom tax thereby; and it is an underlying purpose of this part of the Bill that we do not want companies to be at a disadvantage in any respect just because they are registered in this country.
On general principles, and arising from the general purposes of this part of the Bill, I should have thought it a natural consequence that the non-resident shareholder should not pay United Kingdom Income Tax. As the hon. Member for Stechford (Mr. Roy Jenkins) pointed out, this point was considered by the Royal Commission. It came to the conclusion that on the whole, this was the right solution. For example, at the end of paragraph 692 of its Report, it said: the non-resident shareholder seems to have a fair case for exemption of his dividends on general grounds. That is as well as on economic grounds The Report concluded: We do not think it necessary to say more than this, that the adoption of any scheme for 515 exempting company overseas profits from United Kingdom tax would raise directly the question of taxing dividends of the non-resident shareholder; and that whatever may have been true of the past, the case for their taxation today has worn very thin. There is a further consideration besides the general logical position, and one that was not considered by the Royal Commission. It is a reason that is really decisive.
Most, though not all, of our double taxation relief agreements provide that United Kingdom Income Tax shall not be imposed upon a foreign resident beyond the taxation imposed upon the company from which the profits are drawn. That being so, it would clearly be a breach of the spirit, if not of the letter, of these double taxation agreements that a non-resident should bear tax upon his dividends from a company whose profits, unless and until they are distributed, are not subject to United Kingdom Income Tax. For this company the overseas trade corporation is in a quite different position from that of the ordinary British registered company which bears Income Tax on its profits whether it distributes them or not. Therefore, if we did not make this provision in subsection (2) we should be involved in a breach of a whole range of our double taxation agreements, and that is not a position we could well contemplate.
The hon. Member for Stechford directed all his arguments towards subsection (2), but of course, the Amendment, perhaps merely consequentially and as a matter of drafting, proposes also to omit subsection (3).

§ Mr. Mitchison
It has to, because subsection (3) is simply a provision for the purposes of subsection (2).

§ Mr. Powell
Oh, no. It is necessary for me to point out the importance of subsection (3). The effect of subsection (3), which would not be achieved if it were not within this Clause, is an effect to which I know many hon. Members of this Committee attach great importance. That is, that it should be possible to switch the profits of one overseas trade corporation to assist in building the business of another O.T.C. in the same group. Without this subsection that would not be possible. Although I realise that the proposal to omit this subsection was consequential, I thought it was worth while to point out its effect.

§ Mr. Jenkins
As my hon. and learned Friend said, subsection (3) in its present form could not stand without subsection (2), but the Financial Secretary is certainly correct in thinking that the burden of the Amendment is to remove subsection (2). If the hon. Gentleman would give an undertaking that he would put in subsection (3) in a different form, that would be satisfactory to us.

§ Mr. Powell
Anyhow, we are all clear that we want the effect of subsection (3), which is to enable overseas trade corporations within the same group to be able to use their profits anywhere within the group without incurring United Kingdom Income Tax in the process.
The hon. Member for Northfields put two specific avoidance cases to me. The first was of a United Kingdom resident shareholder in an overseas trade corporation who transferred his holding in it to a company registered overseas in a country where local tax was low or nonexistent, so as to be able to get the benefit of this subsection.

§ Mr. Chapman
While he remains resident.

§ Mr. Powell
While he remains resident in this country. I think the hon. Gentleman will find that possibility is stopped by Section 412 of the Income Tax Act, 1952. Perhaps if I simply read the rubric of that Section, it will be sufficient for the present purpose. The Section contains: Provisions for preventing avoidance of Income Tax by transactions resulting in the transfer of income to persons abroad. In this case the income of a shareholder is transferred to the supposed Bermudan company abroad for avoidance purposes.

§ Mr. E. Fletcher
In the case posed by my hon. Friend there would be no transfer for the avoidance of tax, there would be a capital investment made in a Bermudan company. That company, being a foreign company for the purposes of this subsection, would derive all the benefits of the accumulation of profits in, for example, the Kuwait company. When there was a remittance to the United Kingdom company, the Bermudan company would not be subject to any tax. As a result, in the case posed, the 517 individual who started with an investment in the Bermudan company would accumulate a great deal of capital.

§ Mr. Powell
Yes, but for the purposes of the avoidance device it would be necessary for the United Kingdom shareholder in the overseas trade corporation to transfer his holdings in the O.T.C. to the Bermudan company. That would be the start of it, and it is that transaction which is prevented by the Section to which I have drawn attention.

§ Mr. Chapman
I am sorry I did not find that one; I only found the 1951 Act. It says specifically, if it is proved to be for tax avoidance. There may be many ways round that one too. Does it prohibit completely the transfer of stocks and shares owned merely for the purpose of tax avoidance?

§ Mr. Powell
I have, perhaps rightly, suffered for the sin of quoting a side title in order to save the time of the Committee. If the hon. Gentleman will consult the Section he will find that it prevents the initial transaction upon which the whole avoidance device would rest.
He posited a second case where the taxpayer himself went abroad so as to become non-resident and thus not liable to pay Income Tax upon his dividends from an O.T.C. It is true that a person who renders himself non-resident can avoid United Kingdom Income Tax on any income arising outside the United Kingdom, and consequently, if one accepts my earlier logic, upon income arising from a company treated as non-resident. In the instance which he gave—a certain playwright, who has been mentioned more than once in these debates—of course that playwright escapes United Kingdom Income Tax only upon his non-United Kingdom earnings.
To sum up, I would therefore put it to the Committee that it is consistent with the general effect and purpose of this part of the Bill—and is, indeed, necessary because of our double taxation arrangements—that we should have the provisions in subsection (2). I hope that the hon. Member for Stechford will not think the worse of British registered companies trading overseas because they happen to have a certain number of non-resident shareholders. It was probably 518 an unintentional hyperbole, but I did not think that they deserved to be described on that account as "companies whose connection with this country is so tenuous as to be almost non-existent."
I think we must treat these overseas trade corporations as a group, and accept the logic of non-resident shareholders in those corporations not paying United Kingdom Income Tax.

§ Mr. Mitchison
I wonder whether the Financial Secretary would be kind enough to answer a question which puzzles me. Subsection (2) refers to a person not resident in the United Kingdom and it provides for his getting certain refunds of Income Tax. It then has a proviso which reads: that this subsection shall not apply where the person owning the shares in the Overseas Trade Corporation is —I omit various words— resident in the United Kingdom".

§ Mr. Powell
The hon. and learned Gentleman should not omit those words.

§ Mr. Mitchison
Very well. I will put them in. It reads: Provided that this subsection shall not apply where the person owning the shares in the Overseas Trade Corporation is a company which is a subsidiary of a principal company and that principal company—(a) is resident in the United Kingdom…. Would the Financial Secretary explain to me what is contemplated? First of all, we have an overseas trade corporation. Then we have a subsidiary of a principal company. Is the idea that that subsidiary should not be resident in the United Kingdom? Then we have a third person, which is a principal company resident in the United Kingdom. What sort of practical point has the hon. Gentleman in mind? I wish it could be explained because I find it very baffling, and I am not at all certain that I like the provision.

§ Mr. Powell
The effect of the proviso is this. So far we have been considering a non-resident shareholding company in an overseas trade corporation, but if that non-resident shareholding company were itself the subsidiary—let us say the mere puppet of a United Kingdom company—the practical effect would be that a United Kingdom company or a United Kingdom resident could be drawing the tax-exempt profits of an overseas trade corporation by 519 drawing them through a non-resident shareholder. It is to prevent this method of avoidance that the case where the non-resident company is a subsidiary of the United Kingdom principal is ruled out.

§ Mr. Mitchison
Is not that altogether too easy?—It depends finally on the dummy company the Financial Secretary knows what I mean—being the subsidiary. Supposing that two or three companies, perhaps engaged in a similar trade, have a dummy company of this sort; it is not a subsidiary of any one of them and they will accordingly be able to extract tax-free income although it is not intended that they should. I say that it is not intended that they should because if it were the subsidiary of one of them they would not get it. But all they have to do is to combine, the three of them, and to put up a dummy between them, and they will get the benefit. I should like to know what is the answer to that. I expect that there is one.

§ Mr. Powell
I will certainly pursue that point.

§ Mr. Powell
I beg to move in page 19, line 9, to leave out from "Kingdom" to the end of line 10.
This point follows on directly from that which I have been discussing with the hon. and learned Member for Kettering (Mr. Mitchison). It is necessary that the case of a United Kingdom resident principal company should be ruled out even where that United Kingdom principal company is itself an overseas trade corporation. There need be no connection between this overseas trade corporation and the original overseas trade corporation from whose trading profits the dividends are drawn. There is no reason why a United Kingdom company which happens to be an overseas trade corporation on other grounds should profit by the avoidance device, which the proviso is intended to prevent, more than any other kind of United Kingdom company. It is for that reason that the words are required out of the subsection.

§ Mr. Mitchison
That appears to follow, but the extreme complexity of these arrangements confirms my suspicions that evasion will prove to be only too easy.

§ Mr. Stevens
I beg to move, in page 19, line 15, at the end to insert: and that subsection as so applied to dividends on shares owned by an Overseas Trade Corporation shall have effect as if the proviso were omitted". This is an extremely difficult Amendment to move shortly and clearly. The purpose of the Clause as it stands is to ensure that if a dividend is paid out of untaxed profits to a shareholder who is not resident in the United Kingdom and if there is deduction of tax, the non-resident shareholder shall be entitled to repayment of Income Tax. However, we have just been discussing the proviso in subsection (2) which has now been amended by the omission of paragraph (b).
The situation now arises that where an overseas trade corporation has more than one subsidiary company, each of which is an overseas trade corporation, but where the parent company of the parent O.T.C. is not itself an overseas trade corporation, then that parent company of the string of overseas trade corporations will not, as the Bill is drafted, be able to reclaim the tax deducted from the dividends.
I do not think that that follows through the entire intention of this part of the Bill. It seems to cut across the intention which is apparent in the Bill. In such a case one O.T.C. should be able to switch funds to another O.T.C., and the Amendment puts that detail right. I hope that the Amendment is as clear to the Committee as I hope it is to me.

§ Mr. Powell
These words are, in fact, necessary for the reason my hon. Friend has given, and I recommend the Committee to insert them.

§ Mr. Mitchison
I wish that the Financial Secretary would be a little more explicit. I listened very carefully, but I am afraid that with my limited intelligence I did not see why the words were necessary and I am somewhat afraid that there may be other people who will not see why they are necessary. What is the real reason for inserting these words? They seem to amount to this, that the subsection as applied to dividends on shares owned by an overseas trade corporation shall have effect as if the proviso were omitted. What is the difference between putting these words in and leaving them out?

§ Mr. Powell
The position is that there is a grandparent company which is registered in the United Kingdom, but which is not an overseas trade corporation; there is a parent company which is an overseas trading corporation and a child company which is an overseas trade corporation.
8.45 p.m.
What we want to make possible is transfers of funds without liability to United Kingdom Income Tax between the parent company and the children O.T.C.s, and the fact that they happen to have a grandparent which is not an overseas trading corporation, that is to say, a principal company resident in the United Kingdom, is no reason why they should be excluded in that case from the benefits of switching funds. It is because the proviso to subsection (2), as that subsection is applied by subsection (3), would cut out this process in the case where there happens to be a non-O.T.C. resident grandparent company that these words are necessary.

§ Mr. Mitchison
This sounds to me a very queer family, and the more I hear about it, the queerer it sounds. I see the point, but it seems to me, on the other hand, to be something that is open to a good deal of misuse. I cannot see why this string of companies should be treated in this special way, or that there is any real need for this proviso, but there it is, and we leave it at that. We shall have to consider afterwards what this subsection looks like as a whole with these Amendments, and we may have to revert to it at a later stage.