HC Deb 15 July 1958 vol 591 cc1081-100

Section twenty-three of the Finance Act, 1957, shall be amended by the omission of the word "and" at the end of sub-paragraph (ii) of paragraph (a) of subsection (1), and the Insertion of "or (iii) it is a principal company not itself carrying on a trade but having a subsidiary company which is not resident and is not carrying on a trade in the United Kingdom but is carrying on a trade outside the United Kingdom, and which would itself qualify as an Overseas Trade Corporation if it were so resident, and section thirty-five of the said Act shall be amended by the addition at the end thereof of— '(4) Where the Overseas Trade Corporation receives from another company such as is referred to in section twenty-three, subsection (1), paragraph (a) (iii), being a non-resident subsidiary company a dividend on shares in that company or a grant or loan from that company and

  1. (a) the non-resident company is a subsidiary of the Overseas Trade Corporation, or
  2. (b) both the non-resident company and the Overseas Trade Corporation are subsidiary companies of the same principal company which is also an Overseas Trade Corporation
the dividend, grant or loan shall constitute trading income of the recipient'"—[Sir T. Low.]

Brought up, and read the First time.

Sir Toby Low (Blackpool, North)

I beg to move, That the Clause be read a Second time.

Mr. Speaker

I think that it is possible to discuss this new Clause and the proposed new Clause in the name of the hon. Member for Langstone (Mr. Stevens), which seems to be a related one—"Loss of status by an Overseas Trade Corporation being a principal company"—together.

Sir T. Low

I think, Mr. Speaker, that it would be convenient to discuss these two Clauses together.

The object of this Clause is to help our overseas trade, as indeed was the object of the introduction in last year's Finance Act of the overseas trade corporation. As the Finance Act, 1957, stands at present, an overseas trade corporation may be a holding company, but it may only have overseas trade corporations as subsidiaries, that is to say, the subsidiaries must be British registered companies. This restriction which prevents companies registered abroad from being subsidiaries of an overseas trade corporation greatly reduces, in my view and in the view of my hon. Friends, the usefulness of the whole idea.

This matter was, of course, discussed in Committee on last year's Finance Bill, and in particular on 26th June, 1957, when an Amendment was moved by my right hon. and learned Friend the Member for Kensington, South (Sir P. Spens). As we want to cut the proceedings short as much as possible, I will simply say that everything which my right hon. and learned Friend said on that occasion I should like to say again, but that I shall not say it. I want, however, to say in as few words as I can why I think that this year my right hon. Friend should accept this new Clause whereas last year his right hon. Friend found himself unable to do so. As I am trying to be brief, I hope that he will forgive me if I am a little more blunt than usual and not as courteous as I like to be.

The fact is that a great deal of our overseas trade is carried on by holding companies registered and resident here working through companies resident and registered overseas. It is also a fact that a great deal of our trade is carried on through branches overseas and not through resident companies overseas. At the moment, a company registered here that works solely through branches overseas can get the O.T.C. relief. A company registered here that works even through one foreign subsidiary registered overseas cannot get that relief. That seems to me to be quite anomalous. It upsets the usefulness of this most important relief. Moreover, it seems anomalous at a time when we know that many companies prefer our traders to operate through companies which are resident and registered in their territory.

We do not have to look very far at world news to see how nationalism everywhere is rife and to realise that if one is to trade successfully in many foreign countries it is necessary to accord to the local views and work through local registered companies. Not only is it necessary to do that for that reason, but it has been found convenient for other general trading reasons.

What happens at the moment with holding companies here which work through subsidiaries is that they are unable to make use of the funds in the hands of those subsidiaries for their general trading operations in the world at large. If a company is working through branches and wishes to move money from Africa to India it can do so without attracting tax in this country. If a similar company, in the same line of trade, is working through subsidiaries in Africa and India and wishes, for instance, to transfer surplus funds in India to Africa, for the benefit of its trade and British trade generally, it will find that it can do so only by remitting money from the Indian subsidiary back home which then attracts tax here in the hands of the holding company. In that way, it is penalised compared with the company working through branches. The hon. Member for Birmingham, Northfield (Mr. Chapman) seems to be nodding his head. I understand that to be the position, and he will be able to tell the House if I am wrong.

Not only is this situation anomalous, but it seems quite contrary to the recommendation of the Royal Commission. Again, if we had more time, I would read to my right hon. Friend the Chancellor what the Royal Commission had to say about it. If I may, however, I will just remind him of what the Commission said in paragraph 641 (2) at page 191 of its Report. The Commission makes it absolutely clear that any comprehensive policy of exempting the profits of overseas trade could not well distinguish the dividends which a parent company draws from its subsidiary from the profits of the subsidiary itself. Each remains at that stage the trader's overseas profits. It was trading profits overseas that the overseas trade corporation relief was designed to assist.

The new Clause seeks to remedy the defect in two ways. First, permission has to be given to an O.T.C. holding company to have a foreign registered subsidiary. Secondly, the income received by the holding company from that subsidiary has to be treated as a trading income. The new Clause, I think, satisfactorily accomplishes both those objects. I commend it to the House and I very much hope that my right hon. Friend the Chancellor will tell us something to indicate that, after the year which has elapsed between when the matter was first discussed and now, he is prepared to take this important step to help overseas traders.

It seems to me that the importance of helping our overseas trade at this time is paramount. It may well be that hon. Gentlemen and officials of the Revenue have all sorts of fears in their minds about how this and that kind of tax evasion might arise. But we are not concerned here with helping foreign subsidiaries. That is not what the new Clause does. It helps British resident companies which are deliberately trading through foreign subsidiaries as a matter of policy, which all of us in the House know to be a wise policy.

I noticed in the debates last year and I have noticed in comments and discussions which have taken place since, that the Government are apt to think of this suggestion as a privilege for foreign resident subsidiaries. That is not the object. I say again that the object is to help British resident companies which are trading overseas and which choose to trade overseas through subsidiaries rather than through branches.

Mr. Bernard Braine (Essex, South-East)

My right hon. Friend the Member for Blackpool, North (Sir T. Low) rightly said that the situation arising from the concession made in the Finance Act last year is anomalous. I would go further and use much stronger language. The present practice makes a discrimination which is both unfortunate and shortsighted.

A subsidiary company incorporated overseas would be regarded by the Inland Revenue as being resident in the United Kingdom; that is to say, it would be eligible for O.T.C. status, if it held its board meetings in this country. But, of course, if it did so, that would defeat the whole object of organising the parent company's business through a subsidiary overseas. In some cases, as my right hon. Friend so clearly said, it could even be injurious to the best interests of British traders overseas. Certainly, the present situation was never intended by the Royal Commission.

If I may say so, it is ridiculous that the activities of a company which organises its business overseas through branches should be regarded as patriotic and worthy of tax relief in accordance with what the Royal Commission recommended and what the House saw fit to provide last year, while a company which organises its activities through the medium of subsidiaries is regarded with suspicion and does not enjoy the tax concession. In effect, the Treasury says that this is not a form of trading organisation which should be encouraged.

This is a discrimination between the old-fashioned type of British company which has long organised its trading activities overseas through the medium of branches, because it has found that this is a convenient way of conducting its affairs—it likes so to operate and, no doubt, will continue to do so quite happily—and the modern kind of company which, in accordance with the twentieth century conception of business organisation, operates through subsidiaries because this is the best way of doing business and is also prudent politically particularly now that the tide of nationalism is running so fiercely.

As I said during the Third Reading debate last year, the present practice discriminates in favour of absentee pro-proprietors and against that kind of business organisation which brings local nationals and sometimes local capital into partnership with British enterprise. I do not wish to delay the House, but I will give two reasons why a modern, progressive, forward-looking British business, particularly in the Colonial Territories overseas, sees fit to organise itself through the medium of subsidiaries.

First, it ensures more effective local supervision in that way. Most of the big companies today operating overseas are training local nationals for management. The House approves this practice. It is in line with our policy of encouraging and training dependent peoples to stand on their own feet and to manage their own affairs. Too little credit is given to British companies for the contribution they are making in this modest way towards helping the underdeveloped territories to stand on their own feet. Secondly, this way of conducting business pays very much more regard to the feelings and sensibilities, the pride and interests of the people in those territories.

In one way or another, we talk a great deal in the House, almost every week, about the importance of Commonwealth co-operation. Yet this modern form of business organisation which is penalised under our present tax practice provides a practical example of how British enterprise has been adjusting itself, quite voluntarily, to modern conditions, permitting a fruitful partnership with people overseas. The law as it stands, on the other hand, encourages the kind of business organisation which does not, in many cases, make for maximum efficiency and may constitute a target for nationalistic campaigns against foreign enterprises in the future.

There is a further argument, which I hope will weigh with my right hon. Friend. The level of taxation in most under-developed countries is tending to rise. Though I may be wrong, my own observations lead me to conclude that, as the level of export earnings has tended to fall off during the last year and underdeveloped countries have found increasing difficulty in financing their development programmes, the tendency has been for taxation to rise.

I believe that the trend will continue. If overseas tax rises, the amount of United Kingdom tax collected on remittances home will fall. Thus, the cost of extending the exemption provisions beyond what was provided for last year will obviously be very much less than my right hon. Friend the Prime Minister calculated in 1956, when he was Chancellor, and what my right hon. Friend the Member for Monmouth (Mr. P. Thorneycroft) estimated last year when he rejected my blandishments on the subject. I would also argue that at a time when the terms of trade are still running very much in our favour here and, as a consequence, we are accumulating a good balance, we should take positive steps to encourage trade and investment, particularly in the Commonwealth.

By supporting this proposed new Clause we would be moving in that direction. I have the greatest pleasure in supporting my right hon. Friend and I hope that my right hon. Friend the Chancellor is prepared to give us a kindly and generous answer.

7.0 p.m.

Mr. Chapman

I am glad that this debate is to be brief, because it will enable us to keep it on the very narrow issue with which the Clause really deals. The trouble with the debate of 26th June last year was that it was confused by going wide of the real point at issue. When the Chancellor replied to that debate, he had to point out to his hon. Friends that the point at issue was extraordinarily narrow.

Sir T. Low

indicated assent.

Mr. Chapman

I am glad to see that the right hon. Member for Blackpool, North (Sir T. Low) agrees with me. The point is that these overseas resident companies are already free of British tax on their trading profit and on their investment income. They are outside the British tax net. Nothing that we did in last year's Finance Bill—and the Chancellor repeated this—in any way prejudiced them.

The point now at issue is very simple. I think the right hon. Gentleman dealt with it when he moved the Amendment. It is whether a holding company should be allowed to receive profits from overseas resident registered companies here in this country and then transfer them abroad to some other company or subsidiary for use elsewhere without attracting British Income Tax. That is the only point at issue. I hope I can prove to the right hon. Member for Blackpool, North that this point is not worth pursuing. The right hon. Member did not appreciate the main problem when he moved the Clause. As the Chancellor himself pointed out last year, there is already no bar on a holding company in this country transferring any profit between overseas resident companies and subsidiaries without ever coming through this country and attracting tax.

Sir T. Low

I should like to put the hon. Gentleman right on this point. What he says may be so, but there may be a definite bar on the overseas resident company transferring its funds in any other way than by way of dividend. If the hon. Member would be so kind as to read the exchange control rules of, say, India, he will find that that or something similar applies. If one is to get money out of an Indian resident company, the only way is by way of dividend.

Mr. Chapman

I am obliged to the right hon. Gentleman. What he is saying is that my argument in that sense is limited and that it will not apply in certain cases. But it remains broadly true, as the Chancellor said last year. He said in column 289: Moreover, so far as the United Kingdom is concerned, if they wish to do so they can switch profits from one company to another overseas. We in the Treasury have no control over that. They can switch from one country overseas to another country overseas, and to the best of my knowledge many of them do so."—[OFFICIAL REPORT, 26th June, 1957: Vol. 572, c. 289.] Judging from that, the argument is not so sweeping as it first appeared. It can often be the case that there is no need for these profits to come through a resident holding company in this country, and they can be switched about abroad from one company to another under the jurisdiction of the holding company in this country. We have narrowed the point to the simple one of transfer through a company in this country, back home and out again, and have now discovered it will not apply in many cases.

In such examples as India, what is the final disadvantage about trying to meet this point? As we said time and time again last year, the disadvantage is that it would be impossible to check whether the Income Tax law was being followed.

Sir T. Low

indicated dissent.

Mr. Chapman

The right hon. Gentleman shakes his head, but he must read what the Chancellor said; and the right hon. Gentleman was only repeating what was said in the course of the debate last year.

Mr. Leather

The Chancellor misunderstood it.

Mr. Chapman

I do not think he misunderstood it. The hon. Member for Somerset, North (Mr. Leather) was the one person in the whole of last year's debate who was so irrelevant that when the Chancellor came to reply he had to pick him out and tell him so. The hon. Gentleman spent the whole of his speech talking about the pioneer industry problem, and all the Chancellor could say in reply was this: The pioneer industry question and the frustration of pioneer relief is quite irrelevant to this question."—[OFFICIAL REPORT, 26th June, 1957; Vol. 572, c. 291.] The Chancellor spent a paragraph telling the hon. Member that he was wasting the time of the Committee.

Mr. Leather

It is not true.

Mr. Chapman

It is quite true. The hon. Member was singled out to be told that his argument was irrelevant.

Let me get back to what I was saying.

Mr. Braine

I want to get this point quite clear. Most of the leading tax authorities who have written on this subject since last year have upheld the validity of the arguments that I used in that debate.

Mr. Chapman

I am not attacking the hon. Member for Essex, South-East. We can have another discussion about his point outside.

Let me come back to what I was saying before I talked about the hon. Member for Somerset, North. The point is whether we could check whether overseas registered subsidiaries were acting in accordance with the remainder of the provisions of Part IV of last year's Act. Of course, we could not, because the Chancellor then said that they would be entirely outside the jurisdiction of the Treasury and Board of Inland Revenue. The right hon. Member for Blackpool, North can see the difficulty in lines 6 and 7 of his own proposed new Clause. The proposed new Clause in lines 6 and 7 contains these words: …which would itself qualify as an Overseas Trade Corporation if it were so resident. To qualify as an overseas trade corporation the company has to fulfil very tightly drawn requirements in last year's Act. It must not do certain things. It cannot carry on any United Kingdom activities amounting to the exercise of a trade. All the goods which it takes abroad from this country must be free on board and there must be trading at arm's length. All this is to be carefully investigated by the Board of Inland Revenue. Certain activities are totally proscribed and cannot be included as part of the company's activity.

The right hon. Member for Blackpool, North is really saying that the Inland Revenue would be able to check whether these objectives and requirements were being carried out by a company which was not even registered here and the directors of which could never be summoned by the Board of Inland Revenue to prove whether the requirements are being carried out. If I put the matter in that way, I think the right hon. Gentleman will see the difficulty. The right hon. Member is smiling, but I am only repeating what his right hon. Friend told him last year. He failed to understand it even then.

Let me quote what the right hon. Member for Monmouth (Mr. P. Thorneycroft) said last year. Perhaps the hon. Member for Somerset, North will laugh at this. The right hon. Member said: We would have had to ensure that these companies, non-resident and outside our jurisdiction, did not do anything which would have rendered them outside the category of an overseas trade corporation, if, in fact, on other grounds, they were able to be an overseas trading corporation. There would have to be a special arrangement to ensure that they did not, for example, carry on any trade in the United Kingdom or did any of the other things, like buying goods before they were free on board, and that when the money was distributed it did not find its way into the hands of the directors or back into the United Kingdom…"—[OFFICIAL REPORT, 26th June, 1957; Vol. 572. c. 290–1.] The right hon. Gentleman went on to say that all this was totally impossible to check when these companies were not registered in this country, when they are resident overseas and outside the jurisdiction of the Treasury and the Board of Inland Revenue.

Mr. Braine

They are never outside it.

Mr. Chapman

I hear the hon. Member saying that they are never outside it. The fact that a holding company in this country exists does not mean that those intricate and intimate details of the overseas resident company can ever be checked upon substantially and successfully by the Board of Inland Revenue. That is the most important point.

Mr. Braine

Is the hon. Member aware that under the Companies Acts companies are required to put forward their accounts in standard form? The Treasury possesses wide powers under the existing law, which makes complete nonsense of the hon. Member's argument.

Mr. Chapman

The hon. Member is mistaken. Those powers do not extend to the checking of these matters in companies registered overseas.

Mr. Braine

They do not have to.

Mr. Chapman

Of course not, but in this case they would have to be if they were to qualify as an overseas trade corporation. That is the substantial point.

Hon. Members opposite did not learn from the answer from their own Chancellor of the Exchequer last year, and it is, I suppose, almost impossible to hope that they will learn from it this year. The substantial point is that they are asking for concessions to companies whose qualifications and conformity to the law cannot be checked upon. In these circumstances, I hope that the Chancellor of the Exchequer will stand firm.

This matter has been canvassed in a very slipshod article in The Times of 30th June, which ended with some sort of loose phraseology which implied that these companies were at a grave disadvantage from the present law and that all that mattered was that the holding company would still be able to control. That is not all that matters. What matters is that the resident company overseas shall conform to British law. We really cannot check upon that. For these reasons, I hope that the Chancellor of the Exchequer will resist the new Clause.

Mr. Leather

I support the new Clause. The hon. Member for Birmingham, Northfield (Mr. Chapman) said quite clearly that, in his view, the problem of pioneer industry relief was irrelevant to what we were discussing.

Mr. Chapman

I said, in the Chancellor's view.

Mr. Leather

All right. I have already said, and so have many others, that we do not accept that the Chancellor last year ever understood the point. [Laughter.] There is nothing new about that. I said it last year and I still believe it to be true. Indeed, I go further and say to my right hon. Friend the present Chancellor that, with the respect for his honesty and integrity which I have for him, I cannot believe that he understands it either in relation to certain statements made by the Prime Minister when Chancellor of the Exchequer.

Far from the pioneer industry relief question being irrelevant, that is precisely the point where many of us approached the subject in the first place. If the right hon. Member for Smethwick (Mr. Gordon Walker) is now opposing those of us who are concerned with Commonwealth trade and interests, he has completely reversed his position, because he supported us strongly two years ago.

Mr. Gordon Walker (Smethwick)

On something different.

Mr. Leather

No. It was on the question of pioneer industry reliefs, which is the main point with which we are concerned, and the nearest to which the hon. Member for Northfield can get is that he regards it as irrelevant.

7.15 p.m.

Much of the agitation in this House amongst those of us who are Commonwealth enthusiasts originated on the very point of pioneer industry reliefs. Hon. Members on all sides know perfectly well that in going around the Commonwealth in the last ten years, nothing has caused them more indignation than to see time and time again in Colonial Territories, German, French, Italian and American companies placed at a positive advantage over British companies because of the action of the British Treasury. That is precisely the point on which we started. To say that it is irrelevant is quite ridiculous.

My hon. Friends have made the case on the facts. What shocks me is that my right hon. Friend the Chancellor of the Exchequer does not consider himself bound by a pledge on this issue. Let me, therefore, quote from HANSARD of 19th June, 1956, part of a speech made by my right hon. Friend the Prime Minister when Chancellor of the Exchequer. On that day I moved a Clause to grant tax relief specifically for pioneer industries. In every country throughout the world it is a condition that to qualify for pioneer industry tax relief a subsidiary must be established in that country. Merely a branch of a British company directed in London does not qualify. Therefore, it is a condition of what we are talking about that it must be an overseas subsidiary. We drove home that point as hard as we could to the Chancellor of that time.

First, my right hon. Friend told us that he felt that he could not meet us on that occasion. Then, he went on to say: I realised that my decision to defer action on the Commission's broader recommendations would lead to pressure, very determined and sincere pressure, for the early implementation of the recommendations on pioneer industry reliefs, and I realised, too, that there was special force in this argument in relation to the Commonwealth and colonial countries. The first Clause"— that is, the Clause concerning this point which I moved on that occasion— is limited to these territories and therefore has a special claim for the reasons which have been very well expressed by my hon. Friends. I think that, in passing, I ought to say that much as I recognise these special claims…I do not think that we ought to exclude the consideration of other countries…although, of course, we have a natural sense of priority towards our own traditional responsibilities. In the final paragraph, my right hon. Friend said: This is as far as I can go, but I will add this. If it next year's Budget"— that is, the Budget introduced by my right hon. Friend the Member for Monmouth (Mr. P. Thorneycroft)— the Government should be able to introduce reliefs for overseas trade corporations generally, then, of course, the bigger question would settle the smaller one. If, however, circumstances are such, either from the Budgetary or the balance of payments point of view, that I cannot go the whole way…if I cannot go the whole way and deal with the wider questions…I will give this assurance; I will bring forward legislation next year to deal with the matter of the frustration of pioneer industry reliefs, and I will make it apply to profits earned after 6th April, 1956."—[OFFICIAL REPORT, 19th June, 1956; Vol. 554, c. 1265–6.]

Mr. Diamond

Retrospective?

Mr. Leather

Retrospective. If that is not a firm and unqualified pledge to deal with pioneer industry reliefs, this House must be hard of hearing.

Mr. Diamond

Does not the hon. Gentleman appreciate that the precedent has already been set and that the Chancellor of the Exchequer does not accept any such assurance where it deals with retrospective legislation?

Mr. Leather

The question of retrospective legislation is quite irrelevant. It is as irrelevant as the understanding of the whole issue by some hon. Members opposite. Surely that statement cannot possibly be read in any other way than as a firm pledge to deal, in the Prime Minister's own words, with the frustation of pioneeer industry reliefs. That pledge was given on 19th June, 1956. It is now July, 1958, and the Treasury have ratted on that pledge. There can be no other word to describe it. We were given a firm pledge that pioneer industry reliefs would be dealt with. The Government have quite deliberately not done so to this day, and they are still resisting. Surely if the Prime Minister's words which he uttered when he stood at the Box in 1956 mean anything, the Chancellor must give us some assurance that that pledge is to be honoured.

Mr. Gordon Walker

The hon. Member for Somerset, North (Mr. Leather) is very cocksure of being right. He is trying to persuade the House that he and a few of his hon. Friends are the only people who understand what we are talking about. He has signally failed to convince us of this intrinsically improbable supposition.

The hon. Gentleman argued a great deal about the benefit to the Commonwealth, but this proposed new Clause is not limited to the Commonwealth at all. It would bring just as much benefit to anybody else. Last year's Chancellor carried out the pledge given by the Prime Minister when he was Chancellor. Any company that takes the trouble to turn itself into an overseas trade corporation gets all the benefits for pioneer relief.

I hope that the Chancellor will not give way on this point. The arguments that were produced last year by his predecessor were very convincing, and if the Chancellor had any doubts about this he would have to meet the very powerful arguments that his predecessor advanced on this matter and which are just as valid today as they were then.

We are not in favour of carrying this general principle of the overseas trade corporation further than it has been carried. Last year we on this side of the House were rather doubtful whether it had not gone too far, in any case. One has to keep a balance between overseas and home investment, and not every bit of overseas investment is necessarily good. One can have too much of it. It is important to have home investment. What is invested overseas cannot, at the same time, be invested in this country to raise our own productive capacity and, indeed, to give employment here. What we want are exports rather than massive overseas investment, and we certainly do not want the principle carried further than it was carried last year.

We also want to limit what is a tax privilege. Hon. Gentlemen cannot get away from the fact that this is a tax privilege. A tax privilege was given to overseas trade corporations last year—one that benefits Surtax payers more than any other, and one which leads to dangers of tax evasion which, as my hon. Friend the Member for Birmingham, Northfield (Mr. Chapman) said, would be greatly increased—it already exists—if this new Clause were added to the Bill. This is a privilege to overseas registered companies; one cannot get away from it. That is what it is designed to be. It applies to companies which are outside our jurisdiction and ones which could, therefore, easily use the loopholes which exist even for overseas trade corporations.

Mr. Leather

It is a privilege, but it is not a privilege granted by us. The privilege is granted to these companies by the Colonial Government. What we are objecting to is that our Government deliberately nullifies that privilege. If the Government of Jamaica were to agree to pioneer industry relief to a company because it is doing something which they think is good for their country, that is something of which we should approve. The law as it stands at the moment nullifies it.

Mr. Gordon Walker

Overseas trade corporations last year cost the Revenue money; that was a tax concession. Before the change, that tax was paid. This would cost the Revenue money and it must, therefore, be a privilege. It means that other taxpayers have to pay more. We must not carry these tax privileges too far in our tax system.

Mr. Braine

I am following the right hon. Gentleman's argument as closely as I can. Can he say why there should be a distinction between a British company trading overseas, whether it be in the Commonwealth or anywhere else, through the medium of branches, and a British company trading overseas through the medium of, say, 100 per cent. owned subsidiaries?

Mr. Gordon Walker

One reason is that the overseas trade corporation is within the tax jurisdiction and can be controlled. One that is overseas is not under our tax jurisdiction for almost all the purposes which matter, and there will be great temptations and possibilities of evasion. There is nothing to stop the company with which the hon. Gentleman is concerned from turning itself into an overseas trade corporation. The fact that it does not do so means that it must get some advantage out of its present status. It could get all the benefits from last year's Act, but it chooses not to do so. It must, therefore, get some benefit out of not making this change.

Sir T. Low

Really, that argument is a bit much. The right hon. Gentleman should remember his former responsibilities. Is he really saying to large companies here who have established subsidiaries in Australia, Canada, Pakistan, South Africa and elsewhere, that they ought to be encouraged by the British Treasury to abandon those subsidiaries?

Mr. Gordon Walker

The right hon. Gentleman could have put forward a Clause limited to the Commonwealth, which his speech rather suggested that it was, though, of course, it is not. His last intervention suggests that his whole endeavour is to do this within the Commonwealth alone. If he had put forward a Clause limited to the Commonwealth, we would have looked at it with a more favourable eye. He has not done that at all.

This is a new Clause designed for foreign—not only Commonwealth—resident companies all over the world, leading to the possibilities of tax evasion, and all of which, in these foreign countries, could turn into overseas trade corporations and have decided not to do so. Why?—because it benefits them not to do so.

Several Hon. Members

rose—

Mr. Speaker

I must remind the House that this is the Report stage. We have passed out of Committee. With these constant interruptions this is degenerating into an argument instead of a debate.

Mr. Gordon Walker

I hope that the Chancellor will resist the proposed Clause.

Mr. Amory

The overseas trade corporation scheme has been in existence for only a short time, and I am sure that it is much too early to be dogmatic about any aspect of it. I must confess, however, that the proposal in this Clause, that non-resident subsidiaries should be brought within the scheme, presents a number of real difficulties.

I recognise, as several of my hon. Friends have said, that there are very often circumstances which make it desirable to conduct business in overseas markets through a locally registered company. There is the argument of national feelings, and it is often desirable to secure local participation. I am quite sure that that applies in a great number of circumstances, and in the circumstances in which it does apply we do not want to do anything to discourage that kind of development.

But the fact is, when we look back at last year, that the main object of this scheme was to put resident companies into a better relative position. The whole origin of this scheme was essentially one for assisting companies resident in this country. Again there may be many cases where it may be sensible, efficient and in the national interest that the control of the subsidiary companies should remain in this country. Each case must be taken on its merits. The object of the scheme was to do nothing against the non-resident companies at all, but to do something to assist the resident companies which had made a claim that they were relatively handicapped in certain circumstances.

7.30 p.m.

I should like to remind the House, because I think it important, that nothing in this Overseas Trading Corporations scheme in any way puts the non-resident company in a worse position than it was in before the scheme was introduced last year. Indeed, in many circumstances, in various matters of taxation, the non-resident company may be still in a better position than the O.T.C. But the real difficulty in my right hon. Friend's proposal is the practical one that to bring non-resident subsidiaries into the O.T.C. scheme would be almost bound to open the door to wide-scale tax avoidance. That is as I see it at present. The switched income between one non-resident subsidiary and another non-resident subsidiary might well never come within the purview of the tax authorities in this country, who would have much less information about the accounts of a non-resident subsidiary than they would about those of a resident subsidiary.

It would be unwise for me to put ideas into anyone's head by describing the sort of methods of tax avoidance that I would be afraid of, but this is a real difficulty and at this stage we have not yet found any way round it. Although I am afraid that I have not been able to give the new Clause a very encouraging reception, I emphasise that I do not want at this stage permanently to reject the idea. I concede that there is force in part of the case which my right hon. and hon. Friends put forward.

These provisions have been on the Statute Book for less than a year, and in most cases their application has covered a much shorter period than that. What I should like to do, and undertake to do, is to give the matter further consideration during the nine months or so before next year's Finance Bill. I intend to seek the views of representatives of business and industry, who are concerned in these practical matters, on this very technical subject. I have no doubt that that is the surest way of discovering whether there is a solution which secures the objectives which my right hon. Friend has in mind whilst at the same time safeguarding the legitimate interests of the Exchequer.

The way in which one or two hon. Members spoke seemed to imply that in some way we have hit or damaged non-resident subsidiaries. I want to make it clear that we have done nothing of the sort. I must take issue, in as friendly a way as I can, with my hon. Friend the Member for Somerset, North (Mr. Leather), because I do not believe that it is fair to say that in any way whatever a pledge given by my right hon. Friend the Prime Minister in 1956 has been broken. I owe it to my right hon. Friend to make plain the facts.

What my right hon. Friend said on that occasion was that he would either introduce an Overseas Trading Corporations scheme or, if he did not, he would deal with the more limited problem of the frustration of the pioneer industry relief. He made it clear, and I think it was generally accepted at the time, that the former could be regarded as embracing the latter. Whether our existing O.T.C. scheme is exactly to everybody's liking or not is another question but, broadly speaking, last year we followed the lines of the scheme recommended by the Royal Commission.

I do not think that there can be any doubt that the Royal Commission, which had recommended in its first Report that action should be taken to deal with the frustration of pioneer industry reliefs thought that the introduction of an O.T.C. scheme which it recommended in its final Report would make it unnecessary to deal with the more limited problem. In fact, the Overseas Trading Corporation scheme very largely, if not entirely, deals with and covers the problem of the pioneer industry reliefs.

The only case which I think it does not cover is the case of dividends and, as far as one can see, the Royal Commission did not consider that pioneer industry relief, which was relief to the trading concern, should necessarily be carried through distribution to the ultimate owner. Therefore, I am sure that any suggestion that there has been anything in the nature of a breach of faith cannot for a moment be accepted. I hope that my hon. Friend the Member for Somerset, North will not mind my saying it in a somewhat forthright way, because I rather resent his allegations that the Treasury had "ratted", which I think was the term used, on that scheme.

Finally, I should like to say a few words about the other Clause which we are being allowed to discuss at the same time. Here my hon. Friend the Member for Langstone (Mr. Stevens) seeks to modify the definition of an overseas trading corporation so as to eliminate the disqualification of a holding company if it has a resident subsidiary which is not itself an O.T.C. My hon. Friend no doubt would have pointed out that a parent company which might lose its O.T.C. status, possibly by accident, might suffer a loss in the matter of taxation as a result. I ought to explain that the proviso in question was inserted in the legislation deliberately, as a safeguard against a holding company using exempted profits from an O.T.C. subsidiary to finance a concern trading within the United Kingdom.

At this stage, I cannot feel that I can safely discard that safeguard. On the other hand, I admit that I have another safeguard which might be effective by itself. What I propose to do, and I hope that this will be a comfort to my hon. Friend, is to give this point careful consideration again before next year's Bill, in the same way as the earlier point with which I have dealt. I hope that with this undertaking which I have given to consult with industry and think these difficult matters over in the light of a little more experience of the working of these provisions, my right hon. and hon. Friends may be willing to consider withdrawing the Clause.

Sir T. Low

In view of what my right hon. Friend has said, and in the hope that he and the serried ranks opposite will also believe that our purpose is not to benefit foreign subsidiaries but people here, I beg to ask leave to withdraw the motion.

Motion and Clause, by leave, withdrawn.