INCOME TAX (SCHEDULE C EXEMPTION) (Hansard, 26 March 1958)

§ The Financial Secretary to the Treasury (Mr. J. E. S. Simon)
I beg to move, That the Draft Central Banks (Income Tax Schedule C Exemption) Order, 1958, a copy of which was laid before this House on 17th February, be approved. This Motion seeks approval for a draft Order under Section 22 of the Finance Act, 1957. The House will remember that that Section was concerned with overseas central banks which were defined as those overseas banks entrusted with the custody of the principal foreign exchange reserves of the country concerned. That Section enabled such a bank or its issue department to be exempted by Order in Council from Income Tax on its income from British Government securities. This is the first of the, Orders in Council which have been made under that Section.
The provisions were designed to overcome Income Tax anomalies which had arisen in recent years in connection with overseas currency boards and central banks. The House will be aware that an overseas Government or Government agency is entitled, on the basis of its sovereign immunity, to exemption from United Kingdom Income Tax on any interest which arises to it in this country. A currency board is, in general, a Government agency and, therefore, is entitled to such an exemption, and some of the Commonwealth central banks are also Government agencies and they, too, are, therefore, entitled to the exemption.
However, there is a third class of central bank which, although it may be wholly owned by the Government overseas, is technically a separate legal person and which, under the law as it existed before 1957, could not be given the exemption to tax liabilities which would be given to the overseas Government itself. It is to that class of central bank that Section 22 and the draft Order which is now before the House are directed. It was felt—and I think that it received general approbation in the House at the time—that it would be unreasonable to deny the exemption to such a bank merely because of the technical difference of status. It was particularly difficult to refuse an exemption where a central bank, 542 as so often happened, took over from a currency board which had previously enjoyed the exemption.
The progress from currency board to central bank is a logical step in the financial arrangements of a Government of a developing territory in the Commonwealth or elsewhere, and it was generally agreed that it was in the interests of the United Kingdom that the main external assets of the Commonwealth and other central banks in the sterling area should be held in sterling in London. When the Government of the territory in question owns all the capital of the central bank, the change from ownership by currency board to ownership by a central bank is, as I have said, a purely technical change. Such a Government would, with difficulty, be persuaded that the change should have to be so detrimental in its effect on its tax position. Naturally, if, after such a change, United Kingdom tax were imposed on the bank's income from British Government securities, there would be a very great temptation for the bank to transfer its external reserves elsewhere. That is why the House passed the original Section and why I move this Order.
The central banks specified in the draft Order are the National Bank of Libya, the Bank of Rhodesia and Nyasaland, the Union Bank of Burma, the Central Bank of Iraq and the Reserve Bank of India. All these banks are wholly owned by the Governments of the countries concerned. If they were agencies of the Governments instead of being separate legal entities they would be entitled to exemption from tax on the score of sovereign immunity.
In those circumstances, I hope that the House feels that this draft Order is reasonable and proper.

§ Mr. Roy Jenkins (Birmingham, Stechford)
We did not oppose Section 22 of the Finance Bill last year, and we do not propose to oppose this Order, but I want to raise one or two points about it. First, as the Financial Secretary says, there are five sterling area banks listed in the Order. I understand that three other central banks—the Commonwealth Bank of Australia, the Reserve Bank of New Zealand and the Reserve Bank of Ceylon—already enjoy similar exemptions. I do not know what is the position about 543 other central banks in the sterling area. Why are they not listed in the Order? Do they already enjoy exemption? If not, what is proposed to be done about them in the future?
The Financial Secretary stressed that to qualify for inclusion in the Order and to obtain exemption from United Kingdom Income Tax in this way, a bank must be wholly owned by the Government of the territory concerned and, therefore, to all intents and purposes, must be the same as if it were a currency board, a part of the Government itself. Can he tell us exactly what is the position about the National Bank of Libya?
I understand that although, in practice, it is wholly owned by the Government, in theory this bank could issue shares to private shareholders. What if it were to do this? Would it lose the protection of the Order as a result? I also understand that the National Bank of Libya and, possibly, some of the other banks engage in commercial banking to an extent certainly very much greater than does the Bank of England. I imagine that this does not affect the position of the bank, but if the hon. and learned Member has anything to say about that we should be glad to hear it.
I should like to know, in particular, what is the position about the National Bank of Libya if it takes action, as it can, to issue some of its shares to private shareholders. The Financial Secretary stressed, I think wisely, that it is the Government's intention to extend this benefit only to such territories as are wise enough to have nationalised central banks. I think he will agree that that is the precise meaning of the Order, although it is understandable that he did not choose to use those precise words in commending it to the House. What would be the position if the Bank of Libya or any other bank were to be so unwise as to disqualify itself from this point of view? We can all agree with the general purpose of the Order, which is not to discourage the central banks of these territories in the sterling area from holding their reserves in London and holding them in the form of British Government securities.
Fortunately, a more powerful deterrent than would exist if we were to charge them Income Tax lies in the present 544 extremely depressed price of these currencies. That is not strictly within the terms of the Order, and I do not imagine that the Financial Secretary to the Treasury will deal with it, at any rate at any great length this evening.
Under Section 22 of the Finance Act, 1957, power undoubtedly exists to give this exemption not merely to Commonwealth and sterling area central banks but to any central bank anywhere in the world. Is there any intention to extend this provision outside the range of the sterling area and the Commonwealth? There is certainly nothing in Section 22 to prevent it, and presumably the Government would not have made it possible under Section 22 unless they thought that there was some value in having the ability to deal with any banks anywhere in the world if they so desired.
If the Government will explain their view on this, it will help us in considering the Order, which we regard as a desirable implementation of a desirable principle in Section 22 of last year's Finance Act.

§ Mr. Simon
Perhaps I should reply very shortly to the kind reception which the hon. Member for Stechford (Mr. Roy Jenkins) has given to the draft Order. As he quite rightly pointed out, the Commonwealth Bank of Australia, the Reserve Bank of New Zealand and the Central Bank of Ceylon are not included in the draft Order. The reason is that they already enjoy exemption on the ground of sovereign immunity. In other words, they are agents of Government. The other central banks of the Commonwealth which are not included in the draft Order are the South African Reserve Bank, on the ground that it has private shareholding, and the National Bank of Pakistan, where, I think I am right in saying, the banking department—not the issue department—has private shareholding.
The National Bank of Libya, about which the hon. Member asked a question, can in theory, as he pointed out, issue shares to private shareholders. But that bank has given an undertaking that it will inform us if it is its intention to do this, so that it would then be possible to remove it from the operation of the Order made under Section 22. As the hon. 545 Member pointed out, the fact that these banks undertake commercial banking on a rather more extensive scale than the Bank of England does not affect the position under Section 22.

§ Mr. Jenkins
If the National Bank of Libya were to give notice that it was its intention to issue such shares, am I to understand that the Government's intention would be to remove the Bank from the operation of the Order?

§ Mr. Simon
I think I am right in saying that that would be the present intention, but it would be wrong to give a definite undertaking on the basis of a hypothesis.
The hon. Member asked me, finally, whether it is the Government's intention to extend the provisions of Section 22 by draft Order to institutions outside the sterling area. It is quite true that the terms of Section 22 are not restricted to the sterling area. Indeed, I am not sure that the sterling area has a legal definition—if not, that probably would be the reason. But it is not the Government's present intention to extend the provisions of Section 22 to institutions outside the sterling area. In any case, of course, the House of Commons retains control over the Government's actions, since they must operate by means of a draft Order of the kind which I have laid before the House today.