§
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
the dividend, grant or loan shall constitute trading income of the recipient'".—[Mr. Stevens.]
§ Brought up, and read the First time.
§ Mr. Geoffrey Stevens (Portsmouth, Langstone)I beg to move, That the Clause be read a Second time.
At this stage in our proceedings, I do not propose to weary the Committee with a recapitulation of the inauguration of the concept of an Overseas Trade Corporation. It is, however, worth while recalling that three years ago, when my right hon. Friend the Prime Minister was Chancellor of the Exchequer, in a debate on this subject he gave a clear indication that the Government looked favourably towards this new kind of concept in our taxation practice of a person resident in this country but not 96 liable in respect of a substantial part or, perhaps, the whole of his income to United Kingdom taxation.
In the following year, 1957, my right hon. Friend the Member for Monmouth (Mr. P. Thorneycroft) went a considerable way towards implementing the undertaking given by his predecessor. That undertaking was, however, restricted severely. It was restricted to companies registered in this country and trading overseas by means of branches, but not trading overseas by means of subsidiary companies in the overseas country.
There were three reasons why that limitation was imposed by my right hon. Friend. First, it was largely a new concept and the Government and the Inland Revenue wished to have practical experience of its working—something like a pilot scheme, for example—before considering its wide extension. Secondly there was the question of cost, on which I shall say a word presently. Thirdly, there was the feeling that if the Overseas Trade Corporation concept was extended to subsidiary companies registered overseas, unfair or undue advantage might be taken of the procedure by United Kingdom persons and companies who wished to avoid their proper share of taxation.
That conception has not taken matters far enough. The experience that we have now gained with overseas branches has been sufficient to enable us to consider the implementation of my right hon. Friend's undertaking in 1956. I know it is sometimes said that British companies can obtain Overseas Trade Corporation advantages if they trade through subsidiaries overseas provided the affairs of those subsidiary companies overseas are conducted by local boards of directors. If they do that, it is true that the profits of those overseas subsidiaries pay local taxation and not United Kingdom taxation, but only to the extent that the profits earned overseas are not remitted to this country. As soon as they are remitted here, they become liable to United Kingdom taxation at the full standard rate.
I will explain why that is a serious drawback. One of the principal reasons why the Government felt that the O.T.C. concept was a wise one is that it frequently happens that a British company 97 trading overseas in one country makes a profitable "go" of it in that country and builds up reasonable reserves. It then wants to transfer the profits to another branch of its organisation in another country. By means of the existing O.T.C. concept, that is possible. There can be a transfer from a branch in country "A", which is already on a profitable basis, to a branch in country "B", which is developing.
If, on the other hand, because of local feeling—we are all aware of the development of nationalist feeling throughout the world in recent years—the business of the branch of the British company overseas has had to be converted into a limited company registered overseas with its day-to-day business also controlled overseas, it may well be that the only way in which it can make a remittance to another branch of the business in another country is by remitting a dividend to this country. At once it becomes liable to tax at the full standard rate, and switching from one country to the other becomes an uneconomic proposition.
We on this side have no wish to place United Kingdom industrialists overseas in a particularly beneficial position vis-à-vis anybody else. All we have sought to do is to put them on the same basis as industrialists of other nations trading in those other countries so that they do not have a tax handicap. Organisations which are run by different countries can switch from one country to another without incurring a tax penalty. As matters stand at present, however, that cannot be done if the United Kingdom company is operated by a subsidiary company overseas.
I have referred to cost. I remember well that when my right hon. Friend the Member for Monmouth gave us the O.T.C. concept in relation to overseas branches, the estimate of cost was put at a figure which many of my hon. Friends and I considered to be exceedingly high. I wonder whether we have now had sufficient experience for my right hon. Friend the Paymaster-General, who is to reply to this discussion, to give an idea of the actual cost of the O.T.C. conception for overseas branches. Secondly, can he give a reasonable estimate of the likely cost of 98 extending the proposal to overseas subsidiary companies?
I have referred to the possibility of unscrupulous people using the device of overseas companies to get an unfair tax advantage. I do not think there is a serious risk of that. Even if there were, I would have thought that two Sections of the Income Tax Act, 1952, should give the Inland Revenue sufficient safeguards. It is true that Section 468, which makes specific reference to
transactions which result or may result, directly or indirectly, in the avoidance of liability to income tax,is limited to the transfer of a trade or business or the transfer of part of a trade or business from a United Kingdom resident to someone overseas. There is, however, also Section 469, which covers all transactions in which the buyer is a person over whom the seller has control, the seller is a person over whom the buyer has control, or both buyer and seller are closely related by the operations of a third person. Those two Sections of the Income Tax Act alone, let alone the other safeguards provided in the Act, should be sufficient to safeguard against any improper conduct.I suggest strongly that this extension of the O.T.C. concept to give the full benefit must come some time, and I believe that the time has come now. Our overseas trade is more important than ever before. Admittedly, it is doing extremely well, but it must do better still. Now is the time to remove the tax handicap on British industry so that it can really go full steam ahead. I commend the new Clause to the Committee.
§ Mr. Peter Remnant (Wokingham)I rise to support briefly the remarks of my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens). I must declare an interest in that I am endeavouring to grow tea in East Africa and I wish to refer to that angle of this matter, and to the particular instance of an O.T.C. company in the United Kingdom with a Tanganyika-registered company, which, of course, cannot be an O.T.C., but of which the United Kingdom company is a 100 per cent. owner.
That company, in the early stages of its development, does not find it as easy 99 as it was two or three years ago to borrow money there. That means sending remittances from the United Kingdom, and at the present moment any remittance from the United Kingdom company, which is an O.T.C., to the Tanganyika-registered company is held by the Inland Revenue in this country to be, as in fact it is, a remittance to a non-O.T.C. and as a consequence is grossed up for tax purposes. That being so, development in East Africa becomes an extremely expensive business under the regulations as they stand.
Owing to various political developments, the individual settler is trying to sell his wholly developed or partly developed, or perhaps not developed at all, farm or small garden to the bigger institutions. They are all sellers today, so prosperity in the future in that part of the world needs a steadier. I have been trying to obtain the interest of Government channels in it. They have been good enough to say that if I would put up a proposal to them they would give it favourable consideration. Here is a very simple method of providing about 30 per cent. more cash for development purposes than one is able to do now.
I understood the objection of my right hon. Friend the Member for Monmouth (Mr. P. Thorneycroft) two years ago when he was apprehensive about the switching of exempted income. My hon. Friend the Member for Langstone, in his proposal, also provides that the company concerned comes within the classification of a subsidiary, but I personally, perhaps because the company I am concerned with owns 100 per cent. of the equity, would be prepared to see him raise the proportion a little above the majority holding and to something rather higher if the income can still be treated as exempted income.
The point that I want to make in support of my hon. Friend's proposal is that the regulation, in the law as it stands, is hindering development overseas where those companies have followed what has become the current practice of being registered in the country in which they operate. I hope that my right hon. Friend the Paymaster-General will appreciate that, in our view, the time is now ripe for some amendment and alteration in the provisions.
§ 6.45 p.m.
§ The Paymaster-General (Mr. Reginald Maudling)This is a very complicated branch of our taxation law, but my hon. Friends the Members for Portsmouth, Langstone (Mr. Stevens) and Wokingham (Mr. Remnant) have put the point to the Committee with absolute clarity. It is, of course, a point which has been discussed before in this Committee on more than one occasion. It was discussed on 15th July last year, when my right hon. Friend the Chancellor, as the Committee will remember, made a statement on the subject. At that time he did not feel that he could accept this proposal for several reasons. The first was that, as a matter of principle, the idea of an Overseas Trade Corporation was to put a resident company into a better position and thereby encourage people to remain as residents.
Secondly, my right hon. Friend pointed out that nothing in the O.T.C. legislation had put a non-resident company in a worse position than it was before. It can be argued that it is relatively in a worse position because an overseas branch is in a better position. There is a considerable point in what my hon. Friends have said about the importance of many overseas businesses being conducted by subsidiaries resident overseas rather than by branches. My right hon. Friend certainly shares their view both on this matter and on the importance of doing all that we can to remove hindrances in the way of expanding British businesses overseas.
As a result of that, my right hon. Friend has been giving some study to these problems in the course of the year and has had the benefit of the advice of a number of interested people—deputations with special knowledge of this matter and companies and business associations with special knowledge and experience—and I am sorry to say that he still feels unable at this stage to accept the proposal that is advanced.
The reasons are really those which my right hon. Friend gave last year. As I said, he pointed out that in principle there was a strong case on the side of my hon. Friends, but there was also a case in principle on the other side. The difficulty is a practical one. It is the difficulty of how to prevent the avoidance of taxation arising from the result 101 of the extension proposed by this Clause. My right hon. Friend explained last year, as the Committee will remember, that it would be unwise for him to go into details of methods of tax avoidance. After his having given long and further consideration to this problem, we are still advised that there are substantial dangers of avoidance involved. It would be possible to go a considerable way towards mitigating these dangers, but that would involve very complicated and long provisions difficult to insert in the Bill at this stage, and it is not certain that even then the provisions would be enough to prevent the risk of avoidance.
That is the main consideration that my right hon. Friend has in mind. All the consideration and thought given to this matter in the last twelve months have not, I am afraid, convinced him that the case for this Clause is a conclusive one. There is also the matter of cost. I must admit that I cannot give a very definite figure. It is not possible yet to give the figure for which my hon. Friend the Member for Langstone asked, because experience is not yet adequate to give a definite figure. In the case of this proposal, it would be even more difficult to try to quantify the loss of revenue that would be involved. I can go no further than to say that several million pounds would be involved. It would be unwise to say anything more definite than that.
So there are still these objections which stand in the way of accepting the principle in this Clause—first, the danger of avoidance which it seems difficult, if not impossible, to overcome; and second, the fact that some substantial cost would be involved. With the principle of enabling British businesses to expand overseas and the fact that in many cases it is desirable to operate by non-resident subsidiaries there is no disagreement and no argument. My right hon. Friend feels with considerable regret that, in spite of all the study given to the problem, he cannot yet feel that it would be right to accept this proposal.
§ Mr. MitchisonI am glad that the right hon. Gentleman has given the reply which he did. It has always seemed to me that there must be almost insuperable objections to this proposal. That was the view of the right hon. Gentleman 102 the Member for Monmouth (Mr. P. Thorneycroft) when he was Chancellor and introduced these provisions, and when, in relation to these and similar proposals, he pointed out the extreme difficulty of ensuring that a non-resident subsidiary did not, for example, carry on a trade in the United Kingdom or do any of the other things which would disqualify it from being an Overseas Trade Corporation. That is a practical difficulty, and if, in fact, supervision is impracticable, I am sure that the hon. Member for Portsmouth, Langstone (Mr. Stevens) would agree that that is a very grave objection to a Clause of the kind proposed.
These objections, repeated in somewhat mysterious form today by the right hon. Gentleman, were raised by the Chancellor of the Exchequer, who on 15th July, 1958, said:
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 it is a real difficulty and at this stage we have not yet found any way round it."—[OFFICIAL REPORT, 15th July, 1958; Vol. 591, c. 1098.]I confess to the Paymaster-General that I listened to his speech with the vulgar hope that the secrets would be disclosed, and that some ideas would be put into the heads of people in such a way as would prevent them at the same time from using those methods, but we remain still a trifle mystified as to what they are.We are glad, however, to see that the Government in this respect are still of the opinion that there is no real way round the unnamed, undescribed and mysterious methods of tax avoidance which the Chancellor had in mind a year ago.
§ Mr. StevensI am sure we all appreciate the difficulties in the way of framing legislation so as to ensure that there shall be no improper use of the wider concept, but I still think that the wider concept must come in due course, and it is up to me and to those who think with me to try to assist the Chancellor to find ways of preventing tax avoidance so that, perhaps, I shall have better luck next year. It is in that hope that I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.