§ Brought up, and read the First time.1417
§ Mr. Geoffrey Stevens (Portsmouth, Langstone)
I beg to move, That the Clause be read a Second time.
The effect of the new Clause is that a bank may be an overseas trade corporation. For many years, many of us on both sides of the Committee have realised that organisations trading in overseas territories have had the benefit of certain taxation advantages which have not been available to companies registered in this country but, none the less, are operating in these overseas territories. In the Finance Act, 1957, the then Chancellor of the Exchequer introduced an entirely new conception into our tax structure. He made provision in Section 24 for the establishment of overseas trade corporation status. That provision has been a success. It has helped British business overseas. It has been nothing like as expensive as the Treasury forecast before the measures were introduced.
The measures introduced in the Finance Act, 1957, had two defects, one of which was a minor one and the other a relatively minor one. First, overseas trade corporation status in the Finance Act, 1957, covered only overseas branches and not overseas subsidiary companies. That has been a very considerable drawback. Indeed, a number of my hon. Friends and myself have tabled a new Clause, which in the wisdom of the Chair has not been selected, the effect of which would have been to extend overseas trade corporation status to overseas subsidiary companies as well as overseas branches. I believe that a good deal of business is being lost to United Kingdom overseas companies because tax advantages accrue to foreign companies which enable them to trade at lower prices than United Kingdom companies, which have to pay the higher tax.
I am sorry that my right hon. and learned Friend has not been able in this Finance Bill to extend overseas trade corporation status to United Kingdom companies with subsidiaries overseas. Such an extension might have a noticeable beneficial effect upon our balance of payments position. That was the first and major defect of the 1957 provisions.
The second was a relatively minor one, but it was none the less important. By Section 24 (3, a, i) of the 1957 Act British banks trading overseas were 1418 specifically prevented from having overseas trade corporation status. We have suffered a good deal from that. I raised the point in Committee in 1957 in the debate on the Question that Clause 27 stand part of the Bill. The then Financial Secretary to the Treasury, who is now the Minister of Health, answered my point. He said:The main problem, as he"—that is me—recognised, is that it is extremely difficult to separate that part of the profits of a banking business which are made in this country by the central operations from those made overseas. That is at the heart of the difficulty about placing bank-businesses which qualify under Part IV".—[OFFICIAL REPORT, 27th June, 1957; Vol. 572. c. 462.]That may well have been true then. I am by no means sure that it is true today.
British banks have discussed this matter with the Board of Inland Revenue. They have put before the Board a formula for dividing their overseas profits from their home profits. It is a formula which is reasonable and capable of being worked. It is rather too complicated to outline at length in this Committee at half-past three in the morning, but the suggestion is that banks would not pay United Kingdom Income Tax on the proportion of their total profits represented by the undistributed net profits of the overseas branches. That would put them on exactly the same basis as overseas trade corporations whose business is not banking but simply trading of different kinds.
There are a number of reasons which should commend to my hon. Friend the Financial Secretary and to the Government the suggestion to bring the United Kingdom banks within the ambit of the overseas trade corporation provisions. First, it is fairly obvious that the United Kingdom banks operating overseas have to compete with indigenous banks which have the full benefit of any tax concessions which may apply in the area concerned. Arising out of that, the pressure of competition results in the lowering of rates chargeable for the services rendered by different banks. That means that the local banks have considerable advantages.
1419 Again, if United Kingdom banks are to hold the position that they have held for many years, let alone extend it, they must provide services in ever-increasing areas which hitherto have had no banking facilities. That means further capital equipment of one sort or another—premises, furniture, fittings and all that kind of thing. In the case of United Kingdom banks, all that expenditure must be financed out of profits subject to tax. In a great many cases, there are tax rebates which enable banks controlled by overseas companies to provide for those additions out of their gross income. Finally, the tax burden which the banks operating overseas are called upon to bear seriously restricts the ability of the banks to meet the increased strain on capital resources out of trading profits.
The new Clause does not ask for any special privileges for banks. All that it seeks to do is to put banks on exactly the same footing as trading companies, as provided by the 1957 Act, to enable the United Kingdom banks to have overseas trade corporation status, as United Kingdom trading companies can have, to put United Kingdom banks trading overseas on the same footing as the foreign banks with which they have to compete.
In the newspapers in the last weeks, in particularly in the last days, considerable anxiety has been expressed about the fact that invisible exports are no longer contributing to the country's economy, as they have done in the past. There is much anxiety about that. It is also the fact that banking services are an exceedingly important part of our invisible exports. Anything which the Government can do to help the invisible exports of our banks, they should be willing to do. Banking services of themselves are an important part, but a great deal of other kinds of business, including invisible exports, insurance, trading in goods and all kinds of things, flows from friendly conversations with the bank managers. Acceptance of the new Clause would certainly stimulate the overseas activities of the British banks. It would do something to stem the adverse trend of our invisible exports, and I very much hope that my right hon. and learned Friend the Chancellor may find himself able to accept it.
§ Mr. Mitchison
Before the Financial Secretary to the Treasury replies, I want to ask one or two questions. When the matter came up in 1957, the cost of overseas trade corporations as a whole was reckoned to be £25 million in the first year and £35 million in the first full year. It was expected that in the long run, this loss to the Exchequer would be recouped by an increasing flow of dividends from overseas trade corporations. It was because the future of O.T.C.s, and particularly their financial future, was rather obscure that for the moment, at any rate, the question of including banks was postponed. That appears in the reply of the present Minister of Health in Committee to the hon. Member for Portsmouth, Langstone (Mr. Stevens).
I should like to know what, in fact, has happened. So far as I can see, the opposite has happened and instead of an increasing flow of dividends, if I have the figures right, there has been a decreasing flow. How far that is due to the changes in taxation made by the introduction of O.T.C.s I do not know, but there has been considerable speculation as to whether the result may not shave been the opposite of what was no doubt intended, and as to whether the existence of O.T.C.s has not resulted in the retention and perhaps reinvestment abroad of considerable sums of money either held there by independent O.T.C.s, if I may use the term—that is to say, the first category in the 1957 Act—or again held by subsidiaries of British companies and transferred from one subsidiary to another.
§ Mr. Stevens
I do not at all dissent from what the hon. and learned Gentleman has said so far, but he did quote the original estimate of the cost of the O.T.C. provisions of the 1957 Act. He mentioned £35 million. In fact, I think the estimate originally given was higher than that; I think it was £40 million. Can the hon. and learned Gentleman give the Committee the figure of the actual cost as subsequent experience has shown?
§ Mr. Mitchison
No, that is the figure that I am trying to ascertain. The two figures that I gave were taken from the debates of the time, and I have checked them within the last few minutes. I can find the reference if the hon. Gentleman 1421 wants me to, but I am sure he will accept it from me that those are the ones in HANSARD.
I may have got the matter wrong, but what apparently has happened is this. If one looks at Table 32 at the end of the Economic Survey, headed "United Kingdom balance of payments," and turns to the item "Interest, profits and dividends," one would expect to see an increasing credit surplus. But that is not the position. If one takes, for instance, the year 1958, the excess of credits over debits at that time was about £250 million. The last available figures seem to show a rather smaller figure, about £200 million.
I do not know what the explanation of this may be. It may have no connection whatever with overseas trade corporations, but if the Government of the time were able to give an estimate of the cost to the Exchequer, and if, moreover, the Government recognised, as they did, that this was merely a trial experiment and would have to be watched to see what changes should be made, including, for instance, the kind of change that the hon. Gentleman has been indicating today, I hope that whoever replies for the Government will be in a position to tell us what has, in fact, happened by way of development and whether the anticipations of the time have been fulfilled.
I repeat, the reason for my asking this question is that there has been a good deal of suggestion in the Press—it may be accurate, it may not; I do not know—that the actual effect has been the very opposite of what was intended and that too much money has been kept in these O.T.C.s as a result of the tax advantages which were given to them by the 1957 Act to the detriment of our balance of payments.
As regards the banks themselves, the reason given at the time lay, I think, in the nature of the O.T.C. itself. It was essential for the purpose of the O.T.C. as defined in the Finance Act, 1957, to be able to separate the central control and direction from the day-to-day operation of the enterprise. For that reason, in Section 24 of the Finance Act there was a disqualification if the activities of the company in the United Kingdom amounted, in fact, to a trade carried on in this country. That, of 1422 course, if the central direction was in this country and if it was also inseperable from the day-to-day management of the bank, would obviously disqualify many banks on that account alone. But, in addition to that and for similar reasons, I understand that there is the express disqualification of banks to which this Clause refers and which it is sought to omit.
I hope, therefore, that in answering the question—whatever the answer may be as regards the banks, and speaking for myself I do not see any particular reason for a change in the matter—the Financial Secretary will tell us what has happened about the financial effect, the effect on the balance of payments, of the change that was made in 1957.
§ Sir E. Boyle
The hon. and learned Member for Kettering (Mr. Mitchison) has asked, quite reasonably, one or two wider questions about the O.T.C. scheme and the working of it on this Clause. I will only say two things. The first is that the original estimate of the cost of the O.T.C. scheme was quoted as £35 million in a full year. I cannot give the hon. and learned Gentleman the exact figure, but I can tell him that the cost has proved to be somewhat less than the £35 million.
Without notice, I would rather not generalise this evening about the effect of the O.T.C. scheme on our balance of payments. It is difficult to speak precisely about this, but I will go with the hon. and learned Gentleman to this extent, that when we are looking at the United Kingdom balance of payments it is extremely important that we should consider the invisible account as well as the visible account. My right hon. and learned Friend would not quarrel at all with the view that we want to look very carefully at the figures of the repatriation of profits and interest.
I would rather not comment tonight on the effect of the O.T.C. scheme because, quite frankly, I should, without notice, be uneasy in my generalising about it. The hon. and learned Gentleman has certainly drawn attention to an extremely important aspect of our balance of payments, to which I know that my right hon. and learned Friend would say that we should pay close attention. Looking at the—
§ Mr. Mitchison
I am very much obliged to the hon. Gentleman. If a Question is put down about this perhaps the Government would be in a position to give a rather more definite answer. I am not uninterested, of course, but I am not particularly interested in the fact that the net result at the time was rather less than anticipated. I should like to know how large a part that played in the change I indicated and which appears in Table 22.
§ Sir E. Boyle
I am sure that if the hon. and learned Gentleman puts down a Question on the subject my right hon. and learned Friend will do his best to give an answer.
On the Clause before us I would only make two comments. The first is that my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) would, I think, agree that the Clause as we have it tonight might by itself prove to have little or no practical effect, because even if banks were not specifically disqualified it is unlikely that it would be possible for them to satisfy the statutory tests laid down for O.T.C.s. A bank with its head office in London would deal with current balances by investing them in London as a normal incident of banking business. This would make it impossible for such a bank to satisfy the requirements of the O.T.C. legislation.
I do not want to take refuge tonight simply on a technical point. I know that representations have been made that British banks carrying on business abroad should be given some relief of tax on overseas profits by analogy with the relief given by the O.T.C. scheme. I can tell my hon. Friend the Member for Langstone that this suggestion has been carefully considered by my right hon. and learned Friend. None the less. I think that there are three arguments the other way which the Committee should consider and which, I must tell my hon. Friend, my right hon. and learned Friend the Chancellor has considered decisive.
In the first place I do not think that there is any getting away from the fact that inclusion of banks would be contrary to the whole idea of the O.T.C. scheme as conceived by the Royal Commission and as carried into effect in the 1957 1424 legislation, namely, that the relief should be confined to those concerns whose trading operations are carried on wholly overseas, and, secondly, that banks are, of course, by no means the only concerns engaged in overseas business which find themselves excluded from the O.T.C. scheme.
The ordinary mixed trading concern which carried on trading activities in this country and overseas might for quite a variety of reasons find it inconvenient or impossible to hive off its overseas activities so as to benefit from the O.T.C. scheme. Alterations in the law to allow such mixed cases as banks to benefit from the scheme which do not allow similar arrangements to ordinary mixed trading concerns would, I think, inevitably provoke a certain amount of criticism.
Thirdly, we should not forget that determination of the amount of relief to be given to banks is a difficult matter involving a good many arbitrary assumptions, and it would be necessary in every case to agree with the bank a split of its total profits to determine the proportion which was to be regarded as overseas activities and, therefore, entitled to relief.
Therefore, just to make an amendment of the O.T.C. scheme to bring in a small increase of provision for banks would be a difficult and, I believe, unsatisfactory operation. Obviously, it is four years since the 1957 Bill and the introduction of the scheme, and in the light of a look at the whole of the O.T.C. scheme my right hon. and learned Friend will consider the position of banks and some of the wider questions which my hon. Friend raised in his speech, but I must also say, to come back to what I said at the beginning, that I think that we have to look at the whole of this O.T.C. scheme in the context of our balance of payments position as a whole and of the importance of the invisible account.
I really cannot, in present conditions, give my hon. Friend very much encouragement to think that it would be easy at this time to widen the scheme. I hope that, with those words of frank end fairly brief explanation, my hon. Friend will feel, at any rate, that he has aired what is certainly an important question and that, perhaps, he may see his way not to press the new Clause.
§ Mr. Stevens
My hon. Friend the Financial Secretary, in 1957, finished his reply to me by saying that this was the first stage and that we should have to see what experience teaches us as we go in its application. My hon. Friend has just admitted that we have had four years' experience of the O.T.C. status, and I should have thought that four years might have taught us quite a lot. One thing that I should have thought we had learned, not in four years but in a hundred years, is that we are the financial centre of the sterling area, if not of the world, and that the banking institutions of this contry, in particular of London, can play a very large part indeed in the resuscitation of British industry and British exports and of the invisible trade, as I said a moment ago.
My hon. Friend held out a crumb of hope that my right hon. and learned Friend will consider the position of the banks in the whole context of O.T.C. status. I can only hope that when my right hon. and learned Friend gives his consideration to it he will place more emphasis on the importance of British banks trading overseas than did my hon. Friend a moment ago. I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.