CENTRAL BANKS (INCOME TAX) (Hansard, 1 April 1965)

§ The Financial Secretary to the Treasury (Mr. Niall MacDermot)
I beg to move, That the Central Banks (Income Tax Schedule C Exemption) Order, 1965, a draft of which was laid before this House on 16th March, be approved. This Motion seeks approval for the draft Order under Section 22 of the Finance Act, 1957. That Section enables an overseas central bank or the issue department of such a bank to be exempted in certain circumstances by Order in Council from Income Tax on its income from British Government securities. This was designed primarily to meet the situation where the assets of a currency board are taken over by a new central bank. This is a situation which arises frequently when newly-developing countries attain their independence within the Commonwealth.
A currency board is a Government agency and, as such, it enjoys exemption from tax owing to its sovereign immunity. A central bank, on the other hand, may be a separate legal entity from the Government on whose behalf it acts and, therefore, requires specific immunity. This is what Section 22 enables us to do by Order. It is obviously in our interest to help these countries in this way, because it will be an added inducement to them to remain within the sterling area and to maintain their reserves in London in sterling.
The draft Order before the House proposes to give this exemption to the five banks named in the Schedule. They all satisfy the requirements of the Section in that they are entrusted with the custody of the principal foreign exchange reserves of the territory concerned and they are all wholly owned by the responsible Government. Two of them—the Central Bank of Jordan and the Bank of Sierra Leone—have come into existence only recently and they have each taken over the assets of a currency board. The other three—the Reserve Bank of Malawi, the Reserve Bank of Rhodesia and the Bank of Zambia—have all been established as successors to the Bank of Rhodesia and Nyasaland following the dis- 1996 solution of the Central African Federation. That latter bank itself was the successor of a currency board and it was allowed the tax exemption under Section 22 by an Order of 1958.
I think that the House will agree that it is obviously desirable that the same exemption should apply to the three successor banks.

§ Mr. William Clark (Nottingham, South)
I should like to ask the Financial Secretary to the Treasury one question. Has any assessment been made of any possible loss of tax—I do not mean avoidance of tax—in this connection? If a foreign resident owns an exempted security, of course, we do not collect tax in this country. If the reserve banks are stepping into the shoes of the federal reserve banks that they have taken over or superseded, if there is a swapping into exempted securities, no tax arises at all. But it could be possible that these banks would swap their securities into non-exempt securities. Have the Treasury made any assessment of the likelihood of any loss to the Exchequer in this sense?
I think that the Financial Secretary has the point. If a bank swaps from exempt securities to non-exempt securities and those non-exempt securities are taken from a United Kingdom resident, there could be a loss of tax to the Revenue.

§ Mr. MacDermot
With permission, Mr. Deputy-Speaker, may I say that I think that the immediate answer is that the cost will be nil in the sense that these new banks are taking over from currency boards or predecessor banks who enjoy already the same exemption from tax. One can envisage, I suppose, a possible loss of revenue in the future in the event of these banks acquiring securities from vendors who were liable to tax on those securities, and to that extent when they are acquired by an exempt bank we would lose the revenue, but I think that this would be more than counterbalanced by the obvious advantage to us if these banks were themselves to invest funds in this country in this way rather than to invest them elsewhere.