HC Deb 03 June 1965 vol 713 cc2065-83
Mr. Ian Lloyd (Portsmouth, Langstone)

I beg to move Amendment No. 404, in page 55, line 29, after "agency", to inert: or, being resident in a territory with the government of which no agreement under section 347 of the Income Tax Act 1952 subsists, it carries on a trade which includes operating ships between ports in the United Kingdom or between ports in the United Kingdom and other territories".

The Temporary Chairman (Mr. Thomas Steele)

With this Amendment it would be convenient to take Amendment No. 405, in page 55, line 29, leave out "does so" and insert: carries on such a trade". Amendment No. 406, in line 34, leave out from "on" to "shall" and insert: there such a trade as is mentioned in subsection (1) above". and Amendment No. 407, in line 36, after "agency", insert: or arising whether directly or indirectly from operating ships between ports of the United Kingdom or between ports of United Kingdom and other territories".

Mr. Lloyd

Yes, Mr. Steele. Those three Amendments are purely consequential, and stand or fall with this one.

I find myself in a distinctly anomalous position in moving the Amendment. One of the most notable features of the debate so far has been the preoccupation of the Committee with the effect of these new measures on two types of industry, first, manufacturing industry within the United Kingdom—as might well be expected—and, secondly, that sector of industry with overseas income arising either from investment abroad or manufacturing abroad.

I am sure that the Committee will agree that this is a legitimate pre-occupation, for the cutting edge of the Chancellor's proposals has been well and truly oiled on the hone of Socialist philosophy. This is a very different thing from Occam's razor. Occam's razor is an abstruse and philosophical uncertainty, but Callaghan's razor is a concrete and damaging reality. This reality has given an altogether new meaning, I think, to the term "a close shave". If hon. Members find very shortly that when presented with this razor the national chin is withdrawn with some alacrity from the trembling hand of the Chancellor, I think that this should cause no surprise.

Apart from the case—there is only one—of methane tankers, which was mention by my right hon. Friend the Member for Altrincham and Sale (Mr. Barber), there has been—this is surprising—no mention whatever in the Committee of the shipping industry. Shipping, of course, has no choice of domicile, but without it, not only would there be no shipping contribution to the balance of payments, I think that it would be very difficult for other industries to make their contribution to the balance of payments. The industry has no choice of domicile except only in the most marginal sense of new companies. The investment is made locally, but it proceeds inexorably overseas and it returns in due course with a comfortable profit.

I cannot, therefore, allow the occasion to pass without emphasising that this great and vital industry, whose circumstances are well known to right hon. and hon. Gentlemen opposite, awaits with considerable interest the Chancellor's public reaction to the proposals which have been made to him both privately and publicly. I am afraid he is not here this evening.

The anomaly arises in that this Amendment seeks to serve fundamentally not shipping but, surprisingly, the Government. At present, the Government have their hands tied in the circumstances covered by the Amendment. They are tied particularly when dealing with the competitors of British shipping. These are, in general, efficient, imaginative, ruthless and without scruple in most circumstances and conditions. In dealing with these competitors, the Government's hands are tied, particularly when our competitors are able to operate in this country without registering themselves as companies.

It has long been the practice of Her Majesty's Government to include articles relating both to shipping and air companies and the profits made by both in all double taxation agreements. I understand that it is normally the Government's practice to extend the range of these agreements wherever possible. I also understand that several of these agreements have recently ended and several more are under notice of termination. Therefore, foreign shipowners can avoid tax liability in this country by operating through agents or branches while their Governments tax our shipowners on profits, in some cases real, in some cases merely estimated and in some cases merely notional, calculated on gross rates and gross passenger earnings abroad. In some cases, I may add, these payments have to be made by a British ship, irrespective of whether or not there is a true profit, before the ship clears port.

This is a thoroughly indefensible practice with a quality of inequity which even the present Government's proposals do not exceed. But the Amendment which I propose with its consequential Amendments would at least provide Her Majesty's Government with a long spoon to use when they are supping with those who practise all the confusing subtleties of the new mancantilists, whether of the school of Balliol or of the school of Kings. The effect of the Amendment is quite simple. If it is applied—that is, if there are no double taxation agreements—we would at least gain the tax from overseas shipping companies trading here under various disguises. If it is not applied—that is, if it enables Her Majesty's Government to persuade other Governments to conclude double taxation agreements—the taxable income of British shipowners will be enlarged and it means that Her Majesty's Government will gain.

I submit that this is a case where Her Majesty's Government do not lose, but undoubtedly British shipping will benefit.

8.45 p.m.

Mr. Simon Wingfield Digby (Dorset, West)

I should like to say a few words in support of the Amendment, so ably moved by my hon. Friend the Member for Portsmouth, Langstone (Mr. Ian Lloyd). At Question Time on Tuesday the Prime Minister was full of sympathy from the Government for the shipping industry. We now come to the first of a number of Amendments where the Government will have a chance to show whether they really are sympathetic. The shipping industry is subject these days to a great deal of competition. Some of it is fair but an increasing degree of it is unfair, with companies being subsidised in one way or another. Here we have an example where the shipping industry is at a disadvantage as compared with some of its foreign competitors, where no double taxation agreement is in existence.

The effect of these four proposals would be to assist the Treasury when it was negotiating future double taxation agreements or renegotiating old ones. It would strengthen its hand by bringing the taxation of this country into line with that of many of our competitors who, where there is not an agreement in existence, do charge shipping profits arising from the ports of those countries. They bring them into taxation, which is something which under our present taxation rules we are not able to do. I hope, therefore, that on this first of a series of Amendments on shipping the Government will look sympathetically at the new powers that we seek to confer upon them.

Mr. Edward M. Taylor (Glasgow, Cathcart)

There are a few points I should like to make. The first is that I think we are entitled to ask for special treatment for the shipping industry, and this is in effect the basis of our argument. It is appreciated that other industries may be affected, but essentially we have the shipping industry in mind in putting forward this Amendment. We are entitled to ask for this special treatment primarily because of the effect which the Corporation Tax will have on the British shipping industry. At present under the existing system some companies will gain and others will lose. While it is possible to say that in one industry some firms will benefit arid some firms will not, one thing which stands out a mile is that shipping as a whole will suffer from the new Corporation Tax.

It has been made quite clear that, whereas the average company, in an average industry, which has its dividend covered twice will not benefit or lose, on the other hand a company whose dividend is covered only once—or any figure less than twice—will suffer under this new taxation. In the shipbuilding industry the dividend cover is only just over one, and when we compare that with the average of two it is clear that shipping will suffer substantially.

Apart from that, there is one other point which the Government should bear in mind. That is the effect on the British shipbuilding industry of credit proposals which have been brought forward recently. This is directly relevant to the Amendment because it is tied up with the Government's general attitude to shipping. Under these proposals, referred to very briefly, we have a situation where a foreign shipowner who is being helped by this Clause as it now stands, can order his ships in this country much more cheaply than can our own British shipowners. This is of great concern when we consider that last year more than 80 per cent. of all the ships built in Great Britain were built for the British industry. Quite apart from that, it is most unfortunate when we see the different policies of the Government appearing to work at cross-purposes. We are told that the whole purpose of this entire Budget is concerned with our balance of payments. Do not the Government appreciate that the—

The Temporary Chairman

Order. I think that the hon. Gentleman is going a bit wide now. We are not considering the balance of payments in this Amendment.

Mr. Taylor

That is true, but if the Amendment is not accepted our balance of payments could be adversely affected as a result of the tax on the shipping industry. However, I will not proceed with this point, except to add that last year we saved £250 million in foreign currency because of the contribution made to the economy by the industry.

As we have a great industry which is not scared to face competition from any part of the world, so long as it is fair competition, the Government have an obligation to do what they can to ensure that the shipping industry gets a fair deal. At present it is not getting a fair deal in world markets. We do not have fair trading. Tax concessions are given to some foreign shipowners, although our industry does not ask for anything but normal protection. Some of our ships trading abroad are assessed on profits allegedly earned, although they may not have made those profits. Wild assessments of profits are sometimes made and shipowners must pay tax on them. This is an abnormal situation and something must be done about it.

Only proper double taxation agreements will solve the problem, and it is regrettable that so many countries are not prepared to make such agreements. It is essential that they are made. We do not want to enter a situation in which, like some other countries, we try to protect the industry in an abnormal way. We want to achieve a situation of equality. We believe that British shipping can stand up to fair competition but that the Government must show concern for an industry which has earned so much for this country.

Dame Irene Ward (Tynemouth)

I need not add to the details which have been given about the purpose of the Amendment. I entirely support it and everything that has been said by my hon. Friends in its favour. In my part of the country shipping has had a difficult time and there is no doubt that shipping interests will be adversely affected by the Corporation Tax, although I appreciate that we are not discussing that aspect now.

In two recent Questions I asked the Government to give sympathetic treatment to the industry and the work that is being done in the areas where shipping helps to add considerably to our invisible exports. I was delighted to hear that in regard to regional development in my constituency—and regional development must be associated with shipping as with other industries—the National Economic Planning Board is hard at work trying to find out what it can do to help the North-East Coast.

Acceptance of the Amendment would go some way towards giving that help. There are relatively few ways in which the Government can help shipping interests and the Amendment represents shipping interests through the Chamber of Shipping, an organisation which knows the difficulties faced by the industry throughout the world. The Chamber has had a very helpful reception from the appropriate Ministers when it has sought to adduce the problems which the industry faces.

Through these Amendments, the Chamber of Shipping puts forward proposals that would be of definite benefit to the industry. The Amendments constitute a challenge as to how far the sympathetic statements made by the Prime Minister, and most Ministers to whom I have addressed Questions, are concerned with the interests of shipping, and how far those who have made them genuinely believe in them. In trying to help the shipping industry, the Government cannot avoid dealing with proposals put forward by the Chamber of Shipping itself, and there surely can be no possible objection to these Amendments.

It is extremely disappointing, and not a little surprising that matters like this, which are of national interest and not at all linked with the party political battle, were not embodied in the Bill. Perhaps part of the answer is that though the Treasury is responsible for the Finance Bill, there seems to be a lack of coordination between one Government Department and another.

I am slightly surprised, for instance, that when the Bill was being framed, the President of the Board of Trade did not see to it that it was appropriately amended to meet the desires and views of the shipping industry. It is also rather odd that the Chief Secretary did not ensure that the chairmen of his national economic planning boards saw to it that proposals of this kind were embodied in the Bill.

I suppose that the very width of this Measure, with all its tremendously controversial proposals, occupied so much of the time of senior Ministers of all kinds that they almost failed to notice what was essential to the protection and safeguarding of our shipping interests which, we must all agree, need all the support that a maritime nation can give them. I hope that the Amendments are accepted. I cannot see what objection can be taken to them, representing, as they do, the views of those in this great industry.

Mr. Stanley R. McMaster (Belfast, East)

I raised the subject of shipping in an Adjournment debate last week, and I asked the Minister to convey to his right hon. Friends in the Treasury my feeling, which I gathered, he shared, that Amendments based on proposals by the Chamber of Shipping should be carefully looked at. I was particularly pleased that on Tuesday the Prime Minister, in reply to Questions from me, and the President of the Board of Trade, said that they were prepared to pay particular attention to the needs of the shipbuilding industry.

9.0 p.m.

I shall not weary the Committee by repeating points already made. Our shipowners still sail the largest merchant fleet in the world, but they are rapidly losing this pre-eminent position as other shipowners, flying flags of convenience and benefiting from considerable tax concessions, compete for the available trade. That, and such practices as flag discrimination and flag reservation, reduce the amount of cargo available to be carried. The industry works under very narrow profit margins. If our shipowners were to fail or lose their position, the country would have to spend an estimated £250 million on carrying its cargoes in foreign vessels.

For this reason, I ask the Government to pay particular attention to the Amendment, which are a bargaining counter with countries with which we have not got double taxation agreements. For example, before our ships leave Indian ports the profit is assessed at one-sixth of the value of the outward freight arid they are taxed on that. This is iniquitous. If the Amendments were adopted, we should be in a very much better position when negotiating double taxation agreements with countries with which we have no such agreements.

The Amendments have been carefully drafted by counsel on behalf of the Chamber of Shipping. If the Government are not satisfied with the wording, but would agree to consider the matter carefully between now and Report, my hon. Friends and myself would be glad to withdraw the Amendment on that assurance.

Mr. Peter Emery (Reading)

My hon. Friend the Member for Portsmouth, Langstone (Mr. Ian Lloyd) and others have deployed a powerful case. This is the first of the debates on Corporation Tax affecting any matter overseas. I hope that the Minister will not think, because it is a small point, that we take the view that it is any less important than many of the more major points that we shall deal with later. My hon. Friend the Member for Glasgow, Cathcart (Mr. Edward M. Taylor) rightly said that shipping had made a specific request to the Government that it should have special treatment. The position in regard to India, mentioned by my hon. Friend the Member for Belfast, East (Mr. McMaster), is worse than my hon. Friend led the Committee to believe. The money has to be paid before the ship is allowed to leave.

The Amendments seek to strengthen the Government's hand in negotiating double taxation agreements. It has long been the Government's policy to seek agreements with other Governments for the avoidance of double taxation. This is particularly apposite to shipping and shipping profits. My hon. Friend the Member for Dorset, West (Mr. Wingfield Digby) said that some of these agreements were falling in. The Government need as much power to their elbow as possible in their negotiations. Therefore, although it may be said that it is unnecessary and that the Government are able to negotiate without these powers, it cannot be argued that their position will not be strengthened if they take them.

We are concerned with this rather small change because so many people are worried about the part which shipping has to play in our economy. Over the past years, the net contributions to the balance of payments have ranged from £89 million, £76 million, £72 million to £84 million. It is not the rising figure that many of us would like to see. There is no real sign of advance. Therefore, any specific action which the Government could take to help shipping as such ought to be taken. I hope that we shall have a favourable answer and that the Government will assure us that, if they cannot accept the actual wording of the Amendment, they will at least consider the matter seriously before the Report stage.

Sir Eric Fletcher

So much has been said in this debate by hon. Members opposite with which I agree that it may sound churlish if I say that there was only one observation made by the hon. Member for Reading (Mr. Peter Emery) with which I disagreed, and that was when he said, twice I think, that this was a small and somewhat unimportant matter. I regard it as a very important matter indeed, and I am personally grateful to all hon. Members who have spoken in emphasising the great importance of the contribution which the shipping industry makes to our national life. I cannot approve of the observations of the hon. Lady the Member for Tynemouth (Dame Irene Ward) when she suggests that there is a lack of co-ordination between the Chancellor of the Exchequer and the President of the Board of Trade in their concern for the shipping industry. As the Prime Minister said earlier this week, the whole Government have very much at heart the difficulties and handicaps of the shipping industry, and we are conscious of the competition from which it suffers at the hands of foreign Governments.

It is within that context that we have to consider whether there is anything that can be done within the four corners of the Finance Bill to help the shipping industry. As has been said, some of my hon. Friends and I have had discussions with representatives of the shipping industry. We are grateful to them for the suggestions they have made on how we can help them. We are anxious in this Committee to consider how far anything on the lines of these Amendments would be of value to the shipping industry. This is the problem.

Clause 46, unlike most of the Clauses of the Bill, does not impose a charge but relieves certain companies from liability. It provides that a company not resident in the United Kingdom shall not be within the charge to Corporation Tax unless it carries on a trade in the United Kingdom, and so on. It is proposed by the Amendment that we should bring within the category of chargeable companies not merely those foreign companies which trade in the United Kingdom but also a company which being resident in a territory with the Government of which no agreement under Section 347 of the Income Tax Act 1952 subsists carries on a trade which includes operating ships between ports in the United Kingdom or between ports in the United Kingdom and other territories". I have given a good deal of thought to this Amendment, and I suggest that it will be no waste of time if we analyse a little further what it would do. First, it would give the Government power to tax for Corporation Tax purposes a company which is not resident here, has no branch here and does not trade here but which nevertheless operates shipping between ports in the United Kingdom and other ports, provided that there is no double taxation agreement. As hon. Members have said, we have many double taxation agreements. I have been at pains in recent weeks to analyse some of them. They are very varied and do not follow a common pattern. Each has to be separately negotiated with the foreign country concerned. As the hon. Member for Reading observed, some are on the point of expiry. Others have expired and are being renegotiated.

As the Chancellor has said, the introduction of Corporation Tax itself makes necessary a certain amount of renegotiation of double taxation agreements because, whereas they have applied to Income Tax, Surtax and Profits Tax, the language of the agreements is not in every case appropriate for our new fiscal system incorporating Corporation Tax. There is, therefore, a good deal of detailed diplomatic work to be done on these double taxation agreements. We shall endeavour to secure the most favourable terms for our country in those negotiations.

The Amendment would apply only in the case of those countries with which we have no double taxation agreement. Therefore, it would have only a limited application. I must also consider precisely what application it would have. It would give us power to tax foreign shipping companies which hitherto we have not taxed. It is said in support of the Amendment that it would strengthen our arm in those negotiations. The case of India was cited by the hon. Member for Belfast, East (Mr. McMaster), who pointed out, I think quite correctly, that British shipping companies trading to India are taxed merely because they deliver passengers or cargo at the ports, and he said that that was iniquitous.

I ask myself, is it really suggested that we should take power to reciprocate by doing something which would be something equally iniquitous? Is the suggestion that we should meet iniquity with iniquity? Or is the suggestion merely that we should take power to meet iniquity with iniquity without intending to repay iniquity with iniquity? Hitherto it has not been part of our policy to condemn what some other country does as iniquitous and then say, "We will do the same by way of retaliation unless they mend their ways". If that is the argument hon. Members will see that it has certain drawbacks. But that may not be unfavourable to the argument. I am sympathetic in this matter and anxious to see how far it is possible, consistent with our ordinary principles of legislation, that we can go in meeting the problems of the shipping industry.

9.15 p.m.

In my study of the subject I have had to examine such other difficulties as present themselves. I do not think that any Treasury Minister would be averse from getting more revenue for the country if he could. Suppose we did have this power in this Clause. Suppose we said that although we had the power we would use it for its deterrent effect only and we were not ever going to do anything which anybody could describe as iniquitous whether done by ourselves or another country. I am bound to tell the Committee that quite a number of other practical problems will arise.

For example, if we are going to tax a shipping company which puts cargo into a United Kingdom port, how shall we assess the amount of the profits of that company which should be taxed to Corporation Tax because it puts cargo into a United Kingdom port? That is one point. Secondly, whom are we going to assess to the tax? Thirdly, how shall we then enforce it if we find the right person to assess and the right formula for calculating the amount of the assessment?

I mention these difficulties only to indicate to the hon. Members who have spoken in support of the Amendment that, sympathetic though one is to their problems, this is not exactly as simple as some hon. Members at first sight may have thought it to be. Having pointed out the problems one would then have to consider how far it would be appropriate, if we are to modify our tax—if we are going to modify at all—that we should modify the principles on which hitherto we have taxed foreign countries, that is, on the basis of trading here. How far is it proper to modify those principles in respect of shipping companies alone? Or, if we are going to make a modification, should we extend it to other industries as well?

I hope that I have said enough to express my sympathy with the spirit in which the Amendment has been moved and to indicate some of the practical difficulties which have occurred to me in seeing whether it could be made. I should like to conclude by saying that I hope that the Amendment will be withdrawn and the others not pursued, and I will give this assurance to the Committee, that, in the renegotiation of all the double taxation agreements, the Government will certainly have regard to the very important interests of the shipping industry. Secondly, with the Board of Inland Revenue, I will continue consideration of how far, if at all, any extension of its right to tax foreign companies is possible or not. I can give no assurance that that study, which must inevitably be somewhat detailed, could possibly be completed in time for any Amendments to be put down to this year's Finance Bill. I regard the matter as one of considerable importance, and I think that the Committee will realise from what I have said that it will engage the close attention of Her Majesty's Ministers.

Mr. Wingfield Digby

Would the hon. Gentleman make it plain to the Committee that he is giving an absolute assurance that in every future double taxation agreement there will be a specific article on shipping profits?

Sir Eric Fletcher

I am afraid that I am not sufficiently versed in the terms of the double taxation agreements to give any such assurance, because I have not studied them sufficiently, but my right hon. Friend will have heard what has been said in this Committee, and I repeat the assurance that the interests of the shipping industry will be borne in mind in the consideraton of double taxation agreements.

Mr. Peter Emery

The Committee will be grateful for the way in which the Minister without Portfolio has dealt with this problem. However, his general sympathy with shipping interests would go very much better with hon. Members on this side of the Committee—I say this more in sorrow and anguish than in any forceful political spirit—and it would have been appropriate, as this is the first Amendment dealing with shipping; and there are only two on the whole Bill—if the Minister of State, Board of Trade, who has specific responsibility for shipping matters, could have been present during this debate. I know that it may not be his responsibility to get the Finance Bill through, but he has a specific responsibility for shipping. It would have been very much better if he had had the general good sense and interest to attend the debate.

May I make two points? We realise that there are difficulties. There are always difficulties in negotiating double taxation agreements. There are bound to be problems about how the tax can be calculated. The Indians have a very able way of collecting it. They do not let the ship leave until the tax has been paid. Let me present that as a possible way in which Her Majesty's Government could act if they felt that it was necessary.

I did not take very kindly to the tautological criticism of the use of iniquities. In my view, all taxation is iniquitous and I do not think that we need worry very much about that. However, we should study closely what the Minister has said and perhaps let those people who are particularly concerned with shipping interests look at the matter.

If my hon. Friend the Member for Portsmouth, Langstone (Mr. Ian Lloyd) saw fit to withdraw the Amendment, we might well want to introduce a proposal on Report if the Government are not able to take action themselves. However, I hope very much that the Government will take action before the Report stage.

Mr. Ian Lloyd

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Question proposed, That the Clause stand part of the Bill.

Mr. Peter Emery

There is one quite serious point about the Clause on which we must probe the Government. As the Minister without Portfolio said, this is a somewhat unusual Clause in a Finance Bill in that it starts by exempting certain businesses from taxation. The Clause refers to non-resident companies operating throughout branches in the United Kingdom and merely puts these branches on the same footing as United Kingdom companies as regards taxation on the income arising in the United Kingdom, whether it be trading or invesment income.

The investment income received by these branches under deduction of United Kingdom Income Tax will form part of their normal profits on which the company is liable for Corporation Tax. The Income Tax will be set off against the Corporation Tax liability, but the repayment will not be made until the Corporation Tax liability has been established.

The Clause attempts to make certain that foreign overseas companies are set up on approximately the same footing as one would have expected, whatever their nationality. There is an anomaly concerning Income Tax on the distribution of the profits. The Chancellor has been keen to cure manipulation, but the way to manipulation seems to be left wide open.

What the Clause appears to do is to encourage foreign corporations or companies to stop operating as foreign companies or firms in this country, to dispose of those companies and to begin operating as a branch or agency. Corporation Tax will still be chargeable, but they will then be able to transfer their normal earnings without having to pay the withholding tax which would have been necessary on an ordinary British subsidiary or company if it tried to distribute. There are two damaging points about this. If that is the case, I wonder how much taxation may be lost in this manner.

Yesterday, my right hon. Friend the Member for Hampstead (Mr. Brooke) asked two specific questions of the Chief Secretary when he said: I cannot tell—nobody but the Inland Revenue can tell—what will be the loss of revenue to the United Kingdom Exchequer if every foreign-owned company in this country sets about making this change. Will it be £15 million, £20 million, or £25 million?"—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1793.] My right hon. Friend did not get an answer. The whole point was slurred over. What estimate has been made? If the figure is of that proportion the Committee should know.

Many foreign companies have been building up and attempting to integrate here, to use our labour and to do everything to contribute to the economy. Over the years, I have been associated with one of them. I also know that these companies use Great Britain as their headquarters for their operations in Europe. Surely we want to encourage them to co this.

If, because of Corporation Tax, we make it more worth their while to stop operating those companies and to go over to agencies or branches—and many of them will have other subsidiary companies elsewhere in Europe—it would be nonsense to stop this build-up, which can benefit the economy, so that these firms de not have to pay their withholding tax because they operate as a foreign branch or agency.

This is a serious point. We on this side thought it was something that obviously had been overlooked. That was why we did not put down a specific Amendment. We thought it worth while to ask the Minister to deal with the matter on the Question, "That the Clause stand part of the Bill", because it is of such importance. Unless we get specific assurances, we may have to raise the matter by Amendment on Report. Obviously, the last thing that either side wants is a greater loss of tax and, at the same time, to see companies being encouraged not to stay as companies in this country, to operate not as a whole but through agencies or branches. That is my specific question which I should like the Minister without Portfolio to clear up.

Mr. John Tilney (Liverpool, Wavertree)

I support my hon. Friend the Member for Reading (Mr. Peter Emery). I come from a city which has benefited greatly of recent years by tremendous capital investment by a foreign-owned company—namely, Ford—which has made a tremendous contribution to relieving the unemployment situation on Merseyside.

I am worried that the withholding tax is so high that we will not get the capital investment that we still want from foreign investors from overseas. This big build up of other people's capital in this country has done tremendous good overall. I hope that when the Minister replies, he can give an idea of what will be the level of the withholding tax in due course and tell us what are the Government's intentions.

9.30 p.m.

Sir Eric Fletcher

The hon. Member for Reading (Mr. Peter Emery) and the hon. Member for Liverpool, Wavertree (Mr. Tilney) were quite right to raise these questions and I will do my best to answer them before we part with the Clause.

I am sorry that my hon. Friend the Chief Secretary did not answer the question put by the right hon. Member for Hampstead (Mr. Brooke) in the debate yesterday, when the right hon. Gentleman asked what would be the loss of revenue to the United Kingdom Exchequer if every foreign-owned company in this country sets about making this change."—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1793.] The right hon. Gentleman asked whether the loss of revenue would be £15 million, £20 million, or £25 million. It was a hypothetical question and it was not answered because, with so many incalculables, it is quite impossible to make an estimate of the loss.

The sum and substance in reply to the questions of the hon. Member for Reading are as follows. If we change over for corporations from a combination of Profits Tax and Income Tax to a Corporation Tax basis, what we are basically doing in the Clause is to provide that the principles on which non-resident companies should be subject to United Kingdom tax should be the same principles as have hitherto applied: that is to say, companies which trade in this country either through a branch or through an agency, and no other non-resident companies.

That is why what we have done is to incorporate bodily by subsection (4) the provisions of Part XVI of the Income Tax Act, 1952, with which hon. Members are familiar.

My information is that this change from a combination of Profits Tax and Income Tax to Corporation Tax will have no adverse effect on the willingness and desire of foreign companies to invest in this country. I suppose that it is equally true that any foreign company having to make a decision whether to open a branch or an agency here or on the Continent will weigh up, as it is entitled to do, the fiscal advantages of one course or the other. That may or may not be called a manipulation. Every non-resident company is entitled to weigh up the relevant advantages of where or whether it should open a branch or a subsidiary. My information and belief from the best study which I have been able to make is that the switch from Profits Tax and Income Tax to Corporation Tax will not have any deleterious effect in that respect.

What is far more important—and this answers the question about the weight of the withholding tax—the taxation of nonresident companies generally will be dealt with primarily not by the provisions of Clause 46, but by the provisions of the double taxation agreements which I mentioned earlier and which are being renegotiated, where necessary. That will be the governing factor and it is impossible at this stage to be more precise than to emphasise that it is double taxation agreements which will govern the relative taxation liabilities as between British companies trading abroad or operating abroad and foreign companies operating here.

Mr. Peter Emery

If there is no double taxation agreement, and one has a branch which has paid its 40 per cent. Corporation Tax, it would then be able to transfer the remaining distribution. To take a quite simple calculation, a branch in this country with £10,000 would have 40 per cent. Corporation Tax and so be left with £6,000, and would then have to pay ordinary Income Tax, so that it would be left with approximately £3,300. A branch of a foreign company would pay Corporation Tax and so be left with £6,000, but no withholding tax, and would then be able to transfer £6,000. It is as simple as that. I am not dealing with double taxation. If that is the case, the Minister will appreciate our concern.

This is not a matter with which we want to make great play, but we ask him carefully to consider it between now and Report.

Question put and agreed to.

Clause ordered to stand part of the Bill.