§ 3.41 p.m.
§ The Chairman
We now come to Amendment No. 556, with which, I think, it would be convenient to take Amendments. No. 555: In page 75, line 31, at end insert:(d) if and in so far as any foreign tax chargeable by the Government of a country of the Commonwealth on the profits of a company for any accounting period (the profits in respect of which the foreign tax is charged being hereinafter referred to as "the foreign profits") shall exceed the due proportion of corporation tax chargeable on the profits of such company attributable to the foreign profits the excess of such foreign tax shall he deemed to have been paid rateably according to their shareholdings by the shareholders of such company and shall subject to the provision of Part XIII of the Income Tax Act. 1952, be allowable as a credit against any income tax or surtax charged in respect of any dividends paid by the company in the same or any subsequent accounting period not exceeding in the aggregate the net amount of the foreign profits after the payment of such foreign tax and to the extent of such relief the company shall not be entitled to &duct nor bound to account for income tax in respect of such dividends under Schedule F.Amendment No. 554, in line 31, at end insert:(d) if and in so far as any foreign tax chargeable by the Government of such country as the Minister of Overseas Development shall certify to be in receipt of a grant or loan from the Government of the United Kingdom on the profits of a company for any accounting period (the profits in respect of which the foreign tax is charged being hereinafter referred to as "the foreign profits") shall exceed the due proportion of corporation tax chargeable on the profits of such company attributable to the foreign profits the excess of such foreign tax shall be deemed to have been paid rateably according to their shareholdings by the shareholders of such company and shall subject to the provisions of Part XIII of the Income Tax Act 1952, he allowable as a credit against any income tax or surtax charged in respect of any dividends paid by the company in the same or any subsequent accounting period not exceeding in the aggregate the net amount of the foreign 454 profits after the payment of such foreign tax and to the extent of such relief the company shall not be entitled to deduct nor bound to account for income tax in respect of such dividends under Schedule F.Amendment No. 768, in line 31, at end insert:(d) any foreign tax which cannot be allowed as a credit because the foreign tax on any income exceeds the corporation tax on that income shall be allowed as a credit against any income tax payable under section 43(3) of this Act on that income when distributed, but the maximum amount of the credit allowable under this paragraph shall not exceed the difference between fifty six and a quarter per cent. and the corporation tax.and Amendment No. 764, in line 31, at end insert:(2) Where in any accounting period an investment company, as defined in section 53 of this Act, has a surplus of income arising from its investments in any territory outside the United Kingdom over the income on which it is charged to corporation tax, the surplus shall be available for the grant of double taxation relief against liability to tax under section 43(3) of this Act.
§ Sir Edward Boyle (Birmingham, Handsworth)
I beg to move Amendment No. 556, in page 75, line 31, at the end to insert:(d) if and in so far as any foreign tax chargeable on the profits of a company for any accounting period (the profits in respect of which the foreign tax is charged being hereinafter referred to as "the foreign profits") shall exceed the due proportion of corporation tax chargeable on the profits of such company attributable to the foreign profits the excess of such foreign tax shall be deemed to have been paid rateably according to their shareholdings by the shareholders of such company and shall subject to the provisions of Part XIII of the Income Tax Act, 1952, be allowable as a credit against any income tax or surtax charged in respect of any dividends paid by the company in the same or any subsequent accounting period not exceeding in the aggregate the net amount of the foreign profits after the payment of such foreign tax and to the extent of such relief the company shall not be entitled to deduct nor bound to account for income tax in respect of such dividends under Schedule F.We pass this afternoon, after the amusing interlude a little earlier, to a fresh aspect of Corporation Tax, namely, the treatment of the overseas earnings of United Kingdom companies operating abroad. I think that it is true that no aspect of the Finance Bill has caused more concern than the Chancellor's decision to restrict the relief on overseas taxes paid by these companies to the Corporation Tax alone. This is clearly a highly important decision which 455 will add £100 million to the tax burden of companies operating overseas.
I said when I spoke in the Budget debate in April that we on this side of the Committee do not believe that this decision has been properly thought out. This impression has been heightened by a number of arguments which the Chancellor and other Treasury Ministers have used to justify it since Budget day. That is why we are glad of the opportunity to debate the general principle of the Chancellor's decision on this Clause before we debate the transitional arrangements, including important changes which the Chancellor has made since the publication of the Bill, when we reach Clause 79.
I do not want to anticipate the discussions we shall be having on Clause 79. Of course, we realise that the right hon. Gentleman has made some important concessions which are to cost him £20 million a year for the first three years, but the arrangements under Clause 79, including the new concessions, are only transitional and tapered. They will lead to widely differing results from the point of view of individual large companies. Hence it is right that in advance of Clause 79 we should have a more wide-ranging debate on the decision not to allow overspill tax relief for companies operating overseas when, as is the case for most countries, the overseas rate of tax exceeds the Corporation Tax rate.
§ The Chancellor of the Exchequer (Mr. James Callaghan)
With respect to you, Dr. King, the right hon. Gentleman has joined our debates this afternoon and has now said that we are to have a debate on the general principle of this matter. I understand that we are in Committee. It seems that there has been no particular narrowing of our debates over the last 12 days during which we have been discussing these matters. Perhaps some critics might have thought that some of the debates were more of a Second Reading debates than Committee debates. I ask you whether it is now in order to have a debate on the general principle of this matter or whether, as we are in Committee, we should discuss the particular Amendment to which the right hon. Member has put his name.
§ The Chairman
This is difficult. I understood from the opening remarks of 456 the right hon. Member for Birmingham, Handsworth (Sir E. Boyle) that he was referring in passing to reliefs to come under a later Clause and that he wants to debate the question of relief for overseas companies generally, but he must relate them to the Amendment under discussion.
§ Sir E. Boyle
Certainly, Dr. King, I promise you and the Chancellor that I shall devote my remarks strictly this afternoon to the Amendment I am moving. I referred to the fact, I think correctly, that the Amendment I am moving covers a wider ambit than Clause 79. If I go out of order I hope that you will instantly call me back to order. I was intending to mention at the end of my remarks, but I do so now, that the effect of this Amendment is to provide that the excess of the foreign taxes on a company's profits over the Corporation Tax payable on the same profits should be allowed as a credit against the taxes paid by individual shareholders in respect of dividends paid on those foreign profits. I think that I was surely correct in saying that this Amendment raises the general principle of the right hon. Gentleman's treatment of companies operating overseas—[Interruption.]
§ The Chairman
I do not think there is any difference between the two sides of the Committee. This is merely a question of emphasis.
§ Sir E. Boyle
I thank you, Dr. King, and I shall proceed with what I was about to say.
I make it plain to the Chancellor that we on this side of the Committee recognise the necessity from time to time for strict control for balance of payments reasons on the outflow of capital from this country. I well recall such a tightening up taking place when we were in power on a number of occasions, in 1957 when we closed the Kuwait gap and in 1961 when my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) was Chancellor.
This is quite a different matter from the long-term tax treatment of overseas investment, including our existing investments. Our case against the Chancellor is that his new tax proposals will affect all overseas investment indiscriminately, and irrespective of its worth from the point of view of our balance of payments position. Nor is this our case alone, 457 because the Government have had a number of critics on this matter and of them none has been more pointed than Sir Jock Campbell, who can hardly be accused even by the First Secretary as a member of the "great conspiracy" we hear so much about. He said:The unrelieved application of the Corporation Tax in the overseas field seems to me like trying to kill weeds with sodium chlorate, which kills all growth, when selective weedkillers are available.When I read that report of Sir Jock Campbell's statement I was reminded of a story I heard of a naval captain in Malta who was invited to attend high mass, and was given a seat in the sanctuary. When the kiss of peace was ruched he was given the traditional salutation: "Pax tecum" and replied, "Et tu Brute", that being the only Latin quotation that, on the spur of the moment, he could remember. I should think that the Chancellor must have felt rather like saying, "Et tu Brute" when he read the remarks of Sir Jock Campbell.
§ Mr. Callaghan
As a matter of fact I did not, because I had a letter from Sir Jock Campbell saying that he had issued a statement to the Press commenting that the original statement had been made "Three weeks before the Chancellor's welcome proposals" and expressing the view that he had frequently tilted hard at Conservative policy of aid and trade for underdeveloped countries when they were in power and the Press paid not the slightest attention. Now that there is a Labour Government it became headline news. He ended by saying:I suppose that Labour supporters must live with these mischievous double standards.
§ Sir E. Boyle
All I can say is that I claim the right, when I agree with a political opponent, to say that the arguments he is proposing are correct. I thought that his statement was perfectly justified.
We consider, as my right hon. Friend the Member for Bexley (Mr. Heath) said, that it is humbug for the Prime Minister to stand up in New York and boast of our immense international investments and say what a standby they are for the £ just at a time when the Chancellor of the Exchequer is bringing in for the future a major tax change of this kind.
§ Mr. Callaghan
On a point of order. I do not wish to be difficult, but it would be for the convenience of all of us if we knew where we were going in this discussion. We had a long discussion on Second Reading on precisely the general issues which the right hon. Gentleman is now raising. He did not take part then and no doubt he has a frustrated speech which he wants to make now. [HON. MEMBERS: Cheap."] We also had on the Clause introducing the Corporation Tax a long debate on the same general principles that the right hon. Gentleman is now raising.
I am putting it to you with respect, Dr. King, whether it is the intention of the Opposition, as far as possible, to stretch the rules of order to the utmost limit that they can—[HON. MEMBERS: "Oh."]—so as to have another general debate on the whole principle, or are we to get down to a discussion on the Amendments which we are supposed to be discussing and which are to give relief to shareholders against a tax charge on their dividends for overseas tax paid on the company's profits? Hon. Members opposite may not like this, but there are rules of order in this Committee. Some hon. Members who have only just learned this—[HON. MEMBERS: Oh."]—and are—
§ The Chairman
Order. When the right hon. Gentleman is putting a point of order to the Chair it does not help the Chair or the Committee for noises to be made in support of or against the point of order which he is trying to put.
§ Mr. Callaghan
Thank you, Dr. King. I have concluded the point of order.
We can go on discussing this general principle until Kingdom come and have debate after debate on it, but there are a number of specific Amendments and I put it to you that it would be for the regulation of our affairs in the best possible way if we were to discuss the Amendments, considering that we have had so many discussions on the general principles.
§ The Chairman
I am quite sympathetic to the point which the Chancellor has put to me. It obviously would not be in order for us to have a Second Reading debate on each Amendment before us and the principles involved in 459 the Finance Bill. It would obviously not be in order for us to have a Second Reading debate or a debate on the general principles of the Clause when we are dealing with an Amendment, but I must be fair to the right hon. Member for Handsworth and say that he has a right to refer to some general principles behind the Amendment which he seeks to put before the Committee. I will call the right hon. Gentleman to order if he should get out of order.
§ Sir E. Boyle
I have no desire to go beyond what is in order. In my experience of Finance Bills, and I have some, there are usually some main issues on which we have a longer than average debate. I should have thought that it would have been the wish of the Committee to have the main debate today on the overseas aspect of the Corporation Tax. When he spoke on 2nd June the Chancellor said of my right hon. Friend the Member for Altrincham and Sale (Mr. Barber):The right hon. Gentleman referred to overseas investment, and I shall touch on it in passing although we shall get to this Clause in due course."—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1742.]
§ The Chairman
Order. When I am defending the right hon. Member for Handsworth there is no need for him to defend himself as well.
§ Sir E. Boyle
Thank you very much, Dr. King.
I will summarise our case against the Chancellor's decision under three heads and I will consider afterwards and answer some of the arguments which the Chancellor has used in defending his decision.
First of all, I will put our case. We say that it cannot be right for us to impose a new, severe and indiscriminate tax burden on companies operating overseas, if only for the reason that one of the main restraints on our economic growth since the war has been the too slow growth of our external earnings. I do not think that any hon. Member can doubt the extent to which our rate of growth has been inhibited by the sluggish rate of growth of external earnings since the war. It is, of course, right to be concerned about the cost to the balance of payments of the export 460 of capital from Britain, but do not let us look at one side of the balance. As my right hon. Friend the Member for Bexley said on 10th May, we need also to bear in mind… the returns from these investments in exports, in management fees, in other trading invisibles, in making raw materials available to us, as well as in the actual remittances through profits and dividends …"—[OFFICIAL REPORT, 10th May, 1965; Vol. 712, c. 79–80.]I said in the Budget debate that one section of overseas investment which I thought was of particular advantage to this country was United Kingdom investment in advanced countries, which is closely analogous to United States investment in Britain, where the value of the equipment exported from this country has been greater than the amount of export of capital. Investment of this kind is vital to a country like ours, whose rate of growth is so closely bound up with the growth of external earnings and, therefore, it must be wrong to put up the cost of external investment indiscriminately in the way proposed by the Chancellor.
Next, we want to consider the effect of the Chancellor's proposals on investment in developing countries. Some of my hon. and right hon. Friends have an Amendment down on this subject which is being discussed with this one and therefore I shall not deal with it at length. I recognise that the concessions which the Chancellor has made on Clause 79 will make a little difference here, but surely further investment in industries in high tax-rate developing countries is likely to suffer in the long run just as much whether the chopper falls within five years or within seven years, and it is worth bearing in mind that the Americans have exempted developing countries from actions which they have taken to deal with the balance of payments.
It is also worth remembering what the Prime Minister said about investments in developing countries in the past. In debate on the Commonwealth, in February of last year, the right hon. Gentleman said:… what we export in the way of investment in the Commonwealth should be more purposefully channelled than it is today."—[OFFICIAL REPORT. 6th February, 1964; Vol. 688, c. 1383–4.]The right hon. Gentleman also talked about the export of British capital which 461 we can ill spare for purposes of property speculation in Manhattan. The Chancellor's proposals in the Bill make property investment in Manhattan relatively more attractive than investment in industry in high tax-rate developing countries. I do not criticise a developing country for having a high tax-rate—it may well be justified—but I find it hard to reconcile what the Chancellor proposes today with what the Prime Minister said last year. [Interruption.] I do not consider that I have in any way gone beyond what is reasonable so far on a subject which, by all standards of the past, surely merits one main Committee stage discussion.
§ Sir E. Boyle
Thirdly, the Chancellor's decision on the external aspect of Corporation Tax surely seems particularly unhapy at a time when industry and technology are becoming more international than ever before. As The Statist said at the time of the Budget:The attitude to overseas investment reflected in the Budget is that of the little Finglander… At a time when the countries of Europe are moving towards real economic unity we appear to be withdrawing into our shell.I do not believe that temporarily tightening exchange control would have given the same impression as the Chancellor's present measure.
I come now to the arguments which the Chancellor has used to justify his decision and perhaps the right hon. Gentleman will at any rate agree that arguments which he has used in the course of debate are legitimate matters for someone on this side of the Committee to discuss on this occasion. I shall mention four arguments which the right hon. Gentleman has used.
First, the right hon. Gentleman said, in the early stages of the debate on the Budget, that there was a "positive bias" towards overseas investment in our present tax system. I shall not deal with this at length, because I think that the Chancellor will now agree that, at least as regards direct investment, he has overstated the case here. However, looking back over the whole debate so far, I think that the Chancellor himself goes much too far when he almost speaks at times as though overseas tax paid by United Kingdom companies is just in the nature 462 of a foreign charge. I think that it is, broadly, the right principle that tax should primarily be paid in the countries where the income is earned. But I recognise that the Chancellor has, to some extent, gone back on his original statement that there was a positive bias towards overseas investment in our present tax system.
But there is a second argument which both the Chancellor and the Chief Secretary have very often used with which I wish to deal particularly because I regard it as entirely irrelevant. Both right hon. Gentlemen have made considerable play of the fact that the return to this country on overseas investment is less, on the average, than the return on domestic investment.
§ 4.0 p.m.
§ Sir E. Boyle
With respect, it has got a great deal to do with it. It is an argument which both the right hon. Gentleman and the Chief Secretary have frequently used when justifying their proposals. The Chancellor really ought not to be so cross when I raise this point. If we are to consider the overseas implications of the Corporation Tax, what the Chancellor has said about home and overseas investment must, surely, be relevant.
§ Mr. Callaghan
The right hon. Gentleman is a fair-minded man, and I trust that I usually am, too. But he has not been here during our debates. This is the first time he has spoken. We have been through all these arguments before, in the debate on the Budget, on the Second Reading of the Bill, in Committee on the Clause providing for the Corporation Tax. It is true that I said I should not say much about it at the time, because we were to come to it later, but, after I had finished, we had a whole day's debate in Committee on the subject, with speeches mostly from the benches opposite.
It is very unfair of the right hon. Gentleman, at this stage, not yet to address himself to a single facet of the Amendment, which is concerned with overspill and relief in respect of underlying tax. That is what I am prepared to deal with and what I came here to deal with. It is grossly unfair that the right 463 hon. Gentleman should now raise all these general principles again, without beginning to argue the Amendment before the Committee.
§ The Chairman
Order. I think that we can drop all suggestions of being unfair. I hope now that the right hon. Gentleman the Member for Handsworth, having set out the general principles behind it, will address himself to the Amendment.
§ Sir E. Boyle
As I see it, Dr. King, the position is this. Under the new system which the Chancellor is bringing in by the Finance Bill, companies will be liable to Corporation Tax at a rate lower than the existing combined Income Tax and Profits Tax, but their ability to claim double taxation relief for overseas tax on their profits will be restricted to the new Corporation Tax rates. I am introducing an Amendment which expresses flat disagreement with this decision of the Chancellor, and it seems to me, therefore, that I am being quite fair in answering the arguments which the Chancellor has used in favour of his proposal and explaining why I consider that we should keep to something a great deal nearer to what one might call the status quo.
I shall not dwell at length on these points, but I submit that I am entitled to answer the arguments which the right hon. Gentleman has used in justification of his proposal as compared with mine.
§ The Chairman
I agree with the right hon. Gentleman so far. But I ask him now to apply these general observations to the Amendment under discussion.
§ Sir E. Boyle
Certainly, Dr. King.
To return, the Chancellor's argument about the relative yield of home and overseas investment is statistically incontrovertible, but it is basically irrelevant for this reason. From the point of view of Britain's present economic situation, the relevant criterion must be not just the return on a particular investment but its contribution towards strengthening our balance of payments. The essence of Britain's position today is that, as it were, the marginal utility of an extra £s worth of foreign exchange is substantially greater than the marginal utility of an extra £'s worth of sterling. [Interruption.] I am coming to overspill. In 464 fact, my whole argument is related to this question.
It should be clear to the Government that I am comparing the Chancellor's proposal with what I am suggesting, explaining why I do not agree with his drastic change, and leading up to the reasons why I believe that we should pass the Amendment, the purpose of which I explained perfectly clearly at the beginning of my speech, namely, to leave us very much more nearly where we were. That is a perfectly normal way of conducting argument in this Committee.
I should like, at this point, to mention what was, I think, one of the most important articles supporting the Chancellor. On 2nd June, The Guardian sought to justify his proposals on the ground thatThere must be more productive investment at home if Great Britain is to be modernised and to become prosperous.That is true, of course. Hence the decision of my right hon. Friend the Member for Barnet (Mr. Maudling), at the end of 1962, to give industry the most favourable system of capital allowances in the world, and hence our decision yesterday, rightly, I think, to spend a considerable time in fighting against the devaluation of the investment allowance. But this does not alter the fact that much of our overseas investment contributes even more directly to the level of overseas earnings than measures designed to modernise our home economy.
It really is a rather strange reversal of form for the partv opposite to judge the relative worth-whiteness of home and overseas investment by the sole criterion of the rate of return. It certainly was not the line taken by the present Prime Minister, when we were the Government, years ago. The point about the relative rate of return on home and overseas investment is, surely, an argument for the continued control of capital exports rather than for the proposals in the Finance Bill.
The Chancellor's third argument is based on the beneficial effect of his proposals on the balance of payments. Here it is noteworthy that, in his Budget speech, as I said at the time, he gave Treasury estimates of the estimated balance of payments saving of the other measures affecting the capital account, 465 but he was very cautious about the Corporation Tax, contenting himself with the vague phrase, "a marked benefit to our external account". I believe that the right hon Gentleman was right to be cautious and that the benefit to our balance of payments of the Corporation Tax proposals—this is a matter of direct relevance, Dr. King, to whether we prefer the Chancellor's scheme or what I am proposing—will be a good deal more marginal than some people have supposed. I give three reasons for saying that.
First, as I said in the Budget debate, many major overseas investors, such as the oil companies, have very few alternative investment opportunities in this country, as many bodies like the National Institute for Economic and Social Research have pointed out. Therefore, while the new tax burden under the Bill may eventually affect the wherewithal for overseas investment, it cannot have much effect on incentive. But, in so far as the right hon. Gentleman's proposals do deter companies from undertaking overseas investment, one must bear in mind the adverse consequential effects on our balance of payments as well, for instance, the reduced flow of exports generated by overseas operations and the reduced flow of future remittances.
Another factor which the Chancellor is not taking sufficiently into account is the counter-action which other countries may take as a result of his Finance Bill. At present, we receive very beneficial treatment under most double taxation agreements as regards the withholding of tax; but the Chancellor would be very rash to assume that, at least on dividend account, under-developed countries will let us get away with the balance of payments advantages which he hopes will accrue from the Corporation Tax.
I repeat the question which I put to the right hon. Gentleman on an earlier occasion: do we really want to attempt to check all direct overseas investment in this way for the sake of what may be a quite marginal gain to our balance of payments? Of course, if that balance of payments considerations were really uppermost in the Chancellor's mind, there would be no point in penalising existing overseas investment which is a substantial earner of foreign exchange.
466 That leads me to the last justification that the right hon. Gentleman has put forward, namely, the argument from the principle of the new Corporation Tax. He said at the end of his Second Reading speech:We cannot expect that tax which is paid by the company to an overseas country should be regarded as discharging the United Kingdom liability of the shareholder. It would make a monstrosity of the system to do so."—[OFFICIAL REPORT, 10th May, 1965; Vol. 712. c. 206.]In the closing words of his speech then, the right hon. Gentleman was coming close to saying that it does not matter imposing a new penalty on the existing investment of a company if the only result is to make the shareholder pay more United Kingdom tax.
I flatly disagree with the right hon. Gentleman on that proposition, for two reasons. The first concerns the facts. He is wrong in saying that, in the case of large oil companies, the shareholder is really "as redundant as the rhinoceros". That is not so. If one looks even at the past and the figures which the Chief Secretary and others have quoted concerning the last ten years one finds, for instance, in the case of Royal Dutch Shell, that between 1955 and 1964 its shareholders, while they were asked to subscribe fresh capital only once, provided well over £100 million.
The future for the large oil companies will not be like the past. Since the war, the oil industry has provided about 90 per cent. of its capital needs from its own resources but during the next ten years—and again I quote the Royal Dutch Shell group as an example—the proportion of group investment programmes self-financed may well not exceed 85 per cent. The difference between 90 per cent. and 85 per cent., although it may seem a small percentage, can involve very large sums.
If a company has to raise even as much as £100 million in any one year it is worth remembering that the total amount of money raised in the United Kingdom by quoted companies and local authorities last year was £664 million and, therefore, that £100 million is a very large fraction of the total amount of money raised by quoted companies in a normal year.
My second reason for disagreeing with the Chancellor is this. I 467 beg him to bear in mind that Professor Galbraith, in his lectures, as United States Ambassador to India, on economic development, emphasised the very great importance of the proper treatment in all countries, both developing and those like our own, of large corporations. I believe that the payment to shareholders of a reasonable proportion of net income by way of dividends, the raising of new capital and the orderly carrying through of expanding investment programmes are linked together.
Large corporations simply cannot be regarded as independent altogether of their shareholders. It is in the public interest and not just in the shareholders' interest that a corporation should be able to go to the market on reasonable terms, not least because it is in the interests of our balance of payments that shareholders funds in this country should act, as it were, as a catalyst to attract overseas borrowings.
Here again, I refer to the article in The Guardian, which made much of the fact that only 4 per cent. of the community own shares and said that the needs of the other 96 per cent. were for housing, education and employment. Of course, once we have earned a high national income it is right that a proper share, perhaps even an expanding share, of the extra resources should go to environmental services like housing and education.
As we know, in recent years education has had a rising share every year. But corporations large and small have to earn this income first of all and that is why everyone in this country, and not just 4 per cent., has an interest in British companies being able to find the resources necessary to step up their level of overseas earnings.
§ Mr. J. T. Price (Westhoughton)
Would the right hon. Gentleman care to read more of that article? It drew attention in most vivid terms to the fact that many of the large oil corporations have reached the stage in recent years where they were making practically no contribution to Treasury requirements in the form of taxation.
§ Sir E. Boyle
I have already answered that point. First, The Guardian, like 468 others, possibly made the mistake of supposing that the next 10 years in the history of the oil industry will be the same as the past. I have dealt with that. With regard to the level of taxation, I believe that it is right that by far the larger proportion of the tax that a company pays should normally be paid in countries where the income is earned. I disagree with those who look upon overseas tax as something which should be regarded just as a foreign charge. Taxation should not be so heavy that large corporations on whom we so largely depend for our balance of payments should not be able to raise capital at reasonable rates.
§ It is for all these reasons that we believe that the Chancellor has made a basically wrong decision in not allowing overspill tax relief for companies operating overseas.
§ Sir E. Boyle
I have explained why I do not believe that one can regard a large corporation as something entirely independent of its shareholders.
§ Mr. Callaghan
I am anxious to get the right hon. Gentleman down to the Amendment. I would be grateful if he would explain, in dealing with tax on overspill, why he wishes to extend the relief proposed to Surtax payers among the shareholders. We are not talking about the companies at the moment in relation to the Corporation Tax. The Opposition would extend relief to Surtax as well as Income Tax and this would have a tremendous effect on a great many investors, relieving them of even more taxation than at present.
§ Sir E. Boyle
We provide for that because it seems to us only equitable, although I accept that it is not essential to the principle underlying the Amendment. If the Chancellor cares to accept our proposal but excluding the extension of the relief to Surtax, we would be prepared to consider it.
We do provide that, in rare cases, any additional unrelieved foreign tax should be set against the shareholders' liability to Surtax in respect of the dividends. This seems only equitable and is in line with the general principle that lies behind the purpose of our Amendment. I see no reason why, except for a rather drearily 469 egalitarian reason, this principle should not be extended to Surtax in the rare cases where the point would arise. Let me also remind the right hon. Gentleman that by specifically limiting the amount of relief to the amount of dividends paid out of the foreign income which has suffered foreign taxation we would be deliberately safeguarding the interest of the general body of the British taxpayers.
I have explained the reasons why we consider that the Chancellor has made a basically wrong decision in not allowing overspill tax relief to companies operating overseas. We believe that our arguments are incontrovertible and we are not convinced by any of the Chancellor's pleas in defence. Of course, we will examine his transitional arrangements in Clause 79 carefully when we reach them, including his more recent concession. But let us be clear that the relief in Clause 79 is tied to the past performance in the best years and even before the taper it will not necessarily enable the shareholder to obtain full tax credit on his overseas income in the current year.
Our Amendment provides, as I have said, quite straightforwardly, that the excess of the foreign taxes on a company's profits over the Corporation Tax, payable on these same profits, should be allowed as a credit against the taxes paid by individual shareholders in respect of dividends paid out of those foreign profits. That seems to me to be a perfectly clear and reasonable principle for the reasons I have explained—that it would make it more possible for important companies to develop in an orderly manner and that here would not be this entirely indiscriminate adverse effect on all foreign investment, including existing investment.
We have moved the Amendment because we believe that it is just and in the national interest, and we have moved it as one more strong protest against the particular scheme of Corporation Tax which the Chancellor has seen fit to introduce.
§ The Chairman
Before I call on the next speaker, may I say that I have allowed the right hon. Member for Hands-worth to open the debate rather broadly, but that now he has established the principles behind the Amendment I hope that subsequent speakers will address themselves to the Amendment.
§ Mr. Edward Heath (Bexley)
On a point of order. This is the first time during all the 12 days so far in this Committee stage that we have had the atmosphere which has been created by the Chancellor of the Exchequer, who has constantly interrupted on points of order and asked whether my right hon. Friend was in order. I would like to seek your guidance, Dr. King.
On innumerable occasions so far we have had no discussion on the Question. That the Clause stand part of the Bill, because we have had adequate discussion of the principles involved in Amendments as well as their details. If we are now to have constant interruptions on points of order, trying to bring us back to specific points of Amendments all the time, will it be in order fully to discuss the principles of the Clause on the Question, That the Clause stand part of the Bill? So far, we have made very good progress and we have been congratulated on it every time that the Government have moved to report Progress. However, it will not be possible to make such progress if we are to have this fresh atmosphere.
§ Mr. Callaghan
Further to that point of order. I think that the right hon. Member for Bexley (Mr. Heath) is forgetting the basis upon which we entered discussion of this matter. When giving your Ruling, Dr. King, will you bear in mind the arrangement which was made about this matter? On 2nd June, on Clause 42 and the Corporation Tax, the right hon. Member for Altrincham and Sale (Mr. Barber), moving his rather narrow Amendment, said:… I was wondering whether it might be for the convenience of the Committee, Dr. King, if we were to have the general discussion on the Corporation Tax at this stage rather than on the Question, That the Clause stand part of the Bill."—[OFFICIAL REPORT, 2nd June, 1965, Vol. 713, c. 1722.]The right hon. Gentleman then proceeded to raise, among other matters, the question of overseas taxes and he enunciated exactly the same principles which we have had enunciated this afternoon. I then replied. We went into these details then, so that there has already been a general debate on the subject, although I said that we would come back to it on this Clause. I assumed that there were a number of Amendments, but that after all that had been said in 471 the general debate, in which many hon. and right hon. Members present this afternoon took part and which concentrated wholly on the principle which the right hon. Gentleman has outlined this afternoon—we went through oil companies and everything else and my right hon. Friend the Chief Secretary replied to the debate—we would not have another general debate today.
If there is a different atmosphere in the Committee this afternoon it is because I believe that it is not right that we should now again go through the general debate which we had on Clause 42, especially as the right hon. Member for Birmingham, Handsworth (Sir E. Boyle) did not discuss what I agree to be the important details of the Amendment which he has just moved. I accept that it is an important Amendment and I shall hope to reply to it, but I have not heard any argument in favour of it.
§ Mr. Heath
Further to the point of order. Is is not quite clear from the quotation by the Chancellor that my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) was referring specifically to Clause 42 and that in a general discussion of a tax, as we had on the Amendment to Clause 42, one is perfectly entitled to discuss the impact of the tax on successive Clauses in which the principle is set out? I believe that that is the right of the Committee.
The Chancellor has not sat in on much of the Finance Bill. We on this side have made no protest about that, although we could have made a fuss about it at almost any time. We have recognised that he has great responsibilities, particularly at this time, which take him away from the Committee and we have made full allowance for that and propose to go on doing so. But for his part the Chancellor might allow the Committee to continue its debates in the way to which it is now accustomed.
§ Mr. Geoffrey Lloyd (Sutton Coldfield)
On a point of order. May I point out to you, Dr. King, that in talking about Clause 42 the Chancellor of the Exchequer was talking about the general principle of the Corporation Tax? This Clause specifically deals with double taxation and specifically with double taxation in regard not only to Corporation Tax, but Income Tax. We hold that one of the 472 great mischiefs of the Clause is that it damages the United Kingdom economy, because in specifying with regard to the Corporation Tax—
§ The Chairman
The right hon. Gentleman must not enter into the merits of the case. I would prefer him to keep to the point of order.
§ Mr. Geoffrey Lloyd
The Clause deals with the question of double taxation and our Amendment is designed to remove this mischief from the Bill. We are entitled to argue this as a very important matter indeed. Those of us who have been in almost constant attendance very much resent the new atmosphere.
§ Mr. R. J. Maxwell-Hyslop (Tiverton)
On a point of order. In a nutshell, is it not the complaint of the Chancellor of the Exchequer that he has himself introduced a Bill with 90 Clauses and that he is objecting to the Clauses being discussed?
§ The Chairman
That is not exactly a point of order. I hope that we can get on with the business of the Committee.
§ Mr. Harold Lever (Manchester. Cheetham)
On a point of order. It is by no means my wish to widen this or any other Committee debate, but some hon. Members felt that your earlier remarks, Dr. King, might be construed to suppose that there was one rule of order for the Front Bench and another rule of order for those who did not speak from the Front Bench. May we have your explicit guidance that no such ruling was intended?
§ The Chairman
I am grateful to one of the Temporary Chairmen for his help. The Chair does not distinguish between hon. and right hon. Members in ruling on matters of order.
To return to the issue which has been raised, obviously certain general principles must crop up in certain debates in the Committee stage of the Bill. I allowed the right hon. Gentleman to open the debate rather widely because certain wide issues of overseas trade and Corporation Tax arose on the Amendment. All I said was that, the debate having been opened rather widely, we might now concentrate on the Amendment itself, and that is what I was hoping the Committee would do.
§ Mr. Robert Carr (Mitcham)
On a point of order. The Chancellor of the 473 Exchequer referred to what was said by my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) on 2nd June about overseas investment. However, the Chancellor himself went on to say, of overseas investment:… I shall touch on it in passing although we shall get to this Clause in due course."—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1742.]I submit that that was a fair indication that what was in the mind of the Chancellor of the Exchequer and in the minds of my hon. Friends was that we should have a debate on overseas invesement on this Clause.
§ The Chairman
I think that we might row leave all the points of order alone and get on with the debate.
§ Mr. Sohn Peyton (Yeovil)
I am very glad to have the opportunity to support the Amendment, but I should like at the start, without repeating the arguments which we have just heard, to make sure that I understand the position correctly. The Government have proposed a quite novel principle of taxation—that company shareholders are to be exposed for the first time to a measure of double taxation. The Amendment is designed to stop that. It is, therefore, a matter of widespread principle and I shall find it very difficult to keep my remarks from ranging over fairly broad issues, although I wish to confine them mostly to the bearing of the Government's proposals on the oil companies and the need to protect the oil companies from the effects of the Government's proposals. We believe that the Amendment is well designed to do just that.
I have no desire whatever at this stage to raise the temperature of the debate, but it is quite extraordinary that the Chancellor of the Exchequer should wish to send out from this Committee the message that in some way or other he wishes to discourage discussion. I do not think that any hon. Member on either side of the Committee enjoys a better-earned reputation for fair-mindedness and courtesy than my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle). It seems to me, therefore, strange in the extreme that on one of the Chancellor's very occasional visits to the Chamber—
§ 4.30 p.m.
§ Mr. Callaghan
I let what the right hon. Gentleman the Member for Bexley (Mr. Heath) has said pass, but I think that, on reflection, he will agree that although I have not always taken part in the debates, I have been in attendance in the Chamber—apart from yesterday, when I was absent until ten o'clock for reasons which he privately accepted—for a considerable time and heard a great deal of the argument.
§ Mr. Peyton
I do not think that anyone on this side of the Committee would wish to make charges against the Chancellor on this or any other ground, were it not for his extreme conduct this afternoon and his plain discourtesy during the speech, a perfectly temperate, calm and reasonable speech, made by my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle). One of the things that really worries us on this side of the Committee is the Chancellor's attitude to these proposals. In the course of his remarks in the debate on Clause 42 he observed that in a few years' time hon. Members would come to wonder what all the fuss had been about. It is just that which makes me feel a deep concern as to what is in the Government's mind and whether they have thought adequately about the effect their proposals are going to have.
They seem to be a strange combination of innocence and flippancy, garnished round with a smattering of reformist zeal, without any adequate thought whatever having been devoted to the matter. There is also attendant upon the whole of these proposals a dislike and suspicion of international operations, particularly when they are conducted by oil companies, and of course there is this, to my mind, a very foolish contempt for shareholders. What really worries me is whether the Government have considered, although Ministers have paid lip-service to it, the immense contribution made to our balance of payments by the two major British oil companies. It is an immense contribution. There is no other country in the free world without any indigenous resources of its own that is able to import its oil requirements with so small a burden on the balance of payments. That this is so is almost entirely due to the worldwide operations of Shell and 475 British Petroleum. As a result of the Bill and the Amendments that have accumulated round it, Shell has been singled out, whether by intent and design or by accident I know not, but it has been singled out for very bad treatment indeed.
This is a tremendous company responsible for the import of 30 per cent. of our oil supplies. It exports both oil products and chemicals and is also responsible for the export of a considerable amount of United Kingdom equipment and goods. I hope that the Chancellor will also take these arguments seriously while he is here. This company receives in London immense remittances for supplies both to group companies and in respect of sales made to others overseas. It also receives large payments in respect of shipping and insurance. It receives dividends from operating companies and in addition to that it holds an immense amount of money in London as central funds.
The Chancellor keeps talking, Dr. King. If he wishes me to give way I will do so.
§ The Chairman
If Members on the Front Bench on either side really misbehave the Chair will call them to order.
§ Mr. Peyton
I am grateful. I was driven to attract the attention of the Chancellor to arguments which are taken very seriously by some people even if not by himself.
The point I would particularly invite his attention to is that during recent years the contribution of these companies to the balance of payments has been immense. In the case of Shell, in 1961, it was £98 million, in 1962, £80 million, in 1963, £81 million and, in 1964, £19 million. That figure was much lower (a) because there was intensified pressure on profit margins and (b) because of a particularly heavy item of foreign investment during that year. I hope that the Government will give due weight to the fact that over the past 10 years this immense company has imported into this country £1,200 million worth of oil, mostly crude. It has done so at a cost to our balance of payments of an aggregate outflow of £150 million and that by any standards is a very great commercial 476 achievement which the Government at least should respect and honour and not treat with such disdain as they appear to do.
I turn for a moment to the other main British company, British Petroleum, making, incidentally, a note that few British Governments have ever made such a splendid or more fortunate investment as one of the Government's predecessors did in this case. This company earns £100 million a year in overseas trading. By means of its exports it has made a great contribution to British export. It is also engaged in an enormous refinery industry. It has a large tanker-building programme and I do not know what the effect of these proposals will be upon that programme but it is an immense programme which has been very welcome.
The company imports into the United Kingdom about £40 million worth of oil every year. If those supplies were produced from another company it would be a great deal more expensive than that. I hope that the Government will recollect that oil is an immense international industry of a highly competitive nature. It is conducted almost entirely overseas and it is taxed overseas. The Government now seem to have made up their mind to disregard the intense competitive forces which face the industry and to make a new set of highly oppressive rules.
I am bound to ask, "Whom do they think this will help?" I cannot help feeling the American companies operating in this country and elsewhere must be simply hooting with laughter at the Government's proposals. Perhaps I could read to the Chancellor a quotation from the Petroleum Intelligence Weekly of 19th April of this year. The heading is, "Will U.K. Companies Have to Fight With One Hand Tied?" It goes on:The surprising thing about Britain's pro- posed new tax measures is that they appear to undermine somewhat the competitive position of British based international oil companies, while offering certain advantages to foreign oil based firms.This is a foreign opinion. It is one which the Foreign Secretary appears not to hold and I hope that he will give some serious attention to it.
477 Later in the same article there is the sentence:U.K. Affiliates of American, European and other foreign oil companies, however, may actually get a tax break under the proposed new system—particularly if they plan heavy new investment locally.Of course, this is particularly appropriate in view of the North Sea operations.
Perhaps the Chancellor would be able to comment on this and to show that he has at least reacted to these ideas and thought about the problem. The arguments which the Financial Secretary has used in the Committee are very much in the Government's mind in making these proposals. The Financial Secretary has made three main points. First, that the oil companies pay no United Kingdom tax. That is wrong. Secondly, that the shareholder is redundant. Thirdly, that no damage will follow to the competitive power of British oil companies.
I do not believe that any of these three points is justified. Let me take the tax point first. We are here dealing with a large section of the fuel industry, and it is fair to comment, in passing, that no other section of the fuel industry pays any tax at all, but that fact does not seem to commend itself to the Financial Secretary as being particularly worthy of mention. I would remind him, too, that unlike the other fuel industries, these oil companies collect very large sums of indirect taxation on behalf of the Government. Last year, Shell collected £227 million to hand over to the Government, and British Petroleum, in the same year, collected about £121 million. They also paid rates and direct taxation like anybody else. In these circumstances, it is misleading, harsh and unfair for Treasury Ministers to suggest that no United Kingdom tax is paid by the British companies.
I do not wish to repeat the arguments made by my right hon. Friend, but I should like to refer to the question of shareholders. It is quite fantastic to suggest that a shareholder and a company are quite separate entities. One could not exist without the other. Yet we get remarks such as that made by the Financial Secretary that a shareholder does not produce any of a company's finances, that it derives them from its own resources. From whom does that 478 money come except the shareholder? I suggest that the Financial Secretary is not justified in carrying on this point any further. As my right hon. Friend pointed out, the Shell shareholders provide £126 million or so, which makes them quite a useful rhinoceros. It is a pity that there are not a few more like them.
I come to the next point upon which the Financial Secretary relied, that no damage will be done by these proposals to the competitive power of British companies.
§ Mr. Peyton
The Chancellor seems so convinced; I hope that he will listen and see whether somebody else may not be right, and not he.
I do not think that anybody would think of owning racehorses and then making sure that each and every one of the horses was at the top of every handicap carrying top weight with no chance of winning. One would have thought that in what is essentially an international and highly competitive industry, the aim of the Government would be to fortify as far as possible the companies which operate from these shores to our own great benefit. But no. Here is the Chancellor singling out our own oil industry for quite exceptional burdens.
The Financial Secretary suggested that the British oil companies are in some way privileged as against their American counterparts. I ask him to get the combined resources of the Treasury—I suggest that some prejudice is lurking in that building—to examine how the gross incomes of international oil companies are disposed of.
According to figures that I have here—he can challenge them if he wishes—the percentage of their gross incomes which went in taxation in 1964 are as follows: Standard Oil of New Jersey, 26 per cent.; Socony, 25 per cent.; Texaco, 22 per cent.; Gulf, 23 per cent.; Shell, 36 per cent.; B.P., 43 per cent. On net income the figure for Standard Oil is 43 per cent., for Gulf 41 per cent., and B.P., under the new tax system, paying the same dividend, 70 per cent.
Those figures are clear enough—there may be small discrepancies—to show 479 that the Chancellor is penalising a very vital British industry which has made immense contributions to the welfare of this country. He is doing so wantonly and he has closed his ears to argument. I am prepared to admit that by the transitional provisions he has given a useful measure of temporary relief to British Petroleum, but, because of the previous shape of the Shell operations, which was a fair and legal one, he has penalised Shell and its shareholders to an intolerable extent.
Despite the temperature in which the debate started—I am sure that the Chancellor is under a very heavy strain; it must he a tiresome job seeing through a Finance Bill—I hope that the right hon. Gentleman will accept that this is not a political argument, directed at him in a spirit of party rancour. I am sure that this argument could be put so much better by many people other than myself, but I ask him to accept that we believe that he is making a serious mistake and I hope that he will take every opportunity that is left to him to remedy or at least to ameliorate it.
§ Mr. J. Grimond (Orkney and Shetland)
It is true that we have had considerable debates on the principle of the Corporation Tax both on Second Reading and on Clause 42. On Clause 42, the debate was properly conducted under the guidance of the Chair, and it surely cannot rule out further discussions on a particular aspect of Corporation Tax dealing with double taxation and taxation of overseas companies, which we are pursuing today.
As the Chancellor said, one of the points at issue is whether shareholders should be given some relief for double taxation arising from the overseas operations of their companies. He further said that this raises the question of one's view of shareholders. I do not accept the view that it is desirable for the country that the economy should be run by self-perpetuating corporations many of which appoint their own directors and are more and more divorced from their shareholders. I agree, however that this is a wide point and that it would be improper to go too far with it.
Let us look at the situation as regards the Government's policy at this time 480 The Chancellor is entitled to say that it is folly if this country is in deficit to borrow short and invest long. The simple way out is to use existing machinery, to curtail new investment overseas or to make it more selective so as to invest in highly profitable enterprises only. That machinery exists and, as far as I know, no company has been enabled to undertake any large investment abroad without getting the authority of the Bank or, indeed, of the Government.
But what the present proposals do is to cut the return—that is to say, the return to shareholders—on existing investment overseas. I think one is entitled to spend a little time on this subject because it has caused the gravest anxiety in the boardrooms of many of the most important companies. Shell has been mentioned. There are also Bowaters, I.C.I., Hudson's Bay Co., Rio Tinto and mining companies. It is apparent from talking to the people in charge of those companies that though they owe an obligation to their shareholders, they are not simply concerned to be able to distribute bigger and bigger dividends. They are concerned about what this may do to the whole operation of British business overseas, and this is of importance to the country, whether we are shareholders or not.
Further, the word "shareholder" includes pension funds, charities, and. indeed, the Government themselves are contemplating setting up a unit trust. Therefore, the shareholders are not some rich minority who may be safely persecuted. They are, in fact, an integral part of the structure of the economy, as I know the Chancellor admits.
All the people concerned with these companies to whom I have spoken are quite clear that when taking decisions about investment, they must have regard to the effect of those decisions on their dividends. They may not want to increase their dividends, but they must hold them at a reasonable level, not only because they are under an obligation to their shareholders, but because, even if they are to raise new money from financial institutions, it is vital to them to be able to tell those institutions that they can raise a proportion of the new money, if they have to, on the market. If they cannot do that, they have to pay far 481 higher rates and they will not be able to raise money outside this country.
One of the striking features about these large companies to which I am referring is the amount of money that they have raised outside this country which is now earning dividends, not only in cash, but through services which are drawn out of this country because these companies are British.
Therefore, it is unrealistic to believe that the choice made by a board of directors can simply be to keep up its retentions, its ploughback and its investment by continually cutting its dividends. Theoretically, it may be possible, but as a practical proposition none of those to whom I have spoken regards it is possible. We must have regard to how decisions are taken in a mixed economy in which we all have deep interest.
The principle so far has been that where the United Kingdom rate of tax is the same as or lower than that of an overseas country in which a company or a subsidiary operates, it pays no British tax: that is to say, up to the rate of British tax—56¼ per cent.—it gets relief. It pays its taxes overseas.
What was the justification for this system? The whole Committee would, I think, accept that a country is entitled to tax a company which is making most of its wealth within its borders and that in the case of the new countries of the world this is important. No one, I think, would dispute this. Secondly, this arrangement puts a company which invests abroad in no better position than a company which invests at home.
On 2nd June, the Chief Secretary said thatall these companies investing abroad have been on favoured terms."—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1846.]I do not quite know what the right hon. Gentleman meant by that. They do not appear to me to have been on favoured terms compared either with investment at home or their competitors overseas. The right hon. Gentleman went on to say that the yield on a domestic investment was 15 per cent. and on an overseas investment 4 per cent. I think that the 4 per cent. is arrived at by saying that the gross yield is 8 per cent., of which 4 per cent. is ploughed back and 4 per cent. is brought home for distribution. I take it, however, 482 that that 4 per cent. is after payment of the foreign tax. I am not sure, therefore, that it is the figure which should be compared with the 15 per cent. gross earnings on investment at home.
The Chief Secretary went on to point out that the 15 per cent. was available and chargeable to tax here, which was then used to maintain the social services, defence and other necessities. That is true and it is an important and valid point. The right hon. Gentleman made no allowance, however, for the fact that money invested overseas, although it may bring in a lower rate of return, makes a great contribution to the balance of payments.
I do not want to go into this in detail; the figures have been given again and again and they have been made known to the Chancellor in innumerable memoranda. One group of the extractive industries have brought in £1,800 million in 10 years and one group of industrial concerns overseas have brought in £980,000. Innumerable examples can be quoted, from Hudson's Bay, Shell, and so on, not only of the direct benefits from overseas investments, but of indirect benefits in insurance, in the use of British patents and skill, raw material and of the subsequent trade which that brings us. These must be taken into account. Such operations also benefit the overseas countries.
The Chancellor has properly pointed out that private investment in the developing countries has been decreasing, but I am not at all clear that this is a reason for attempting to decrease it further. It may be pertinent to control new investment, but I am not certain that one should penalise old investment simply because one wants to shift the emphasis at the present moment.
Here I would say—this is relevant to the general debate because we shall debate later the Chancellor's transitional proposals, which I regard as important—that we should spend a moment or two again today in considering whether it is really wise for this country, when the whole world is moving towards a more international pattern of trade and when countries are becoming increasingly international, to confine our economic activities more and more within our own boundaries.
The Chancellor has argued again, and it was said also by his right hon. Friend the Chief Secretary, that not only have 483 companies operating abroad had a favoured position as against home investment—I do not believe that they have—but that their shareholders have had a favoured position, too. The Chancellor has said that in certain cases they have been able to reclaim tax which has never been paid. This arises from a Report of the Comptroller and Auditor-General and, again, it is a serious point and one which the Committee should examine and put right. It is a valid point but not, perhaps, of great moment in the sense that a lot of money is involved.
It is, I understand, possible for a dividend warrant to be issued saying that tax has been paid when, owing to the position of the company, no tax ultimately was chargeable. It is also possible, I believe, for the shareholder to reclaim tax on his personal tax position on that warrant. I am also told that all that is needed is a running record between the company and the Inland Revnue and that the Inland Revenue has prepared a scheme which would have put an end to this type of evasion.
It is a curious fact that if a person is very rich, with an income of £14,000 a year—which few people in this Committee have—it appears to pay him to invest overseas in America. One of the places, curiously enough, which is both gaining under the present system and, I understand, will continue to gain under the new system is South Africa. Owing to its low rate of withholding tax, it may pay people to invest in South Africa, but only marginally and for an individual investor only if he has a substantial income, of over £7,000 a year. These are points which have been made and which should be answered. There seems to be some validity in them. I never regard them as sufficient reason, however, for a general extra charge upon all investors and all shareholders in companies operating overseas.
I wholly accept the argument of the hon. Member for Yeovil (Mr. Peyton) that the oil companies to which he referred bring in a great deal to this country and collect a lot of tax on behalf of the Government. Here again, however, the Government have a point of substance. These companies carry on immense operations in this country and yet they do not pay any contribution 484 to the British tax system. There is a case for saying that a company which carries on large operations here and which takes advantage of the various services which are provided out of taxation in this country should pay a contribution at least towards the general running of the country.
Again, however, would not the way to overcome this be to try to consult those companies about whether a scheme cannot be agreed? This is well known in the oil world; it is what goes on continuously in the oil-producing countries. That, however, is insufficient reason for what might be the serious effect of this shift in our taxation system.
§ Mr. J. T. Price
Is the right hon. Gentleman seriously suggesting from the Liberal benches that the House of Commons should initiate legislation to give discriminatory tax concessions to particularly selected industries, because they have such problems that they should be excluded from the general taxation provisions of the country, and provided for in a special way? This seems to be a most illiberal doctrine.
§ 5.0 p.m.
§ Mr. Grimond
I do not think that I was suggesting anything of the sort. But whether Liberal or not, the number of exceptions, allowances, and so forth, made under our tax system, is legion, as I am sure the hon. Member knows. There is no end to the making of such exceptions. Nor is this something produced by the Liberals in 1965. It has been done by every party in the last 50 years at least. However, I was not in fact suggesting that. What I was suggesting was that investment abroad is being put at a disadvantage and I think the Committee has got to get that into its head.
My point—and no doubt the Chancellor will reply to it—is that what we are now doing is not correcting an advantage which overseas investors have had, but what we are doing is a positive disincentive to future investment overseas and a penalty to existing investment. This is what, I think, the Chancellor wants to do. He wants to shift the emphasis. Unless he were doing that there would be no point in the Clause at all. Unless he were definitely disfavouring—if that is the right word—overseas investment there would be no 485 point in the Clause, because that is the point of it. That is the point at issue: do we want to deter overseas investors permanently?
I would concede, and I think that many people would, that there is a temporary case for putting a check on overseas investment. Overseas investment accounted for some half of the adverse balance last Year. Certainly, there is a case for that, but not for writing into our legislation a permanent disincentive to investments overseas.
It has also been argued that this will put the shareholders in those companies in a position of equity if not in a position of equality with home shareholders, and that in investing overseas one must expect overseas taxation as a charge on one's earnings. But this is not so. Take two hypothetical cases, of companies operating on 40 per cent. corporation, one of which invests in a country with a 50 per cent. rate of tax, and both ploughing back 30 per cent., the home one would he left with 18 per cent. for its shareholders and the overseas one with only 12 per cent. So I think the case, so far at any rate, is clear that overseas investors will be put at a disadvantage.
I do not want to go back over all the principles behind this. I have made it dear that I differ at any rate with the Chancellor in the emphasis he puts on the importance of shareholders. I do riot entirely dissent from his view that there is nowadays a distinction between the shareholders and the company, but the point I am making is that they cannot be dissociated too far. To say that shareholders can be reduced to a minimal dividend of 2 per cent. or whatever it is is not the way our system works, and it could not work.
I would agree that there may be loopholes which ought to be stopped up, and that there may be a case for a temporary check on overseas investment, but I do believe that this Committee should not accept the view that at this stage in its history this country should go back on its long tradition of overseas investment as a permanent part of our policy. I know the Chancellor does not intend to do that entirely. Of course he does not; he intends a certain amount of it to go on; but from all the conversations I have had with people concerned in this as practical men I believe that the effect of this 486 Clause will be much more serious than he anticipates. Of course, we cannot now debate transitional arrangements but I understand that during the transitional period there will be a full-scale inquiry not only into the effect on exports, etc., of investment overseas but also into the incidence of taxation, whether in fact overseas investments were unduly favoured or will be unduly disfavoured. Though we cannot debate these things now I think they are relevant to this Clause, even though we must take the Clause as it now stands. It is only fair to the Chancellor to mention these arrangements as they will help. But from all the inquiries and conversations I have had, this Clause is having a most disturbing effect on the sort of British industry, on which we are bound to depend a great deal in general and indeed over the balance of payments.
§ Mr. Harold Lever
I agree with many of the principles enunciated by the right hon. Gentleman the Member for Orkney and Shetland (Mr. Grimond). I think he is fair-minded enough, in his anxiety to discuss this dispassionately, to see that the Chancellor's intention here in changing the taxation system in relation to overseas earnings was, at this period of our economic development and our financial difficulty, to cause a closer, a more exact scrutiny to be observed in relation to new overseas investment. I do not think anybody should burke that issue however passionately one is in favour of overseas investment.
I yield to none in respect for the efforts of those great enterprising companies which have gone overseas and hazarded much in terms of effort to the advantage of our country, and I yield to none in my anxiety to see that they receive fair treatment. Nevertheless, as I have pointed out before, and as I shall point out briefly again, it is idle to lament the necessity to restrict to some extent overseas investment in general, and in so far as the Amendment is directed to reducing the disfavour to overseas investment I think it cannot be supported.
For this reason, what we have to lament is not the Chancellor's measures to cause a closer scrutiny of overseas investment. What we ought to be lamenting is the absence of the export surplus which permits and finances overseas investment, which most people here would very much 487 like to see promoted. We must get the order of prorities right. To lament the reduction in overseas investment when we have not got an export surplus, when in fact we are running a considerable export deficit, is really definitely a misconception of the orders of priority. We must get an exports surplus first, and then the country can decide whether the minority of obstinate and narrow-minded people who are against overseas investment ought to be encouraged, or whether the great majority of us, who include the Chancellor and probably every member of the Government, who are in favour of promoting overseas investment, should find the means of doing it. I said on Second Reading that I agreed in general with the need to put a closer eye on our current overseas investments, but that does not, of course, involve in any way any penalising of existing overseas investment.
It has been represented that the Chancellor has a vicious disposition and that, though happy to bite at home investors from time to time, nothing pleases him so much as an opportunity to bite the oil companies and their shareholders. This myth has been completely dispelled by the Chancellor's reactions and his very sympathetic intentions which he has manifested to help overseas investors by these reliefs. Whether these reliefs go as far as some of us would like to see them go is another matter which we shall discuss on a later Clause, but what I wish to emphasise is that we shall not have as useful a discussion as we might in this Committee if we are going to project this false picture of the Chancellor as an ogre with a passionate desire to injure companies investing overseas, the great names and enterprises which have been spoken about, as an ogre who is anxious to injure the larger shareholders. Those who intend to give such a picture of the Chancellor are doing a great disservice to those companies themselves overseas, because overseas they will not be able to trade so well and their reputations will suffer if it is supposed, even wrongly, that they are pariahs detested by the Government of whatever party is in office in this country. I hope we may continue our discussion on this question in a way which does not project this false picture of either the Government or the Chancellor.
488 One of the things wrong with this Amendment is that, unfortunately, it does not take into account the need in general for a closer scrutiny of overseas investment, that is to say, whereas the Chancellor could have been criticised, especially before he made these concessions, and perhaps to some extent now, for penalising existing investment, the Amendment indiscriminately allows overseas investment to take place and grants very considerable relief to companies and their shareholders in respect of any investment whether already made or to be made in the future. For this reason I cannot support the Amendment, because I am not in favour either of penalising existing investments or of diminishing the Chancellor's purpose of scrutinising with some care new investment in the future. The Amendment does not qualify for acceptance because of its indiscriminating character.
With his characteristic intellectual honesty, the right hon. Member for Birmingham, Handsworth (Sir E. Boyle) recognised that we should have some general provision discouraging new investment at the present time. What he objected to was what he called the indiscriminating and general character of doing so by means of the tax system. But again he conceded that the alternative was to stiffen and extend exchange controls and the overseas export of capital controls. Since the war we have had an interesting debate as to how to achieve our social purpose—whether we should do it by full controls of this kind, or by more general and practical measures such as the Chancellor is taking. I favour the general controls, because they do not place an added and insupportable burden on a limited supply of very skilled manpower.
The weakness of the right hon. Gentleman's criticism, and of his support of the Amendment, is that it allows the indiscriminate investment to go on. He invites the Chancellor to set up a more detailed and effective control of the export of capital. If we accept the Amendment we will have to set up a vast extension of the controls for the export of capital, and this is what it would be undesirable to do at the present time when we have so many calls on our skilled management. We need to simplify administration and 489 not complicate it by widening it in this way, and for this reason I cannot support the Amendment.
The hon. Member for Yeovil (Mr. Peyton) said that the Amendment was designed to stop the double taxation of profits, once in the hands of the company, and once in the hands of the shareholder. I shall not go into this interesting metaphysical and juridical debate as to the identity of shareholders and the company itself, but I know that it is a matter of extreme interest to hon. Members opposite. They have been grapping with it ever since the Finance Bill came to be debate in Committee.
I hope nobody will think that I am disrespectful of other people's speeches more than I am of my own, but I cannot say that the problem is any nearer solution now than it was when we first started on our discussions. It is, however, enough for the purpose of this discussion to say that companies regret the change in the tax system although it may be said to affect their shareholders as it affects their own business, and it would be unwise in the highest degree to pin tie hon. Gentleman's argument to the idea that this is not affecting the company at all, but what the Amendment is proposing is a concession to shareholders and not to the company, and it does not affect its position. This will not help. I know that this is rather the official Treasury view, but it is not a sound view, because the simplest test shows that the reaction of the companies themselves illustrates that they are affected by tax changes and raises the problem as to how we should act in relation to the concessions which the Chancellor has made.
My first point on that is that the concessions are very substantial. In many cases they carry over companies for three years, completely unaffected by the tax changes. With respect to the Chancellor and to right hon. and hon. Members who have drawn attention to the gravity of our position, including the Leader of the Liberal Party who talked about permanent changes in the tax system, perhaps I might point out that this Committee is not in a position, within the constitution of the country, to make permanent changes in the tax system. All this can be looked at again in the House next year, and the 490 year after. As the Chancellor has made generous provision for three years, I for my part, holding as I do strong views on this subject, would have been completely satisfied had I been sure that the provisions covered all companies for three years and did not cover only some of them.
I would have been unqualifiably satisfied, in the circumstances in which we find ourselves, if the Chancellor had met the case against him of penalising investments by saying that for the next three years the provisions would apply as fully to some companies as they do to others. I am not keen on mentioning names, but British Petroleum would appear to be unaffected in its activities for the next three years, whereas the Shell Company appears to be not so well placed in this respect.
While I reject the Amendment, for the reasons which I have given, and although I welcome the Chancellor's concessions on this matter because I think that they have shown a proper spirit of fair-mindedness by changing a tax which adversely affects many overseas companies, I hope that he will not be inflexible and that he will see whether he can so arrange it that those companies which for one reason or another do not gain anything like the help over the next three years which the Chancellor intended to give them do in fact receive some assistance.
I have often been accused, and it is particularly dangerous when we come to discuss the position of the oil companies, of uttering compliments to my right hon. Friend in the nature of an emollient or a lubricant to make palatable to him the criticisms which I have sometimes felt obliged to make of the provisions of the Bill. Having criticised the Bill fairly frequently, I feel a degree of resentment when I hear criticisms of my right hon. Friend's reaction to the Bill. I have taken part, as have many hon. Members on both sides of the Committee, in deputations to the Chancellor, not merely in the House, but outside, too. I have found him ready at all times to listen, to make efforts to be impartial, without limit of patience and intellectual effort to take the point that we were trying to make on very technical matters on which a 491 Chancellor is not necessarily obliged to become expert. He has been prepared to suffer these almost unendurable complications to give fair consideration to the case that we have made. I think he will be illrewarded if snide remarks are made about his occasional absences from the Chamber.
I cannot support the Amendment because, in a sentence, it is indiscriminating in its effect as between existing investment and new investment. It does not take into account the nation's need, which at this time is to control the flow of new investment capital, until such time as we have the export surplus which will finance, permit, and make desirable that new investment. In those circumstances the Amendment is not to be supported.
On the other hand, I welcome the Chancellor's concessions wholeheartedly. I think that they go a long way to help the companies most affected by this change in our tax law. I hope that my right hon. Friend will be able to make even further adjustments if a case can be made for them to help those companies which have not fully benefited from these concessions.
§ Mr. R. H. Turton (Thirsk and Malton)
The hon. Member for Manchester, Cheetham (Mr. H. Lever) said that we on these benches regard the Chancellor as an ogre. In fact, we regard the Chancellor as one who, with insufficient preparation, and acting on bad advice, has created a blunt instrument that is going to do grave damage to the whole economy. That is our charge against him. Nor, indeed, do we suggest that he is biting hands. We associate that with the First Secretary, and not with him.
I cannot think that the argument which the hon. Gentleman has used, that the Amendment is wrong because the Chancellor, by these provisions, is making an exact scrutiny of our overseas investment, can be correct. Surely nothing is less discriminatory than the Chancellor's replacement of the Section 201 relief by the relief offered in Part I of the Fifteenth Schedule. It certainly penalises all investors. There is a strong case for some measure of discrimination in overseas investment. The balance of pay- 492 ments is such that, by exchange control or other investment control, we should steer investment where it is most needed, not merely in our material interests but in the interests of the nation. But if we are not going to use that method and are going to use, instead, the Chancellor's overall penalising of overseas investment, we must have some measure such as my right hon. Friend suggests.
I want to speak not to the Amendment that has been moved but to Amendment No. 555, in the names of myself and my hon. Friends, which is being taken with it. The Chancellor's Corporation Tax proposals for overseas investments have undoubtedly caused consternation throughout the Commonwealth. Consternation has been expressed in nearly every Commonwealth country. It is felt by these countries that these provisions will damage their interests, at a time when most of them are finding it very difficult to develop their resources and have been looking to Britain to help them do so.
My right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle) recalled the speeoh made by the Prime Minister on 6th February, 1964. No doubt he chose an extract that was applicable to his Amendment, but there was another very pertinent part of that speech, dealing with the Commonwealth, in which the right hon. Gentleman made ten points, the third of which wasTo fulfil Commonwealth requirements for development capital we should agree to expand those sections of our industrial system where existing capacity is inadequate to meet Commonwealth needs—both by incentives to private enterprise"—I underline that—and by creating new publicly-owned industrial establishments.This Clause contains a disincentive to private enterprise. It is true that it is intended to deal not with the position that we are coming to later, in Clause 79—in respect of which I believe the Chancellor has provided a quite inadequate tapering-off—but with the position of the shareholder. If, however, we are providing a disincentive he will not invest. That means that investment in Commonwealth countries will be diminished. This is what is causing consternation.
If the Chancellor will accept the Amendment dealing with those companies 493 which have Commonwealth tax applied to their earnings either in the form that we have laid down or in some other form, he will be giving an incentive to the investors in Commonwealth countries. That will be especially appropriate today—the day before the meeting of the Commonwealth Prime Ministers' Conference. By action that he could take tonight he could do a great deal to remove the misunderstanding that his Budget provisions have engendered throughout the Commonwealth.
So far the Chancellor has argued that there has been a bias in favour of the investor overseas. If we study the position from the point of view of the investor in the Commonwealth we see that there has certainly been no such bias. In nearly every case, because the Commonwealth country concerned is developing rapidly, the investor has had to pay a very high rate of tax in that Commonwealth country. Up to now, that has been set off by the Section 201 relief. From this date, however, the investor will not get that set-off in respect of Commonwealth tax. Therefore, if he is considering whether to invest in a Commonwealth country or in some enterprise in this country he will realise that he will be much better off if he invests in this country, because here he will have to suffer only British Income Tax, whereas if he invests in a Commonwealth country he will have to suffer both Commonwealth tax and British tax—subject to the provisions of Part I of the Fifteenth Schedule, which give only marginal rdiefs.
I beg the Chancellor and the Financial Secretary to reconsider the question in view of the widespread dissatisfaction that has been aroused over the Government's proposals for dealing with investment in the Commonwealth. Only last week the position of our investments in Australia was recorded by the Australian Treasury. The figures showed that in the last 17 years British investment in Australia has totalled about £A1,200 million, which represented about 60 per cent. of total investments in Australia. Do the Government say that we invest too much in Australia? In recent years the Americans have invested more. The American proportion of such investment is rising as ours is falling. At this time it is important for this country to 494 increase its investment in the Commonwealth.
As the present Prime Minister said in February of last year, there is certainly a case for cutting down our investment in speculative building in Manhattan, or in similar projects. I believe that the needs of the Commonwealth—and particularly the developing countries—are all-important. That is the reason for the Amendment. The previous Government made certain pledges at the Geneva U.N.C.T.A.D. Conference, where points were put forward by my right hon. Friend the Member for Bexley (Mr. Heath). The feeling generally in the Commonwealth and in the developing countries is that the Government, by their Corporation Tax provisions, have made it very difficult for those pledges to be fulfilled. I therefore ask for a concession either on the lines of Amendment No. 555, or in some other form, to provide special discrimination in favour of Commonwealth investment.
§ Mr. Robert Maxwell (Buckingham)
How does the right hon. Member propose to deal with this point? Our total investment in the Commonwealth is rising—although our investment in Australia is falling—but our exports to Commonwealth countries have fallen disastrously. This cannot be allowed to continue.
§ Mr. Turton
I am glad to have had that interruption. Let us take the case of Australia. Every year, simply because we have been investing a great deal—we invested £60 million last year in Australia—we have had a favourable balance of trade with Australia. That is also the case with New Zealand. In some years we have had a favourable balance of trade, but in some years we have not. In Canada, where our investment has been falling, we have unfortunately had a very adverse balance of trade.
There is a good case for saying that at the Commonwealth Prime Ministers' Conference we should take up the whole question and point out that if we are investing in the Commonwealth we expect each Commonwealth country to reciprocate by securing us a good return in terms of our balance of trade. That has been done by Australia and that is why the Australians feel so bitter against the Chancellor and his party, because when they are doing all they can to help 495 the Commonwealth partnership, when they have great commitments in Malaysia, which require a very high rate of taxes, this Government are imposing this disincentive on investment in Australia. If, as a result of this debate, we get some concession for investments in Australia and countries like Australia, I and those who have their names to this Amendment will feel that we have accomplished something.
§ The Temporary Chairman (Sir H. Legge-Bourke)
Order. I was not quite clear whether the right hon. Gentleman had concluded his speech or was giving way.
§ 5.30 p.m.
§ Mr. J. T. Price
I am sorry that the right hon. Member for Birmingham, Handsworth (Sir E. Boyle) has left the Chamber, because I wanted to offer him a small apology for an intervention of mine during his speech earlier on. He was deploying an argument in support of the thesis behind these Amendments, in which certain quotations from the Manchester Guardian were used. I intervened to remind him of certain other things which the Manchester Guardian has said. I was not quite accurate in that, in so far as I referred to 2nd June issue of the Manchester Guardian from which he was quoting. I have taken the opportunity, in the interval, to get the copy of the Manchester Guardian for 3rd June from the Library. It has, I think, some very important things to say so far as these Amendments are concerned. I was, to that extent, inaccurate. The right hon. Member was quoting from 2nd June and the quotation which I mentioned, relying on my memory, was from 3rd June.
In that issue it said:The row about the Corporation Tax is deafening and last night's tied vote will add to it again… The Government is proposing to change a situation in which the largest company in Britain (Shell), the third largest (B.P.), and a number of others have paid virtually no British income tax since 1960.496 Further in the leading article, the editor says:For four of the past five years, the" net U.K. rate' at which Shell has been paying income tax in Britain has been one penny in the pound in the fifth year, it paid no"—Order,order. [Laughter.] With great respect to the Chair, Sir Harry, I have been very strongly provoked on many occasions to interrupt my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever), but, of course, my manners have prevented me from doing any such thing. I object if he does it to me while he is sitting down.
§ Mr. Harold Lever
I may as well say standing up what I said improperly. I apologise for that. I said that Shell paid Id. in the £ in Income Tax for the perfectly good reason that they were paying their appropriate share of taxation overseas, which was in accordance with the perfectly well-established and long-established principles of taxation in this country. There is nothing wrong about it at all. It should not be said as if they were doing something wrong.
§ Mr. Price
If, by what he has said, my hon. Friend is seeking to rebuke me, I stand unrebuked. I prefer to rely on this occasion on the judgment of the Manchester Guardian—[HON. MEMBERS: "Oh."] Certainly. I have great respect for the Manchester Guardian: I still call it the Manchester Guardian, as hon. Members will have noticed. I am trying not to be controversial, but I can see from the way in which the temperature of the House is going up that if my hon. Friend the Member for Cheetham tries to assist me we shall get into an argument. I do not want to waste time. I want to complete the quotation I was giving.
The article said:For four of the past five years, the 'net U.K. rate' at which Shell has been paying income tax in Britain has been one penny in the pound; in the fifth year, it paid no tax at all. B.P. paid no tax at all throughout the five-year period"—B.P. paid no tax at all during this period—both companies, however, have been able to avoid paying British taxes"—
§ Sir Alexander Spearman (Scarborough and Whitby) rose—497
§ Mr. Price
I will finish this quotation, if I may—because Britain, unlike any other major industrial country, forgives shareholders their domestic taxes if their company has already raid taxes abroad. There must be more productive investment at home if Britain is to be modernised and to become prosperous.I am familiar with the sort of academic argument—
§ Mr. George Y. Mackie (Caithness and Sutherland) rose—
§ Mr. Price
Let me just finish this.
I am familiar, of course, with the academic argument put forward so persuasively on behalf of the City of London from various quarters of the Committee—that, if a company pays taxes abroad it has no need to pay taxes at home. I understand the equity of that argument, but it does not end there. If the company is enjoying the social services of this country, such as the police, the fire brigades, and the educational services, it is perfectly logical and morally right that it should make a contribution to the taxes of this country. All the fevered language and blinding with science which goes on on the other side of the Committee on these occasions will not blind me to the fact that accountants have become so clever in our time that they have erected all kinds of devices for getting out of paying a proper share of taxation. If some group of citizens is escaping its moral liability to pay to the tax revenue of the country, somebody else has to pay more to make up the deficiency—
§ Mr. George Y. Mackie
As I understand the hon. Member's argument, he is saying that the large sales installations of the Shell Company and others in this country are not paying tax because of some manipulation. Surely it should be for the inspector of taxes in charge to make the case that they should pay taxes and that the accounts were wrongly presented. It is not a question of the tax system.
§ Mr. Price rose—
§ Mr. John Harvey (Walthamstow, East) rose—
§ Mr. Price
One at a time. I do not intend to be completely diverted from my argument. In the ordinary courtesy of the House, I shall give way when I feel 498 disposed to do so, but that is not at this moment. I have said nothing wrong, so I do not need to do so.
On the question asked by the hon. Member for Caithness and Sutherland (Mr. George Y. Mackie), it may seem strange that I as a Socialist—an unrepentant Socialist—for many years in this House should have to tell the hon. Member, who represents one of the Highland constituencies and comes in under the Liberal banner, that I prefer the views of the Manchester Guardian to those of some of the new-fangled Liberals who are putting forward views—
§ Mr. George Y. Mackie
On a point of order. Is it in order for an hon. Member to act as the mouthpiece for another hon. Gentleman behind him and repeat his words?
§ The Temporary Chairman
That is not a point of order. If an hon. Member speaks, he takes responsibility for himself for what he is saying.
§ Mr. John Harvey
The hon. Member says that he wants to state the facts. I hope that he will state them fairly. Surely they begin with the fact that it was a Labour Government, in the post-war years, which first introduced this principle of double taxation agreements, which have been of inestimable help to developing countries. That is tremendously important, but the hon. Member should also recognise that no Chancellor lives by Income Tax or Profits Tax alone. What of the millions of pounds which the big oil companies collect every year for the Chancellor in taxation of a different type? The hon. Gentleman tried to suggest that they should pay something for fire services and police. But they pay rates. Let the hon. Member be fair.
§ Mr. Price
I do not want to speak at length, but if I get much more of this I shall go on for a very long time.
Heavy criticism is being directed against the Chancellor suggesting that he is doing something which in some way is detrimental to the best economic interests of Britain. I am not satisfied that that case has been made out. It is a completely fallacious argument. Does any reasonable hon. Member with experience of the affairs of the House pretend that people of a senior status in the Labour Party are deliberately setting out on a course which would injure the economic structure of the country? We are seeking to reform the tax system of Britain, to encourage people who are worth encouraging and to discourage those who are dodging their fair share of taxation.
It has been said from the Opposition benches in previous debates, to which I listened without saying anything or even attempting to interfere with the debate, that because we are following this policy we are in some way Little Englanders. Nothing of the kind. I entirely repudiate any suggestion that I am a Little Englander. I hope that I have as healthy an attitude towards the outside world as has any other hon. Member, and I am as anxious to promote co-operation, in particular in the Commonwealth, as is anyone.
It is wrong to suggest that we are Little Englanders. We are trying to face the realities of our situation; as a debtor country we are no longer able to employ so large a proportion of our resources in investment overseas. One of the most successful exporters in the world of commerce, particularly since the war, has been Japan—and Japan has done no overseas investment at all in order to get markets. Does anyone wish to controvert that?
§ The Temporary Chairman
Order. The debate has been going very wide of the Amendment. I ask the hon. Member at least to confine himself to Britain's overseas investments and not to deal with 500 the investments overseas of other countries.
§ Mr. John Tilney (Liverpool, Wavertree)
Will the hon. Member explain why Japan has an insurance for private investors overseas and has been conducting this business in quite a big way?
§ Mr. Price
The Japanese have to have a hedge of some kind if they are prudent business men. It does not get away from the fact that Japan is not regarded in any sense as an important provider of international finance. The hon. Member should not try to put those "phoney" arguments across me, because I will not have them.
I will be brief and will bring my rather rambling remarks to an end with these few thoughts which are germane to the Amendments. The right hon. Member for Handsworth opened the debate in his usual quiet and thoughtful manner which we all respect so much. He said that the purpose of the Amendments was to retain the status quo for the time being for overseas investments—in other words to do nothing about these things on which the Manchester Guardian wrote on 3rd June.
We in the Labour Party, who have the responsibility of Government on our shoulders for the time being, are seriously concerned. Overseas investment in itself might be a good thing for the country if circumstances were more favourable and if our resources were greater than they are, and if we were not continually embarrassed by balance-of-payments problems. Overseas investment on the scale of the past 20 or 30 years has been such that it is running at about £11,000 million; that figure has been quoted in the debate. We are concerned that three tests should be applied to such investments in order that they may be justified. The first is that the investment makes some contribution to the employment of British labour; secondly, that it makes an important contribution to the balance of payments; or thirdly, that it makes a contribution to the British revenue. In so far as much of the foreign exchange has done none of these things, we think that the time has come to bring about a change and to reform the system in the way in which the Finance Bill proposes to reform it.
501 I apologise for going on much longer than I should have done but for the interruptions. No case has been made out for the Amendments, and they ought to be ejected.
§ 5.45 p.m.
§ Mr. Geoffrey Lloyd (Sutton Coldfield)
I begin at once with a point made by the hon. Member for Westhoughton (Mr. J. T. Price) that our overseas investments have rot contributed to the balance of payments, and I urge briefly to the Committee that we should give a great deal more attention to the influence of overseas investment on increasing our exports. The Government should have made a much more detailed investigation of the effect of overseas investment on promoting our exports before they brought forward the Clause, and we therefore suggest Amendments to take away the penalty which the Government propose to put upon overseas investments.
My hon. Friend the Member for Yeovil (Mr. Peyton) dealt with the special case o' the oil companies which has been referred to by many hon. Members, and I will comment on it only briefly. The Minister of Fuel and Power has had the longest official connection with the oil industry. At my time at the Ministry of Fuel and Power, and when I was Petroleum Minister during the war, it was accepted in the Treasury that the exports of oil by the sterling oil companies, although they were not made physically from this country, counted as gross British exports, and in considering what was their value to the country we had to deduct from the gross exports the actual cost in foreign exchange to facilitate production. Oil by volume and by value is the greatest single article entering into international trade today. The operations of these great sterling oil companies constitute one of the greatest export efforts made by this country, even though the oil is not physically exported from Britain.
When I was Minister of Fuel and Power the gross production of oil by the sterling oil companies was equal in value to the total manufactured exports from this country. This should make the Committee realise the great importance of the oil industry, far transcending the interests of particular shareholders. I support what my hon. Friend the Member for 502 Yeovil said; it is very unfortunate that this blow has been struck at the efficiency of the operations of these great international oil companies which play a very important part in our export earnings.
May I ask the Government to consider one particular aspect which is not so large in scale but which is nevertheless important in detail in considering the effect of overseas investments on our exports and in considering our desire on this side of the Committee to remove the penalty which the Government propose to put upon this kind of activity. I want to refer to something quite different from the oil companies. I know that the Government do not like efficient, progressive private companies. In spite of the lone voice of the hon. Member for Manchester, Cheetham (Mr. Harold Lever), it is apparent that there is a prejudice in the Government against the most successful and progressive companies in this country.
That being the case, the Government may be the more disposed to listen to a case of an entirely different kind. I refer to the Commonwealth Development Finance Company, which was set up after the Commonwealth Economic Conference of 1952 in order to help the developing Commonwealth countries. I want to examine the deleterious effects that this Clause will have on the operations of this concern and that on its help with exports from this country. Although this is an ordinary company in the sense that it is incorporated under the Companies Acts. Although it is a City company, it was formed at the instance of the Governor of the Bank of England at the request of the then Chancellor of the Exchequer to fulfil a public purpose in the Commonwealth. Although it pursues proper commercial disciplines, it has also non-commercial objectives.
At the recent annual meeting it was stated that in past years the company's net receipts of income from abroad when added to capital repayments received on loans made in previous years amounted to 87 per cent. of the capital funds which the company had transferred abroad from investment, and that in looking to the future it could be confidently said that the figure would normally exceed 80 per cent. I ask the Committee to note that that means that of every £1 million of 503 capital transmitted abroad by this company the cost to our foreign exchange balance is at most £200,000.
But there is this other most important point. It is also stated authoritatively that capital purchases in this country resulting from projects in which the company invest will amount on average to about eight times as much as the net outflow. Thus, for £1 million placed abroad by the Commonwealth Development Finance Company only £200,000 represents a net payment of foreign exchange, but, at the same time, £1,600,000 worth of orders for British machinery are placed by the projects in which the company invests. This is not just an isolated example. Because this is a public company fulfilling a public purpose we have the records extremely well documented, but I suggest that the same thing applies to many other important investments made abroad by other companies.
I especially asked the Commonwealth Development Finance Company to give me rather more details of this matter, and it told me that selecting 12 representative investments made in the last five years to which the company contributed a total sum of £3.4 million, the sponsors of the projects concerned have placed orders in the United Kingdom to a total of £5½9 million for a most diverse array of machinery—just the kind of exports the Government want to help us export—including rubber processing and tyre moulding equipment, machine tools, steel melting and other furnaces, foundry and specialised casting equipment, machinery for processing, spinning and weaving, jute and cotton, machine tools, metal presses, tube forming equipment, rolling equipment of many kinds, and a wide variety of electrical apparatus.
It is also fair to say in this instance, as in many other instances in a wide range of public companies, that not only are there the capital orders placed right at the beginning but demands which recur and continue for replacements, machinery, and even for intermediate products that help to make up the final products. This kind of investment should not be penalised by this Clause, against the effects of which we would, by our Amendments, like to protect the receipts of the Commonwealth Development Finance Com- 504 pany and many other companies which we believe are actually encouraging exports and helping our balance of payments by their foreign investment.
§ Mr. Maxwell
I cannot understand how right hon. and hon. Members opposite who purport to represent our business community cannot get straight in their heads the simple fact that it is not possible for our country to borrow short and lend long. No one can do that—we cannot—and no amount of talking, hypocritical or otherwise, will change that very simple fact. We have been suffering balance-of-payments crises over the past 20 years, and they have invariably been due to the fact that we have allowed capital investment in the Commonwealth and alsewhere to run way ahead of our earnings—
§ Mr. Maxwell
And Government spending—I certainly concede that. Basically, however, we would not now be in such a terrible balance-of-payments position if the former Administration had taken the kind of steps that my right hon. Friend the Chancellor of the Exchequer is now taking to bring in a disincentive to investment. To do otherwise is just not possible. As we can see, the foreigners who have lent us money short, seeing that we cannot pay our way and finance these capital expenditures abroad, have withdrawn their money from London, and we have no alternative but to go cap in hand to the international bankers to lend us money so that we can pay our bills in the short term and avoid being bankrupt.
All hon. Members must realise that the time has definitely come when we have to put our affairs in order. We have to get the foreign bankers off our back, and we shall do that only by ceasing to lend money that we have not got, money that we have not earned. We need investment and modernisation in the United Kingdom more urgently than the Australians do in Australia.
Hon. Members opposite keep harping on the point that to bring in these disincentives to investment in the Commonwealth or abroad will harm our exports. If that is why they are pressing this Amendment on the Government, they have to answer the following question. 505 How is it that Germany, France, Italy, the Scandinavian countries, and every other industrialised country have increased their proportion of trade in those very Commonwealth countries where we e re supposed to have enjoyed all kinds of preferences, where our kith and kin E re the managers, and in which we have made enormous investments? The fact is that the proportion and percentage of trade we have been getting into these countries has been falling, so the argument that we should invest there in order to protect our falling trade is obviously quite nonsensical and does not bear examination—
§ Captain Walter Elliot (Carshalton)
The hon. Gentleman has referred to the percentage of trade in those countries, but will he refer to the gross values?
§ Mr. Maxwell
I do not have those figure in my mind, but they are all available in the Library. The facts are very well known. Great Britain used to be the world's No. 2 exporter. We have fallen behind in the Commonwealth. In the past five years our trade has fallen by about a quarter—
§ Mr. Braine
I am sure that the hon. Member wants to be fair and accurate. There has been a decline in the proportion of Commonwealth trade and world trade enjoyed by this country, but it is a relative decline and not an absolute decline. In recent years other nations have come along and become competitive, and so on, but that does not mean that our trade with Australia and other Commonwealth countries has diminished; it h as continued to grow.
§ 6.0 p.m.
§ Mr. Edmund Dell (Birkenhead)
This is a point of substance and the facts should be made available to the Committee. In the five years 1959 to 1963 in Australia—the main country in which we have invested—we invested £237 million, yet during the whole period our exports to Australia remained stationary.
§ Mr. Maxwell
I am very much obliged to my hon. Friend. This is precisely the point. It is no good hon. Members opposite ducking this issue. The need for our country to bring in disincentives to investment abroad at least for the next four or five years until we have the foreign bankers off our backs should not 506 be a party issue. Many right hon. Members opposite were Ministers not long ago. They must know how humiliating it must be to go cap in hand to Governments saying, "Lend us money or we shall go bankrupt." This is not something which should be a party issue. We cannot afford to make these investments by borrowing short and lending long.
§ Mr. Ian Gilmour (Norfolk, Central)
I follow how the hon. Member's argument applies to new investments over the next five years, but how does it apply to investment already made overseas?
§ Mr. Maxwell
I am very glad that the hon. Member accepts that new investments require a disincentive. I hope that if and when the Committee divides on this Amendment he will go into the Lobby with us and vote in favour of the Chancellor's proposal. It is extremely difficult and tricky from a taxation point of view to separate old and new investments. Because of this technical position it is not possible or necessary to separate them.
§ Sir E. Boyle
The hon. Member has been talking about the next four or five years, but the proposal which the Chancellor has put forward will not take full effect for seven years. During the next three years, in a rather haphazard way, temporary provisions are to be provided. Our complaint is that this will have a very major long-term effect and not one just for four or five years. We should look at the question of whether for the long term this is the sort of way in which we want to move.
§ Mr. Maxwell
What the Chancellor wants to do, and what this country needs to do, is to give notice to our business community and administrators that the time has come to call a halt to making these investments abroad because we as a country cannot afford them. When we have earned a surplus on foreign exchange and have a surplus to invest, it will be up to the Government—as my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) said—to say that we can now afford to encourage investments abroad. We want to put everyone on notice that we require them not to invest abroad now. Although we can argue about the technicality of the 507 Clause and that it postpones certain things to bridge over individual business difficulties, the principle is unarguable and unavoidable.
I come to the point about the oil companies. Unquestionably those companies have rendered this country sterling service over the years. They are certainly one of the largest earners of foreign exchange. They earn for Great Britain something which is even more precious, a great deal of influence and prestige abroad. I well understand why shareholders and investors in those companies squeal today that the value of their shares has been knocked as a consequence of the change in this taxation method. But the shareholders in those companies have not done badly over the past 20 years.
§ Mr. Maxwell
Major companies have benefited enormously from taxes paid by this community for defence purposes. Those companies would not have grown to their present size and prestige if the Government ever since the war had not helped and protected them. It is about time that the managers and owners of those companies made a contribution to help this country out of its present problems. On those grounds alone one would have thought that hon. and right hon. Members opposite—if they accept, as they must, that we as a country are in a chronic economic crisis—would agree that this matter has to be tackled.
The former Administration, represented by the party opposite, for the past 10 or more years have let this position drift continually. They have masked from the country the dangerous position we have been getting into by borrowing short and lending long. They have refused to face the consequences. The present Government have said that they are prepared to tell the country the truth. This Government have told foreign bankers and foreign Governments that by telling our country the truth, by facing realities, bringing in a new wind of change, changing our taxation system, accepting sacrifices, taking unpopular action and doing all that is necessary to restore the health and wellbeing of the country, we intend to retake our place as one of the premier 508 exporters in the world, as an exporter of capital as and when we have earned it from abroad. We refuse to go about borowing short and lending long because that cannot be permitted to continue any longer.
This Finance Bill has been dragging on for a long time. It is highly technical but it is nevertheless of the greatest consequence and importance to our country. It brings about radical and important changes whose purpose is to encourage modernisation and innovation. Any businessman or any business which will contribute to enhancing our exports and think first whether it is the advantage of the United Kingdom which lies in its enterprise is bound to be not only rewarded but praised by this Government.
§ Mr. Maxwell
Yes indeed, and honoured. Since the party opposite prides itself as being the party of most business experience and by its Government experience has got us into this position, are hon. Members opposite out to prove that they are as incompetent in business as they are in politics?
§ Mr. Robert Carr (Mitcham)
The hon. Member for Buckingham (Mr. Maxwell) has had the experience of building up a highly successful private enterprise business of his own. He has a desire, which I honour and understand, to build a still bigger industrial empire under his leadership in future. With the experience he has had I should have thought that he would have spoken somewhat differently. He has talked the most colossal nonsense which anyone with any experience in these matters must know is colossal nonsense.
The hon. Member spoke, for example, about the foreigners who lend us money and the need to satisfy them and to get them off our backs. Those were the sorts of phrases which he used, but does the hon. Member believe for a moment that the confidence of these foreign investors and lenders in us will be increased by the spectacle of Britain reducing overseas investment on a permanent basis? It is absolutely the reverse effect which this legislation will have on the confidence of those foreign lenders in our ability to pay our way. They will lose confidence in us 509 because of the spectacle of our making a permanent change.
As the hon. Member for Manchester, Cheetham (Mr. Harold Lever) said, we must first get our surplus, and we on this side of the Committee would understand temporary measures to hold back investment this year. But we are talking now of legislation which will only begin to have effect in a year's time and the effect of which will be deliberately tapered off for seven years. It will become fully effective only eight years from now. That cannot possibly increase the confidence of short-term lenders.
While these short-term lenders may wish to see us take measures which are effective in the short term, they would riot wish to see Britain taking measures to reduce overseas investment in the long term, still less to reduce, as the Government's proposals do, the value of our existing investments. As the Prime Minister and the Chancellor have rightly said, the vast existing overseas investment of this country is one of the chief backings of sterling and one of the chief reasons why foreign lenders should have confidence in us.
Hon. and right hon. Members opposite keep referring to other countries. They say that they do not seem to invest as much as we do overseas, yet they seem to do well in foreign markets. But the very set-up and history of those countries are totally different. They are not heads of any Commonwealth. The hon. Member for Westhoughton (Mr. J. T. Price), whom I am sorry to note has left us temporarily, took what I can only describe as an extraordinary Little Englander outlook. This may or may not be a justifiable outlook to take, but it is certainly not the outlook which the party opposite pretends to take. It is certainly not the outlook on which hon. and right hon. Members opposite went to the country last October. Before the election the Prime Minister spent at least a year thumping up the Commonwealth and saying what a wonderful Commonwealth party his party was. But if we are to head the Commonwealth there are responsibilities which we must accept. One of these is that we should continue to be a major source of new industrial investment for members of the Commonwealth.
510 The major difference between this country and the other countries which have been mentioned is two-fold. First, our population and standard of living in relation to our raw materials and resources are totally different from those of many of the other countries quoted. This in itself is in many cases a powerful reason for large overseas investment, particularly in relation to raw materials.
The other major economic fact which this country must face is the percentage of our national product which we must export if we are to balance our payments. We must bring into play every facet of overseas influence and investment if we are to screw up our exports to the very high level that we must secure if we are to balance our payments. There is no other country maintaining a comparable standard of living which has to export as we do at least 30 per cent. of the national product to pay its way. This puts this country in an entirely different position from that of most of the other countries which are sometimes quoted in comparison with us.
These are reasons why Britain must encourage overseas investment as a longterm policy. Whatever the short-term reasons for holding back, we must have a policy which encourages overseas investment in the long term, and this is why we on this side of the Committee have moved the Amendment. Based on every experience we have had and on the advice, knowledge and experience of all those best equipped to deal with these matters outside the House of Commons, we believe that as a long-term policy the one which we are invited by the Government to accept would be damaging to our national interest.
I wanted to speak today, however, not principally about these wider matters, to which I have been provoked largely by the last two speeches from the benches opposite, but particularly from the point of view of the developing countries. I want to draw attention to the damaging effects on the developing countries, particularly within the Commonwealth, of the Government proposals to change the whole scale and basis of double taxation relief as we have known it. There is no doubt that the effect will be, and indeed is meant to be, damaging. It is not, of 511 course, meant to be damaging to developing countries just for the sake of damaging them. I am not in any way suggesting that the Government desire to damage as such the developing countries, but I say that the inevitable results of these proposals if unamended will be to damage the interests of those countries.
It has been a major priority of British overseas policy for many years, and particularly over the last 10 years, to give aid to developing countries, to assist them to make their economies self-sustaining. Therefore, on this side of the Committee we must condemn the proposals as they stand in this Clause, and press with all our strength for their amendment. I, of course, support the main Amendment moved by my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle). This would meet the overall national need and the need of the developing countries, but if the Government insist on refusing to accept that Amendment, I make a strong appeal for special provisions for the developing countries. This is why my hon. Friends and I have tabled Amendment No. 554, which is being discussed with this Amendment.
Amendment No. 554 is on exactly similar lines to the Amendment moved by my right hon. Friend, but it limits the concession to the developing countries. I earnestly appeal to the Chancellor to grant us this concession even if he feels that he cannot grant the wider one, which I believe strongly he should do. I remind the right hon. Gentleman once again that the United States, in the measures which it has taken to restrict temporarily its outflow of investment capital, has made an exception of outflow to developing countries. Since the American example has been quoted to us as justification in other respects, I hope that at least it will be followed fully in respect of developing countries.
It is important that we should be convinced of the importance of private investment as an instrument of aid to the developing countries. Some of the statements and attitudes of at least some hon. Members opposite make me doubt whether they fully accept this—and that is not just some Tory dogma. It is a view and policy strongly held and propagated by, for instance, the Develop- 512 ment Assistance Committee of the O.E.C.D., the main international organisation in aid to the developing countries. This is what the Chairman of the Development Assistance Cornmittee said in his Report for 1964:The Members of the D.A.C. have long been on record as recognising the significant role that might be played by private capital in economic development. Private investment not only constitutes a substantial addition to the fund of financial resources available to the less developed countries but, particularly in the form of direct investment, brings with it the administrative, technical and managerial skills necessary to launch or expand economic enterprises, which in turn provide training and experience for local personnel.In other words, private investment which goes to a developing country not only leads to new or increased local output, but it brings with it built-in technical assistance and training for the nationals of that country at every level of managerial and technical skill, and it also helps to encourage what one might describe as the habit and skill of entrepreneurship which has been generally recognised as a vital factor in bringing any economy to the point of self-sustaining growth.
It is not only the Development Assistance Committee of the O.E.C.D. which ranks private investment high. So does the Overseas Development Institute here in this country, a body which is making a specialist contribution to our knowledge in this field. Perhaps even more important, because it shows the views of the developing countries themselves, the importance of private investment was specifically recognised by the famous United Nations conference, the U.N.C.T.A.D., which met in Geneva last summer. It is worth recalling that the resolution of that conference dealing with aid to the developing countries called on the donor countries to establish and accept as their target 1 per cent. of their national income for aid, including private investment. In other words, the United Nations members at that conference, the great majority of which were developing countries, clearly recognised the important role which private investment has to play in their development.
I do not for a moment suggest that private investment on its own can do the job of providing development aid to the countries we have in mind, but what 513 I do suggest is that Government aid on its own cannot do it either. They are absolutely complementary. One without the other does not make sense and will not achieve our objective. To give more and more Government aid without the complementary injection of private investment will not result in the best fruits and most effective use of the Government expenditure.
Until a year or two ago, private investment from Britain in the developing countries was contributing very largely to our effort. In fact, it was contributing an amount to the developing countries equal to or, more often than not, greater than the amount of Government aid itself. Unfortunately, that picture has now changed. As some hon. Members opposite, notably the hon. Member for Birkenhead (Mr. Dell), have reminded us on several occasions, the amount of private investment in the developing countries has been falling seriously in recent years.
§ The Chief Secretary to the Treasury (Mr. John Diamond) indicated assent.
§ Mr. Carr
I am glad to see the Chief Secretary nod his head, but, surely, he will recognise that the only logical conclusion to draw from that fact is that this is a time when we ought to be encouraging private investment in the developing countries, not taking measures specifically meant to cut it down. This is the chief condemnation of the Government's proposals in relation to their effect on the developing countries. At a time when they ought to be encouraging something which is declining, they are deliberately taking action to push it still further down.
Again, this is directly contrary to the views and recommendations of the Development Assistance Committee in Paris. The other week, at Question Time, when I suggested that the proposals which she was supporting cut across the policies of the Development Assistance Committee of the O.E.C.D., to which I thought the British Government subscribed, the right hon. Lady the Minister for Overseas Development tried to deny it. But this is what is said on page 96 of the 1964 Report of the D.A.C., under the heading, "Encouraging the efforts of the private sector"—… the D.A.C. Members should give prompt attention to O.E.C.D. proposals relating to the 514 use of tax incentives and a possible multilateral guarantee scheme.Here is a direct request from the O.E.C.D. that we, along with other D.A.C. members, should give prompt attention to its proposals relating to the use of tax incentives and the possible multilateral guarantee scheme, but, instead of that, we are faced with an avowed tax disincentive, not a tax incentive. I mention the D.A.C. only to make clear that the view which I am propagating is not just a party view held in the House of Commons but is a view shared on an international scale by the most authoritative international body in this field.
I have some questions to put to the Chancellor about the Government's intentions, questions which raise important issues in judging the extent of the damage of their proposals and, therefore, the extent of the need to adopt the Amendment. First, how long is this disincentive expected to last? The hon. Member for Cheetham said that it would not be permanent because this Committee could not make it permanent and that, in another year, we could, of course, alter it. That is true, but it is the intention behind it which both investors in this country and the receiving countries will look at. The intention of the Government, surely, was that it would be a permanent feature of our legislation.
§ Mr. Callaghan indicated assent.
§ Mr. Carr
I see the Chancellor nod his head. I wonder whether he saw a report in the Indian newspaper, the Statesman, of 1st May. This was a report of a speech or answers to questions—I am not sure which—by his right hon. Friend the President of the Board of Trade on his recent visit to India. According to the Statesman of 1st May, the President of the Board of Trade said that he hopedthat the withdrawal of tax concessions on overseas investment would only be temporary.Perhaps the right hon. Gentleman was misreported. If so, we should like to know. If he was not misreported, we must be told what the Government's policy is before we come to a conclusion on this Amendment. Is their policy expressed when the Chancellor nods his head and says that it is the intention to make this permanent, or is their policy 515 expressed when the President of the Board of Trade says in India that he hopes that the withdrawal of the tax concessions will be only temporary? On the face of it, there is a complete conflict between two members of the Cabinet on this subject. As I say, I have quoted only from a newspaper report. If the President of the Board of Trade was misreported, we should be told, and then the apparent contradiction will be cleared up and we shall know that the intention is to make it permanent.
The second question concerns whether it is the right hon. Gentleman's intention that the reduction in private investment in developing countries which he deliberately wants to bring about by this means will be compensated for by increasing Government aid. We should know what the Government's policy is on that, because, here again, there seems to be some conflict. On 1st June, in response to a supplementary question that I put to her, the Minister of Overseas Development, speaking about the volume of expected Government aid, said:I am not expecting any decrease. On the contrary, I am hoping for an increase."—[OFFICIAL REPORT, 1st June. 1965; Vol. 713, c. 1482.]I know that the Chancellor could ride out this and say that we all hope for things but when a Minister makes a statement in the House would-be recipients are inclined to think that the hope is an intention. Is it the intention of the Government to increase aid? They promised to do so before last October not only here but in the developing countries themselves. However, an apparently conflicting statement was made by the Chancellor himself speaking in the opening debate on the Corporation Tax on 2nd June. He said, referring to the reduction of outflow,This must apply on Government account, as well as to private account, and I should like to make it clear now that I regard it as an essential obligation on me to see that Government expenditure overseas is reduced, as well as seeing that private expenditure overseas is reduced…"—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1744.]It is true that the words he used were "Government expenditure overseas" and I realise that aid expenditure is not the only form of Government expenditure 516 overseas. But the right hon. Gentleman was specifically speaking in the context of overseas investment and immediately following an intervention that he kindly allowed me to make on the subject of developing countries. Unless he chooses to clarify that statement, anyone reading it will feel that he was saying that he had to make a reduction in the outflow of Government expenditure—or at least, certainly not an increase—in the form of aid to developing countries, just as he had to hold back the outflow of private investment in developing countries. We should have some statement about that.
Finally, if there is to be an increase in Government aid in order to offset the reduction in private investment in the developing countries, how will that improve our balance of payments? Perhaps there is some subtle reason not apparent to me or other people; but surely a Government loan is a greater burden on our balance of payments than a private investment in a productive undertaking overseas. If the object of the exercise in cutting down private investment in developing countries is to relieve our balance of payments, that object will not only be neutralised but worse from the balance of payments point of view if the private investment held back is replaced by Government loan. If that is not so, I hope that the right hon. Gentleman will explain.
§ Mr. Callaghan
Most of the companies operating in these territories are overseas trading corporations that bring no return to the United Kingdom.
§ Mr. Carr
The Chief Secretary says that it is not so, but it has been proved in the case of large numbers of individual companies. If it is not true on average then I support the hon. Member for Birkenhead in some of his pleas in recent weeks that we should have an inquiry that would establish the facts. But until we have established them we should not alter the structure of our tax system on the 517 assumption that the Chief Secretary is correct. The Chief Secretary or I may be correct. Let us assume for a moment that there is doubt about it. We should certainly not alter the whole basis of the tax structure unless or until his point of view is borne out by a factual inquiry.
I should disclose an interest here. I am asociated with a number of companies operating overseas, and in my personal experience there is undoubtedly a net beneficial flow back to this country. Companies do not invest overseas for fun any more than they export for fun. It is very hard work. Sometimes, until they have learnt the lessons of experience, it is not an easy or successful task. But we do it because, unless we do so, we shall lose markets which we already have and we shall not only lose the market for that part of the range of our products to be manufactured locally but also for the wider range of related products which will still be manufactured outside the country concerned.
Obviously, the company which has its local facilities for production supplies not only its products made in that country but the associated products still made here at home. It brings back the bulk of the orders for the equipment for the factories concerned. It may not do so in every case but, from a fairly wide experience, and drawing on the knowledge of people with much wider experience, I believe that on average there is a total benefit from overseas investment—the dividends, the know-how payments, the orders for the plant and equipment and the opportunities for further export to that market which come from being established in it. I find it difficult to believe that all this does not contain substantial benefit for our balance of payments.
Although it may not be necessary for other countries which have to export say only 10 per cent. of their national output to bring every lever to bear in order to get orders from overseas, I am convinced that it is necessary for Britain to do so since we have to export at least 30 per cent. of our national product if we are to live at the standard of life that we have and which we hope to have in future. For the sake of the developing countries, for the sake of the prosperity of our own people and for the sake of our role in the Commonwealth and the 518 world I beg the Chancellor to accede to the Amendment.
§ Mr. Dell
I am glad to follow the right hon. Member for Mitcham (Mr. R. Carr) because, like him, I am very interested in the prospects and problems of development in the less developed parts of the world and concerned with any disincentive effect that taxation proposals may have on investment in them. But, as he says, in referring to remarks that I have made during debates on this Bill, there has been a reduction in private investment in the less developed parts of the world. That reduction appears to affect not merely this country but all industrial countries and it seems to me that this is a far larger and wider question than one that can be affected by the details of Corporation Tax in this country.
If we are to deal with the problem at all—and I accept the right hon. Gentleman's sincerity in wishing to deal with it—it must be dealt with in quite different ways from the ways he seems to be concerned with. The main problem here is simply that investment in developed countries is more profitable than investment in less developed countries and it is for that reason that investment in less developed countries has been falling year by year. If we want to increase the amount of investment in less developed countries, we have to adopt quite other methods. We have to adopt very much more radical methods than developed countries have yet been prepared to adopt. If right hon. Gentlemen opposite and my right hon. Friends are willing to support the sort of methods which will be necessary to increase private investment in less developed countries, I shall be delighted.
The sorts of methods which are required are those which will increase the profitability of private investment in less developed countries, such as commodity price agreements which will tend to raise the prices which the less developed countries can obtain for their commodities, extensions in the system of preference offered to less developed countries on their manufactured goods—and may I say in passing that it is a pity that the new Part IV of G.A.T.T. makes no reference to this—possibly permission within the international trading system for export subsidies, certainly the gradual elimination of quotas on manufactured imports 519 into the developed countries and certainly the elimination of the systems of differential tariffs existing in too many developed countries which discourage the processing of raw materials in less developed countries.
All these are measures which would end with the result that private investment in less developed countries would not be less profitable than private investment in developed countries. If measures of that sort are taken by the Government and by the Governments of other developed countries, they will have an effect on the rates of private investment in the less developed countries. If in addition we can have a guarantee of investment in less developed countries, and I think that such a guarantee is now under consideration, we may make a radical change in the present undesirable and worrying situation.
§ Mr. Dell
I agree that those were the sorts of proposals which were put forward. Unfortunately, this was a preliminary conference and no decisions were made, but decisions of that sort have now to be taken and I hope that the Governments of the developed world will now agree on measures such as these.
In other words, the answer to the problem is to make investment in less developed countries more profitable and more secure than at the moment. The details of the system of company taxation in a country such as this or other countries in the developed world are not the answer to the problem.
I return to the point which I have made several times in these debates and which I should not have made again had it not still come from hon. Gentlemen opposite. Again and again I have made the plea for an inquiry into the effect on our balance of payments of overseas investments, and I have also stated that in my view my right hon. Friend is correct in his decisions, because the balance of the argument as it stands is that the effect on our balance of payments has been unfavourable.
520 Right hon. Gentlemen opposite have referred to the effect on our exports. There is no doubt that there are certain ways in which overseas investments benefit our exports. It may be that a great deal of the capital equipment which is exported to the countries in which we invest comes from this country. It may be that there is a flow of raw materials as a result.
Nevertheless, we cannot take the whole of the credit for those exports as returned to us on these overseas investments, because one of the things holding back our exports at the moment is our lack of capacity. In other words, it would appear that much of the exports now credited against the investments which we make overseas would have occurred anyway. Because in our total demand, home and overseas, we are running up against our total industrial capacity, my right hon. Friend has had to introduce taxation which will cut home consumption so as to release capacity for export. In other words, in the short run at any rate, we face a situation when much of the exports being credited against our overseas investment would probably have taken place anyway.
Let us take the particular example of chemicals. I take the example because I happen to have some experience of this industry and also because we have recently had a specific report on it and on its balance between imports and exports, and also a specific statement from the chairman of the largest chemical manufacturing company in this country, Sir Paul Chambers, the Chairman of I.C.I. He has said that the main fact which is now limiting an increase in I.C.I. exports is lack of capacity. I.C.I. is justly presented as one of the best examples of the effect of overseas investment on our balance of payments, and yet at this moment I.C.I. is able to export less than would otherwise be the case, because of lack of capacity.
There is also the fact, mentioned in the Report of the Economic Development Committee for the Chemical Industry, that:Since 1962, imports have increased by 46 per cent. During the same period the home consumption of chemicals has increased by 21 per cent. Since 1962, direct exports of chemicals have risen by 21 per cent.521 What do these figures mean other than that we have had to import chemicals partly because we have lacked capacity to supply them? They also mean that the rate of increase in our exports of chemicals has been lower than it could have been, because of lack of capacity.
We therefore have to accept that much of the argument that overseas investment is justified by the exports which follow it is, at any rate in the short run, untenable. These exports would have been made anyhow, because our exports are currently being held back by lack of capacity.
There are other companies which have specifically stated that their overseas investments have no effect on exports. Courtaulds have specifically said so and it must be true of many companies, in addition to those which claim that there is a beneficial effect.
§ Mr. William Shepherd (Cheadle)
Have not the Americans specifically stated that 23 per cent. of their total exports of manufactured goods go to subsidiaries in other countries?
§ Mr. Dell
The Americans have certainly given a very similar figure. However, if the hon. Gentleman will examine, with the care which these facts deserve, the comparison between the American export performance in relation to American overseas investment and our export performance in relation to our overseas investment he will find that the American performance is much more favourable than ours. The Americans have adopted the deliberate policy of making those overseas investments which increase their exports.
I can give many examples of this, for I have come to the Committee armed with examples. It will be found that the Americans have deliberately made the bulk of their investments in countries which as a result have imported a great deal more from the U.S.A. Going through a list of American investments overseas one finds again and again that they are in highly developed countries, and, as a result, there has been a very large expansion in American exports to those countries.
As the hon. Member for Cheadle (Mr. Shepherd) is interested, it might be worth giving a few examples. Between 1959 522 and 1963, the Americans invested 769 million dollars in the German Federal Republic and, as a result, or as a consequence or following this—I do not want to state that this is necessarily cause and effect—American exports to the German Federal Republic have risen considerably.
The Americans have invested the sum of 467 million dollars in France during the period 1959 to 1963, and American exports to France during that period have practically doubled. This is a very remarkable record and it probably shows that if overseas investment is planned properly it will have a most marked effect on exports. If one looks at a British overseas investment unfortunately one does not find the same effect at all.
§ Mr. Airey Neave (Abingdon)
Does not the hon. Gentleman agree that one of the purposes of overseas investment is to increase exports? Therefore, the policy of the Government in cutting it down is likely to damage our export trade.
§ Mr. Dell
I entirely agree with the hon. Gentleman: one of the desirable effects of overseas investment should be to increase our exports. I think that any company in this country planning overseas investment should have in its mind the desirability of increasing our exports as a result. A handful of companies in this country, when considering overseas investment, do have this result in mind. Unfortunately, if our overseas investments are examined, it will be found that our exports do not follow our overseas investments.
In a short intervention I made earlier I gave the example of Australia. Australia is important, because, leaving aside investment in oil and insurance, Australia accounted for 20 per cent. of our overseas investment during the period 1959 to 1963. During that period we invested £237 million in Australia. Yet, if the figures are looked at, our exports to Australia throughout that period remained pretty well stationary. In 1964 the figures of our exports to Australia were still less than they were in 1960.
§ Mr. Tilney
Do these figures include our invisible exports and dividends to Australia which are very considerable indeed?
§ Mr. Dell
These figures do not include our invisible exports to Australia. They are specifically on the point I am trying to separate—the effect on our exports of overseas investment. Hon. and right hon. Gentlemen opposite have repeatedly referred to this point. They have repeatedly said that there is this very beneficial effect on our exports. I personally am at one with them in this: overseas investments should produce a beneficial effect on our exports. The fact that they do not is most unfortunate, and I am afraid that in too many cases it may reflect on the quality of management which has made those particular overseas investments.
§ Mr. R. Gresham Cooke (Twickenham)
Taking the instance of Australia, if we had not made investments in Australia our exports would have fallen even more sharply. If one is prohibited from exporting a motor car or a machine tool to Australia, which is the present position, one opens a factory there which can import some of the parts made in this country. Our exports would have gone down even more but for that.
§ Mr. Dell
Hon. Gentlemen opposite have such a contemptuous attitude to the quality of British management that I am horrified. We have hon. Gentlemen opposite saying that had we not made these investments our exports would have fallen, even though other countries, which have not made investments of anything like the same size, have increased their exports in the territories in which, according to hon. Gentlemen opposite, we would have lost exports. Hon. Gentlemen must really decide whether this contemptuous attitude to the quality of British management is justified.
§ Sir Harmar Nicholls
The hon. Gentleman has used the word "contemptuous" in relation to observations made from this side of the Committee. He has said that investments abroad should produce exports and has quoted other countries whose investments abroad have resulted in exports. The only inference to be drawn from that is his contempt for British management and British industry—that they are not as patriotic or as keen or as able as our competitors in other countries. Does he wish that slur to stand, because it is the only message in the words he used?
§ Mr. Dell
I think it was an hon. Member opposite who was guilty of the slur. I have certainly said that our overseas investment policy, the policy of many of our companies, certainly deserves review. I think that one of the results of the introduction of the Corporation Tax will be that there will be this very desirable review. I was merely saying that for an hon. Gentleman to say that our exports to Australia would have fallen if we had not invested £250 million-odd in Australia over a period of five years is surely a contempt of the quality of British management, which fortunately British management does not deserve.
§ Mr. Gresham Cooke
I cannot let the hon. Gentleman get away with that. They would have fallen, for the reason that Australia was putting up import controls which prohibited our exports. One cannot export a motor car, for example, to Australia.
§ Mr. Dell
I am finding it increasingly difficult to make a speech in this Committee because I find that every two minutes hon. Gentlemen opposite jump up to intervene. It must be that I touch them on the quick. If the hon. Gentleman was aware, for example, of the figures of American investment in Australia and the effect that the American investment in Australia has had on their exports, he would find a very different picture which contradicts the whole of the position he is now taking up. The Americans have invested a very much smaller sum than we in Australia but their exports to Australia have been going up by leaps and bounds. These are the facts, and I am sorry that hon. and right hon. Gentlemen come to this Committee to speak on this subject without having investigated the facts. It is not my responsibility, but I am prepared to provide them with the facts and give them copies of the studies I have made on the subject. I think that out of courtesy to the Committee hon. Gentlemen should come with a little information before they make the extravagant claims that they do.
The trouble, I think, is that we have concentrated our overseas investments in countries which have taken a highly protectionist attitude and have said "As a result of your overseas investment we will ban the imports of the same goods", and naturally as we have been making 525 abroad the type of goods we make in this country the direct effects of our investment in those countries has been to cut our exports rather than to increase them. This is an unfortunate and undesirable result. It is not the sort of result we should have from overseas investment, but on the basis of all the figures I have been able to accumulate this has been the result. There can he quite a different effect. I hope that one effect of the sort of investigations now being made in companies and in the Treasury as to the effect on our balance of payments on overseas investment will be a reappraisal, both by Government and companies, of the sort of considerations that ought to govern our overseas investments. I think that will be very much to the benefit of our economy.
I am sure that in so far as the effect of the Chancellor's proposals are to increase investment in this country they also will be very beneficial, because if we can increase investment in this country we will also be able to increase our exports and to increase the standard of living in this country. The message that the Chancellor's proposals give to this country is of the importance of investing in Britain, and that is an importance which no hon. Gentleman will deny.
§ 7.0 p.m.
§ Mr. Braine
I wish strongly to support all the Amendments moved by my right hon. Friends in their very cogent and persuasive speeches. Whatever arguments can be adduced for Corporation Tax as such, it is clear now from the views expressed on this side of the committee, that its side effects on overseas investment, whether intended or largely unforeseen, are damaging both to the longterm national interest and to the interests of developing countries overseas. That these side effects are damaging and that they may have been to some considerable extent unforeseen, is, I think, recognised by the Chancellor in coming forward as he has done with the extension of transitional reliefs. It is not without significance that the Committee is discussing this subject today at a time when the Commonwealth Prime Ministers are gathering in London to discuss economic and trade problems which stem in substantial part from a shortage of private investment in their own countries. 526 I entirely agree that in the short term, if our country is faced with a balance of payments problem, there may be a need to exercise great caution. There may be need to subject new investment to a close scrutiny and, perhaps, as my right hon. Friend the Member for Mitcham (Mr. R. Carr) said, to curtail it sharply in the coming 12 months. On this point the hon. Member for Manchester, Cheetham (Mr. Harold Lever) was absolutely right, as he has been so often throughout these debates. But this is not in issue; this is not really what we are discussing. Our contention on this side is that we will not cure the balance of payments problem by penalising existing overseas investment as the Chancellor proposes.
I wonder whether the Committee recalls what the N.E.D.C. said in its account of gains and losses as set out in its report on "Conditions for Faster Growth". Its conclusion was that severe restrictions on private investment abroad could hardly be maintained indefinitely and, in any event, could worsen the current account of the balance of payments in the long run. A policy which forces United Kingdom companies operating overseas to remit a larger proportion of their profits home may certainly serve the short-term interests of the Treasury, but at a far greater long-term loss. The reason why I support the Amendments with their different methods is that they would reverse that policy.
In some cases, that policy is positively damaging to the interests of countries with whom we have long had trading links, and, in particular, of countries which are the recipients of United Kingdom Government aid. I am always interested in the speeches of the hon. Member for Birkenhead (Mr. Dell), because there is a great deal of sense, clarity and vision in what he says. He would, however, allow that, in judging a matter of this kind, we are not dealing with the export trade of the United States or with the fiscal and trade problems facing the Federal German Republic or France. Here, as I shall show, we are dealing with a unique trading pattern and unique trading problems.
The Chancellor and the Financial Secretary to the Treasury have tried to argue that the advantages of overseas investment are overrated and that we could get a higher return for the same 527 money invested at home. I do not doubt that this would be true in a good many instances. According to the Chief Secretary on 2nd June, the average return to this country from a foreign investment is 4 per cent. The right hon. Gentleman said:Eight per cent. is made. Half of it is reinvested abroad and 4 per cent. comes back to this country."—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1847.]The comparison, the right hon. Gentleman told the Committee, is with a 15 per cent. return on our domestic investment, half of which goes in tax and provides considerable social benefits. The right hon. Gentleman has patiently worked hard and patiently throughout our proceedings on the Bill, and we all respect him for the good temper he has shown throughout our debates. Nevertheless, that is an extraordinarily facile argument, and I will venture to say why.
First, it takes no account of the great diversity and complexity of our overseas investment. Secondly, it takes no account of the close, intimate connection between investment and exports. Thirdly, the figures adduced by the Chief Secretary are doubtful in the extreme.
Take, first, the scale and nature of our direct overseas investment. Capital is not exported for fun. It goes overseas, it grows there, flourishes and changes. In some instances it is highly rewarding, in a good many cases it is not very rewarding, and in some it is positively unrewarding. I see present a number of my old friends from the former Colonial Territories in Africa and Asia. They know only too well how unrewarding such investment often is but how necessary it is for the economies of developing countries. The fact is that our direct investment overseas has gone there because of a trading pattern which is peculiar to Britain. Few great manufacturing nations have such a dearth of domestic raw materials. We were obliged to go overseas to develop sources of raw materials. That is the first consideration.
The second consideration is that exports are vital for our economy. Not a speech is made without this being underlined. If we express exports as a proportion of respective gross national products, ours are three times bigger than those of the United States of America. 528 They have to be, because although the United States is not wholly self-sufficient nowadays in raw materials—she is increasingly taking an interest in the exploitation of resources all over the world—she is rich in minerals and raw materials of every conceivable kind. She is so rich in food that her great problem is what to do with the vast surpluses that she possesses. We are poor in raw materials. We provide about 50 per cent. of our own food and our climate is such that a great many of our foodstuffs have to be imported. We export or perish, and there is no other country in the world of which this can be said.
The third consideration—and this is the answer to the hon. Member for Birkenhead—is that much of our overseas investment is defensive. As tariffs rose against us, as they continue to rise against us in our traditional markets, which are now fast industrialising, incidentally with our encouragement and help—that is a phase through which these countries must go—we were and are obliged to build factories behind the tariff wall in order to keep a share of valued markets. Is this wrong? Apparently, according to hon. Members opposite, it is.
§ Mr. Braine
I accept the correction. The hon. Member, however, is on to the wrong point. I used the word "defensive" in the sense that to provide 54 million people in these islands with a high standard of living—a far higher standard of living, for example, than the people of Japan, who were quoted earlier, or a far higher standard of living than almost any other industrial country except the United States of America—we have been forced to invest overseas in order to protect our sources of supply of raw materials and to obtain the foodstuffs necessary to sustain our people. That is not the position of the United States nor that of the Soviet Union.
Does anyone in the Committee believe that if a great part of the capital employed for those purposes had stayed at home, we would have remained in business and would enjoy the standard of 529 living that our people enjoy today? Bearing these considerations in mind, to use the new Corporation Tax to try to channel surplus money into home rather than overseas investment is to use a crowbar to sort a collection of Dresden china. It is crude, inefficient and bound to cause considerable damage.
A great many global figures have been adduced in this discussion. Trade, however, is not a matter of global figures. It is a matter of movements of commodities, large and small, and of a vast range of goods and services. Consider the diversity of our overseas investment. First of all there are the mineral extraction companies. I am not going to say anything about oil, because this has been dealt with so effectively by my hon. Friend the Member for Yeovil (Mr. Peyton) earlier this afternoon. These companies operate overseas because they have to. Oil companies in America operate overseas, too, of course, but there are already vast resources of oil inside the United States of America, while if we want to bring oil to this country we have to go out to get it.
Extraction companies go overseas because that is where the minerals and the oil are to be found. Here the benefit has been to ensure the supply of fuels and raw materials needed for British industry, both for home consumption and for export, and—this is a point which the hon. Gentleman the Member for Birkenhead has overlooked—at prices which have probably fluctuated less than they would have done if we had not had a stake in their production. I have forgotten for the moment the name of the organisation, but there was a report on world trade published some years ago which showed that in general, in the years before the war, Britain and her dependencies enjoyed great advantages as a result of Imperial Preference and price stability than countries outside the sterling area. These are advantages not to be sneered at.
The criterion here should be, surely, will the proposals in this Bill and in this Clause encourage or discourage British-owned companies in relation to their international competitors? On this side of the Committee there is no doubt whatsoever as to the answer, and there are plenty of hon. Gentlemen on the other side of the Committee, too, including the 530 hon. Gentleman the Member for Cheetham who have no doubt.
Then we come to the second group of companies, the plantation companies operating in the poorer, under-developed countries which in general have difficulty in attracting new risk capital. Of course American enterprise does not venture into those countries, because there is no return, or virtually no return. The British companies are there, however, because they went there fifty or sixty years ago or more. Here the great difficulty is to attract new risk capital.
These are some of the facts of life, which hon. Gentlemen on the other side of the Committee seem to know so little about; but they are facts of life. Many British investors in those countries, no doubt from a purely selfish point of view, would like to repatriate their capital and bring it back here, but the effect on the developing countries in question would be quite disastrous. Here the direct benefit to the United Kingdom economy may be little, but it is probable that it helps to keep the terms of trade reason ably favourable. It encourages the export of machinery and capital.
I, too, have here a file of letters from companies in those territories, showing how they have been assisting the export of British machinery, components and expertise. Indeed, if we had not supplied those things they might have come from other quarters, or they might not have come at all. These are, in the main, grant-aided countries, and this is what attracts me so much to the Amendment of my right hon. Friend the Member for Mitcham. These are countries which are the recipients of grant in aid or loans from the British Exchequer. The British people as a whole have a stake in the political stability and the economic future of those countries. The British taxpayer is pouring out money to assist those countries to overcome their problems. Precisely because these countries are struggling against poverty they need the contribution which the wretched shareholders in these companies make, not only to the economy of the United Kingdom but also to that of the host countries.
As the Committee knows, I have been concerned with Commonwealth trade matters for a good many years and have had scores of letters from companies 531 operating in these territories. Here is a letter from one tea company operating in Malawi, surely one of the poorest countries of the African continent. That company has no doubt whatsoever about the Chancellor's proposals. It is pleased with the reliefs which the Chancellor is proposing, for they alleviate the position slightly. But the company goes on to tell me:What is absolutely clear is that when the effects of the Chancellor's proposals are felt there will be very little money for capital expenditure and no possibility of putting money by for further investment either in new projects or in investment in United Kingdom stocks and shares.7.15 p.m.
This is a company which has over the last six years ploughed back nearly 50 per cent. of its net profits into improvement of its estates; it provides scholarships for the young people of the country; it has served Malawi well. The company tells meThere is no doubt that there will be a depressing effect on the part played by this company in the economy of malawi and on the way in which it plays a part, albeit a small one, in the economy of the United Kingdom, if the Chancellor's Bill is passed.Like other hon. Members, I could go on reading from scores of letters like this.
It is odd that we have to make this point to a Government who have made so many promises to aid the poorer countries of the world. In this I believe the Labour Party is perfectly sincere. I remember how throughout the period of the last Government the Labour Party was constantly urging us to devote more and more aid to those countries, and yet here it is manifest that the steps which are being taken by this Bill will injure the economy of countries already in receipt of and and, no doubt, expecting more.
The third category of companies are those operating in countries like India and Australia, countries which are now highly industrialised, and where industrialisation has caused imports to be replaced by domestic manufactures. Here, the existence—I say this emphatically—the existence of British-owned subsidiaries is the only means of keeping a share of the market, but this also means exporting British components and capital goods and receiving back royalties and remittances. 532 When hon. Gentlemen on the other side talk of overseas investment they always leave the side effects of such investment out of the calculation, but they are, of course, as important to the balance of payments as they are to the economy. Here the question is surely how far it is important to keep a toe-hold in markets where good will towards British business is still very considerable. These Amendments, if the Committee carries them, will make some easement for these companies.
What defeats me is that the Chancellor and his henchmen have completely failed to recognise the close link which exists between overseas investment and exports. The hon. Gentleman the Member for Birkenhead, who has made some of the most intelligent speeches from the other side of the Committee—there have been very few speeches on that side—and one feels bound to listen closely to what he says, threw considerable doubt—this worried me because I know he speaks with some considerable knowledge—on the link between overseas investments and exports. It is true that there has been a tendency for some years for private investment overseas, particularly in the under-developed countries, to decline, but the reasons for that are clear enough, and it is the duty of Governments, as the hon. Member for Birkenhead said, to get together to promote the kind of atmosphere in which it is possible for investors once again to take an interest in countries where there is still considerable political risk.
The hon. Gentleman was able, as I think the Chief Secretary was, to throw doubt on this relationship between exports and investments because he lumped all the figures together. He took no account of the variety and indirect benefits of overseas investment. Nor did he take any account of the duty which his party always urged on us on this side of the Committee, that of keeping going in countries where the return is small, where the profit is small, precisely because these countries are poor. What has happened to the idealism of Socialists in the course of the debates on this part of the Financial Bill? It has completely disappeared.
§ Mr. Shepherd
Was not the hon. Gentleman even less straightforward than that? He said that he was dealing with visible exports from Australia, but when 533 he came to capital investment he did not split it between visible exports and invisible surpluses.
§ Mr. Braine
That is a valid point, and underlines what I have been saying. The only effect of the Chancellor's proposals is to make things more difficult in countries where risk capital has been shy to go. I have no doubt that, just as in earlier times trade followed the flag, so today it follows investment.
Large overseas investment brings enormous advantages to the country. I.C.I. has been quoted as an example, and I shall not go into detail, except, as the hon. Member for Birkenhead preceded me and mentioned something that Sir Paul Chambers had said in April. In his Chairman's speech he said thatalthough I.C.I. probably earns a lower rate of return on its investments abroad than on those at home, the value of exports generated from I.C.I. companies in this country over the last 15 years as a direct result of such investments has been more than three times that of the capital outflow.I have no doubt that companies in the motor car and rubber industries could tell the same story.
§ Mr. William Baxter (West Stirlingshire)
I was rather interested in the hon. Gentleman's comment about trade following investment. He has not given us any facts or figures to prove his contention. It has been proven to my satisfaction that, certainly with regard to Japan and Germany, trade does not follow investment, but follows salesmanship. I think that if the hon. Gentleman were to devote a little more of his time to considering the desirability of expanding trade on the basis of good salesmanship, he would be nearer the point. Further, I think that it might be better if he were to devote a little more time to explaining the position with regard to the balance of payments situation, and how we can rectify it without taking the action which my right hon. Friend has indicated in this Clause.
§ Mr. Braine
The hon. Gentleman is correct in one respect. If one takes the global figures, the picture is nothing like as, encouraging as if one takes particular companies. There is a lot to be said for the view expressed by the hon. Member for Birkenhead. We ought to be taking time out to find out the facts. This is what I complain about in the Chancellor's 534 proposals. He is acting with a lack of knowledge of the facts.
We know at least two things. A little earlier my hon. Friend the Member for Cheadle (Mr. Shepherd) quoted a figure. He said that 23 per cent. of American manufactured exports were purchased by the subsidiaries of American companies abroad. The Federation of British Industries carried out an investigation into this matter. It questioned 40 to 50 leading British companies and last month published its report which showed that there is in fact a close association between capital and goods in the case of many firms.
I do not want to detain the Committee for very much longer. I could quote from examples which I have, and I am willing to provide the details to the Chancellor. I am willing to provide examples showing how particular companies have increased their investment overseas, and how this has been followed by substantial exports.
I grant that it is difficult to be precise. I grant that the Chancellor's concessions in regard to the transitional relief will give more time to assess the matter, but I think that the arguments which the hon. Member for Birkenhead and the Chief Secretary have adduced to show how poor is the return on overseas investments in relation to domestic investment have been shown to be faulty.
I suppose that one of the best authorities on this subject is Professor John Dunning of Reading University. He has done more work on this subject than anybody else in the Kingdom, and during the last few days he has written this:In the period 1958–62 the private rates of return on home and overseas investment (i.e. profits less tax as a proportion of net assets) were about equal; both averaged out at slightly less than 8 per cent. On the other hand the average social rate of return on home investment (profits before tax as a proportion of net assets) was 13.8 per cent., and that on overseas investment the same as the private rate of return. The implication of this difference is that had the resources invested overseas by companies (other than those in oil and insurance) in the period 1958–62 been invested at home and similarly distributed as the existing capital stock, the community would he better off today by some £60 million per annum …Broadly that supports the kind of argument that was being adduced by the 535 Chancellor, but Professor Dunning then says:… as they stand, these figures can give a misleading impression and can be variously interpreted.He then gives his reasons for saying that. I suspect that this is what the Chancellor did not take into account and I hope that he will be able to tell us whether I am wrong, and whether Professor Dunning is wrong. The reasons are as follows:First, the profits data recorded by U.K. companies at home are those obtained from the consolidated accounts of U.K. public companies, which themselves include the profits earned from overseas operations. … Secondly, the royalties and fees paid by foreign subsidiaries and associates for services rendered by investing companies are not included in the overseas earnings figures."—That is what I have been complaining about during this debate—When these are taken into account they reduce the differential between home and overseas social and private rates of return. … Thirdly, included in the domestic profits are the earnings of foreign-owned companies in this country. Fourthly, and working in the opposite direction to the three factors mentioned above, the profitability ratios of U.K. companies overseas take no account of the tax which has to be paid to the U.K. Exchequer on remitted profits equal to the differential between the U.K. rate of tax and the local foreign tax.Professor Dunning concludes by saying:The purpose of this article has been to show that the case for or against curbing foreign investment is not proven.That is the answer to the hon. Gentleman.
§ Mr. W. Baxter
There are many other factors to take into account when considering whether foreign investment is more profitable to the nation. One must not consider merely the amount of net return to the investor. An industry in my constituency has closed down because British capital has been utilised to start a similar industry in another part of the world. People in my constituency are unemployed. What does the hon. Gentleman say about that? The fact is that we have to take into consideration the amount of money that is paid by way of unemployment benefit to the people in my constituency who are now unemployed.
§ Mr. Braine
If I followed that road, I would not merely detain the Committee 536 for far longer than I intended, but I would stray very wide of the debate.
All I am saying is that we should not merely test this matter against the financial return for this country. Many other benefits are obtained from overseas investment. In our own peculiar circumstances, without access to foreign sources of supply our economy would be gravely disadvantaged.
There is one final consideration. The export of private capital is not the only part of the story. What about the impact on the balance of payments of the massive growth of Government aid in recent years? In the short term, each million pound's worth of aid has the same impact on the debit side of the balance as each million pound's worth of private investment overseas. We can argue about the long-term effect. If aid is properly used it undoubtedly helps a country to improve its educational facilities, infrastructure, and the rest. On the other hand, each million pound's worth of investment overseas will bring benefits to the country concerned and also to the British economy.
When the Conservative Government were in office they were faced with incessant clamour from the party opposite to increase aid and to help the poorer countries to help themselves, How is this to be done? We do it by grants, loans and, surely, by encouraging private enterprise in every form. This is not my view; it is not a Tory doctrinaire view. Let the under-developed countries speak for themselves. My right hon. Friend the Member for Mitcham referred to last year's United Nations Conference on Trade and Development, in which a notable part was played by my right hon. Friend the Member for Bexley (Mr. Heath)—who has not been given sufficient credit for it—in giving a lead to the 120 nations gathered together there.
Of those 120 nations, 70 were in the under-developed category. That conference recognisedthe contribution of direct private foreign investment to the economic diversification and the development of private capital to both importing and developing countries.It further declared thatforeign private investment brings technical know-how and managerial skill.537 and itcalled upon Governments of capital exporting and developed countries to avoid measures preventing or limiting the flow of capital to under-developed countries and to encourage it by tax exemption and reductions and giving investment guarantees to private investors in the under-developed countries.In short, the under-developed countries of the world know very well the value of existing private investment in their countries. They want more of it.
In this instance the Chancellor has given them a very dusty answer. I beg him to reconsider the matter. If he cannot accept this Amendment, let him accept the lesser Amendments Nos. 554 and 555. Let him openly discriminate in favour of the Commonwealth and the poorer countries.
§ Mr. Douglas Dodds-Parker (Cheltenham)
My hon. Friend the Member for Essex, South-East (Mr. Braine), who speaks with such enthusiasm and knowledge on this subject, has gone wide enough on the points raised by the hon. Member for Birkenhead (Mr. Dell), and there is only one point that I wish to raise in connection with the speech of the hon. Member for Birkenhead. He seemed to disagree that trade followed the flag in Australia, but seemed to imply that it followed the American flag into Germany and France. That is the sort of point that should be looked into in an investigation of the effect on our balance of payments of investment overseas.
We must consider the many imponderables, such as the flight of capital from Socialism or the fear of Socialism. That is the reality of the situation that this country has been facing for the last few years.
§ Mr. Dodds-Parker
Yes. Let us be quite clear about it. There was a fear that one day there might be the return of a Government other than a Tory Government. [Laughter.] The Chancellor may laugh, but I have been earning my living in business since the end of the war and I have worked in the export trade. We have to face the facts.
§ Mr. Callaghan
The hon. Member said that was a flight of capital because of the fear of Socialism. I was asking him whether that was true in 1961 when we 538 had a stable Conservative Government with a large majority and the prospect of a long term of office—but an almost record flight on capital.
§ Mr. Dodds-Parker
In terms of an expectation of office, three or four years is not a great length of time in commerce or industry. If the Chancellor does not realise this, I suggest that he gets better informants to tell him what goes on.
I have said that this is one of the imponderables which would have to be considered in any investigation of the matters referred to by the hon. Member for Birkenhead. We cannot isolate these individual influences on investment or sales overseas. That is the point that the Department of Economic Affairs is looking into.
§ Mr. W. Baxter
On a point of order. This is the Committee stage of the Finance Bill. Is it in order for an hon. Member to read every word of his speech?
§ Mr. Baxter
Further to that point of order. The hon. Member who has been speaking has been reading every word of his speech. Is that in order?
§ Mr. Dodds-Parker
I was not reading. I was quoting the remarks of other hon. Members who had spoken.
§ Mr. Dodds-Parker
I leave it to you, Sir Samuel, to tell me when I am not in order.
I come now to a point which is essential for us to study in connection with this matter, namely, the relief from general taxation. The Amendment intends that the excess of profits over Corporation Tax should be allowed as a tax credit. That is the issue that we have been debating. In other words, this is some form of double taxation. I am trying to speak on this matter from the rather narrow point of view of one who has been concerned with the practical application of commerce and industry to work overseas.
539 The Chancellor will have noted that so technical is this Finance Bill that the Clause is almost unintelligible if read by itself, without the use of any cross-reference. I have no direct financial interest to declare except a small shareholding in a company with overseas trading interests. I came to this place soon after the war, however, and I speak from experience gained with the company that I worked for then, which was trading overseas. For the first 40 years it had not paid a dividend, which a number of my Socialist friends in those days thought was not a bad start for a company.
From the information I gathered then I was able to see the practical problems of development in these overseas countries during the physical shortages of those days, rather than the financial difficulties that we have today. War-time taxation was kept on. From those years we moved forward slowly to 1950–51, to the post-Korea period and a Ministry of Raw Materials. Not until 1951 did we return to office and started to "set the people free", largely by a reduction in taxation. By so doing we liberated much energy, enterprise and resources to carry out the job which this country wanted done. The most significant of those actions, without any doubt, was the introduction of lower rates of taxes. It is therefore sad now to see higher taxation on these enterprises. I remember the Paley Report on shortage of raw materials, a gloomy report, which most of us have forgotten. Now, thanks to the private enterprise system, we have overcome the shortages. We are now facing other problems in the development of these countries which reintroduction of higher rates of taxation in this form will undoubtedly harm.
These provisions will harm the small businesses and future enterprises in these overseas countries. The bigger enterprises, the established companies, of course, will be able to carry on. They will not be affected to that extent except, possibly, in the case of oil companies, whose affairs have been discussed in some detail today. This is an added—even though a marginal—discouragement, when one remembers the existing over-taxation of all those who are trying to get on with the job. It is depressing 540 for them that we should be going backwards to the restrictive action which we saw in the years after the war—restrictive action which we do not believe is necessary in today's circumstances.
I wish to take the first three Amendments in the order in which they appear on the Paper. So far, the Committee has heard of the general effect—as far as anyone can estimate it—and in previous debates we discussed the Capital Gains Tax and Corporation Tax. I am sorry that I was not here for the debate on the overseas trading corporations, but I was away on Parliamentary duties. Whatever the merits of the taxes we discussed earlier, I believe that this tax will do considerable harm. I realise that there is a good argument for it, because I have been studying this for some time.
What I dislike is that it will be administered by a Socialist Administration. Sometimes, a system which may have advantages as well as disadvantages, if properly administered, is not too bad, but if it is administered by a Socialist Administration with restrictive and reactionary views on the economy of the country, I believe that it will not be to the benefit of British industry, commerce and enterprise.
Whatever is said, the proposals of the Chancellor will remove intact a larger amount between a company's gross profit and the net to be received by the taxpayer. That must inevitably lead to a restriction on the availability of capital for further investment in British and overseas enterprises, whether public or private. I fear that it is the intention of the Government, of all good Socialists—if that is not a contradiction in terms—eventually to remove all profit from the free enterprise system. I would recall very briefly what Mr. Chambers, I mean Sir Paul Chambers—I forgot the change, in these days of instant honours. I would say, on behalf of everybody in the Committee, that this is a very well-deserved honour and one which I believe is long overdue. No one has worked better for the country, both at the Inland Revenue and at Imperial Chemicals.
It was in his former capacity, I think, that he said in 1947:What can ruin Britain is the efficiency of the tax-gathering machine and the honesty of the taxpayer.541 It seems to me that very few hon. Members who have spoken in these debates have estimated or can estimate the effect of these taxes, including this one, over a long period. Certainly, as a company director, one cannot do so, when 400 amendments are now proposed by the Government. One can only put one's papers aside until the Bill is an Act and then see what the situation is.
Having been here for as long as I have, I am sure that it is the intention of Socialism to defeat and to replace the free enterprise capitalist system. We do not hear very much nowadays about Clause 4, but this Amendment is clearly one of the taxes on the long term which is aimed at destroying, abroad as well as in this country, the private enterprise capitalist system. The future prosperity of this country at home and abroad depends on this system, as did our past prosperity.
In this Finance Bill, we have had Capital Gains Tax, Overseas Trading Corporation taxation and Corporation Tax, which, with death duties and other forms of taxation, means—and deliberately means—that there will be a slow strangulation of the free enterprise system. Certainly, Clause 60, which we seek to amend, will help to do that unless we are careful. I recall—
§ The Deputy-Chairman (Sir Samuel Storey)
The hon. Member is getting very wide of the Amendment which we are now discussing.
§ Mr. Dodds-Parker
I was only about to say that I recall very clearly the strenuous efforts of hon. Members on this side—particularly my hon. Friend the Member for Liverpool, Wavertree (Mr. Tilney)—to introduce the overseas trading corporations. It took a good deal of hard work to get the idea accepted, even by the Tory Government of those days.
There is no doubt, certainly in my mind, that these corporations worked to the very great benefit of this country and of the overseas countries where they have been working. In those days there was no suggestion from the other side of the Committee, so far as I remember, that these forms of trading corporation were wrong. Our aim was to help to 542 develop under-developed territories, particularly in the Commonwealth. I remember, in particular, the right hon. Gentleman who is now Secretary of State for Wales and the Minister of Overseas Development working very hard—admirably and rightly so, in my opinion—to develop this form of overseas investment to help the people entrusted to our care.
While the Ministry of Overseas Development can, of course, put a considerable amount of infrastructure into these countries, I believe that it is the individual company operating there which will do the real job of creating the wealth for the benefit of the populations concerned.
Unless this Clause is amended as we have suggested, it will not carry out our intentions and what the House intended in 1954 when this form of trading corporation was introduced. As my right hon. Friend the Member for Wolverhampton, South-West (Mr. Powell) has said, what we want in these countries is capitalism and not just capital. We have to encourage people there to create and develop wealth by their own efforts. This is, of course, largely a matter of management, which I will not go into this evening, rather more than simply the provision of money. Just as we in this country are willing to introduce teachers and managers, from North America, for instance, so I believe that many countries have been helped by these overseas trading corporations to invest not only in buildings and equipment but in managers.
As Sir Paul Chambers also said recently, investment brings orders for equipment and so brings with it wealth and job creation both here and overseas. At the same time, however, this investment must be reasonably profitable. Certainly the history of the past few years has not shown that great excess of profit which has been implied from time to time from the other side of the House. I should like to think that the First Secretary is taking some interest in this problem, because this is, obviously, of vital importance to the whole future of the country. I do not blame right hon. Members opposite for their dislike of the entrepeneur. Perhaps they do not like their dentist, but if they want material benefit they have to put up with these disadvantages. If they want prosperity, 543 they have to give some reward to the people who are doing the job. What one sees at the moment is the slow closing of all the ways in which those who go overseas can earn their reward. It is not in order for me to suggest that the Chancellor should see what has been happening in Eastern Europe, and particularly in Czechoslovakia, since 1963, but it is apt in the context of investment.
In the 20 years I have been in the House this is infinitely the worst Finance Bill that I have seen. There was nothing like this in the six years after the end of the war. If Clause 60 is ever put into effect it will handicap Chancellors of the Exchequer in raising standards for a considerable time. We are back to the old days of levelling down. It is a most cynical reversal of the Socialist claim to help those throughout the Commonwealth, after all that we heard at the last election. I put it to the Chancellor that if he cannot accept Amendment No. 556 he should at least say something favourable about Amendments 554 and 555 and should promise to look at the matter again so that there are some modifications of the present policy on Report.
§ Mr. Tilney
I rise to thank my hon. Friend the Member for Cheltenham (Mr. Dodds-Parker) for what he said and to support what others of my hon. Friends have said in the debate. I have some sympathy with the Chancellor in his endeavours to tackle the balance-of-payments problem.
I was much interested by what was said by the hon. Member for Birkenhead (Mr. Dell), although I do not accept his figures, for it is wrong to lump these figures together globally. If there are places in which investment has not helped exports, it is a question of looking into the whys and wherefors and not of dealing globally with investment overseas, which I know in many cases helps exports; it is wrong to deal with such investments globally to their detriment and to the detriment of Britain. There may be an argument for reducing investment in the United States and Western Europe, but by dealing a blow at new investment overseas the Chancellor is hurting not only developing countries but 544 also investment overseas which has been in those countries for many years.
It was surprised by what the Chancellor said about overseas trading corporations. I believe he said that they were not of benefit to Britain.
§ Mr. Tilney
I declare my interest as a director of an overseas trading corporation responsible for millions of £s of exports and paying very substantial Income Tax and Surtax, and also a great deal in rates in my home city. Does the Chancellor feel that that is of no benefit? His intervention surprised me. I believe that he is making an attack on the developing countries.
The hon. Member for Westhoughton (Mr. J. T. Price) and, in a singularly ill-informed speech, the hon. Member for Buckingham (Mr. Maxwell) attacked the Shell Transport and Trading Company. It is only fair to put on record that the company has not been irresponsible in paying little or no Income Tax. It is as well to bear in mind that companies engaged in all sorts of different activities have a relatively free choice between investment overseas and investment at home in many types of industry. But this is not so with the oil industry. Its existence and its operations are dictated by geography and geology, and it has to do its business where the oil is and where it is needed or else cease to operate.
It is worth putting on record, as the company has been attacked in this debate, that the calculations in the Shell Group alone for the period 1954–64 show that it obtained for the United Kingdom imports of oil to the value of £1,2000 million against a net foreign exchange outflow over the period of only £150 million. Put in another way, as the chairman said,During this period the group's operations resulted in currency gains which were sufficient to finance the whole of its overseas expansion and, in addition, to supply the United Kingdom with over 30 per cent. of its oil requirements at a minimum cost in foreign currency.It is reprehensible that some hon. Members opposite attack a company as great as that for dodging its full share of taxation.
545 Like my hon. Friend the Member for Essex, South-East (Mr. Braine) I have had a certain amount of correspondence on this subject. He had had a letter from Malawi. I have had a letter from Singapore which reads:Both here and elsewhere in Malaysia great strides are being made in capital development, both of factories and housing, as well as roads. The only back-pedalling is among the British-owned plantation companies whose replanting programmes are badly hit by the British Budget.I hope that the Chancellor will consider very carefully the effect of his Budget in the long term—despite the help which he has given over the next few years. It is not the immediate future which is of concern, because he will get no benefit immediately for the balance of payments. We are discussing a matter of principle. Let us bear in mind that if all earned profits are distributed the new method will mean that a Malayan resident company will pay 40 per cent. tax on profits whereas a United Kingdom registered company—and there are so many—will pay 65 per cent. tax. Owing to the lower taxation in Malaysia, in years to come we must expect take-over bids.
In many ways the Chancellor is a trustee for the assets of Britain. Does he want deliberately to depreciate those assets so that they will have to be sold in some way at a lower price than they are worth? Will he bear in mind that over 50 years ago, through various independent small capitalists, this country invested about £70 million in rubber plantations in Malaya? These are worth three or four times more than that figure today. Very little more capital has been sent from this country in the last three or four decades, and yet there is an annual return on that £70 million of approximately £25 million—surely a remarkable record. The Chancellor is risking the deliberate depreciation of our assets not only in Malaysia, but in India, Pakistan, Ceylon and elsewhere, because there are many foreign and many indigenous capitalists who would willingly buy what is an attractive proposition at a knock-down price.
Will he also bear in mind that whatever the United Kingdom receives from Malaysia is under the control of the 546 Malaysian Government, which has not hitherto put any restrictions on remittances to this country? That applies also to Nigeria and many other poor overseas countries, and there are many of them in the Commonwealth.
The hon. Member for Birkenhead said that investment had been falling because it had not been profitable, but I suggest that investment in Asia and Africa has been falling over the last few years or so because certain individual countries there have been too Socialist minded, and have made it impossible to remit profits—
§ Mr. Tilney
Yes, Ceylon is an example of this. There is now no prospect of remittances from Ghana, either. That has been foreseen, and that is why investment in the developing countries has gone down. I believe that this proposed action is very detrimental to the developing countries and to the United Kingdom. If companies owning plantations—be they rubber, tea or coffee—are not allowed to retain as much as the indigenous companies are allowed to retain, they will first stagnate and then decline. I urge the Chancellor to remember that development depends entirely on retained profits. If retentions are inadequate, companies of the first class, of which there are many, will suffer greatly. Will the right hon Gentleman also remember that in certain Commonwealth countries, and Pakistan is one, the tea industry is compelled by the Government to expand its acreage by 3 per cent. a year, and the cost of that expansion can be met only by retained profits. That is often forgotten.
Will the Chancellor of the Exchequer also bear in mind—and I speak as a trader in West Africa who is interested in exporting British cars to some West African countries—that we will not be able to compete with cars from America or Europe unless we can service them properly. That means putting up buildings and service stations, and wherever possible going into partnership with local owners of capital. A letter I have here from someone who knows the West African trade very well states:If we do not provide the means and the vitally necessary know-how, our competitors in overseas markets—the Germans, Japanese, Italians, Hungarians and others—are only too anxious to do so.547 The Government seem to forget the services that go with this trade; the training of people coming here and our own technical "know-how" being given to the developing countries in this way—this to-and-fro method by means of which ideas and "know-how" can be exchanged. They will look to this country and we will look to them; so the friendship and confidence and understanding we have had in the past can be expanded.
Will the right hon. Gentleman also remember that many of the splendid types who used to go into, say, the Indian Civil Service or the Sudan Civil Service are going abroad to train and to teach, and for the time being, until the expatriate can be done away with, are often in charge of local industry.
The hon. Members for West Stirling-shire (Mr. W. Baxter) and Birkenhead showed by their interventions that they had forgotten that tariffs are put up, controls are put up, and that it is quite impossible to export some of our old products to these countries because they are determined to make their own. They may take ancillary components, but the textile mill, the steel mill, and the like, has to be established in that country. Only the other day I was talking to a director who had up to last year had a major export trade with Iran. He said that the only way he could keep his trade there was to establish a factory in Teheran, as otherwise, no matter how efficient he was or how much he cut his prices, it was impossible for him to surmount the tariff barrier. There is no doubt that such people are very worried about the Budget.
The same applies to Australia. When I was there, the complaint was that we were exporting much more to Australia than we were importing from her. One had to argue that the services and, above all, the capital we were giving to Australia more or less balanced things out. That also applies to New Zealand. I believe in multilateral trade, but it is utterly wrong to forget that many countries rely on the investment of British capital to more or less balance their trade with this country.
I accept it from the Chancellor that because of balance of payments difficulties there is a need to cut some forms of 548 aid, but I would prefer to cut the public rather than the private aid. I believe that private aid will get a return of, say, 9½ per cent. or 10 per cent., pay 5 per cent. or more in taxes in the developing countries, but that some money will still come back here as well. Public aid is often a present and, in any case, bears interest of far less than 9 per cent. or 9½ per cent.
I urge the Chancellor to look yet again at the overseas trade corporations which have hitherto been enabled by special legislation to compete on equal terms with local companies. He sometimes forgets, I fear, that many O.T.Cs compete with locally-owned and established companies which will pay much less taxation than will companies registered in this country if O.T.C. status is taken away. If he cannot keep the O.T.C. status in respect of all countries overseas, will he please help further those in the Commonwealth, and particularly those in the developing countries?
§ Mr. Callaghan
We have been four-and-a-half hours on this group of Amendments. I hope the Committee will think it reasonable that I should now put the Government point of view in response to what has been said. We have travelled very widely, from Clause 4 to Eastern Europe. I hope to confine my remarks to the subject of the Amendments. Although in reply to what has been said by hon. Members opposite I must make some comments, I hope to keep them brief, because I shall be doing little more than repeating some of the arguments I have used before in this Committee.
The right hon. Member for Birmingham, Handsworth (Sir E. Boyle), who opened the debate, made, as always, a very well constructed and thoughtful speech. If I was a little impatient, it was because I had heard all the arguments before. I make no complaint about it, but I expected him to deal with the Amendments, as I shall do in due course. I think the Amendments have an effect which he did not realise and which those who put them forward did not realise in relation to what has been proposed. At the present time shareholders in a company resident overseas can be credited, not only for any tax charged on their dividends which is withheld, but also for the appropriate part of the tax paid by the company on its profits—the jargon 549 phrase is the "underlying tax"—whereas O.T.Cs., which are also mentioned, get complete exemption from United Kingdom taxation on their trading profits.
It is this situation, as well as the quite undue relief which is given for overspill, that these taxation provisions seek to remove. We are introducing a new system of taxation. Therefore, different considerations must apply. It is said by some Members of the Opposition that it is not clear what the effects of the new system of taxation will be and that therefore I should not have acted as hastily as I have done. I must point out that they, too, wish to act hastily, because they want, to make permanent the temporary relief I am giving and, as I shall show, to extend the relief which is at present proposed into something which is, much more favourable to the taxpayer than the existing system.
I can only conclude from this—indeed it has been implicit if not explicit in many of the speeches—that the Opposition want to encourage to an even greater extent than at present investment overseas, unselective though it is—no matter where it may be, no matter what the rewards may be, or in what part of the world it may be. That is the effect of the Amendment. It is a complete "across the board" Amendment. I am speaking of the main Opposition Amendment.
This Amendment is designed, unselectively, to encourage overseas investment in any part of the world, to make it more favourable than investment at home, and to make it more favourable than it is today. That is an astonishing proposition to put forward in the light of the experience this country has had over the last 20 years. I instance it in two ways. It is proposed to give further relief than is given at present by enabling a taxpayer to set off his Surtax liability, or to enable some part of the relief which would be given to be set off against his Surtax liability, a proposition never hitherto advanced no put into force by the Opposition when they were in Government.
Secondly, the Amendment proposes to enable individuals to carry forward any unused part of the relief for any particular year for any number of successive years until it is exhausted. That again is a proposition that hon. Members 550 opposite have never advanced hitherto, which is not in the existing Statute and which would be bound to make overseas investment even more attractive than home investment is at the present time. The Opposition should be quite clear about what I am sure the right hon. Member for Bexley (Mr. Heath), who is to speak next, knows is their attitude about this matter. Are they saying that they believe the position of the country is such now, or is likely to be in the immediate future, that we should make overseas investment more attractive than does any other leading industrial country, more attractive than it is today, unselective in its effects, although they say they do not know what effect this would have on increasing exports? That is the proposition they are asking the Committee to adopt. That is precisely the effect of the Amendment. I do not see how any responsible Government changing the taxation system could possibly accept an Amendment of this sort.
We are saying in the Clause as it stands that any company operating overseas is entitled to set off tax paid overseas against Corporation Tax chargeable in this country. There is no dispute about that. To that extent double taxation relief will continue to apply. It is generally accepted—this point was raised by the right hon. Member for Handsworth and accepted by me—that it promotes the intercourse of free trade between countries if there are provisions for double taxation relief. I think it would also be pretty universally accepted that the country in which the profits arise should have the first, and may be the major, slice of the taxation to be deducted.
This was the proposition which the right hon. Member made. There is no dispute between us on this. It is for that reason that if the Corporation Tax in another country is, say, 40 per cent., as in the case of Malaysia, which has been quoted to us, a company operating here shall be entitled to set against our Corporation Tax, even if it is as high a 40 per cent., the full 40 per cent. charged in the State of Malaya. This is the purpose, the intention, and the effect of the Clause as it stands. There is no difficulty about double taxation relief.
551 What the Committee has to consider now is whether we should go further and accept the Amendment which has the effect that a shareholder living in this country shall be entitled to set off against his United Kingdom tax liability the tax paid by the company in which he is a shareholder in Malaysia. In other words, the Opposition is asking that he should be able to satisfy his United Kingdom liability, his liability to our country, because of the payment by his company in which he has invested, by taxation either to a Commonwealth or a foreign government. Although I have mentioned Malaya, this applies equally to foreign governments.
This is bringing the whole of the debate this afternoon down to the effect of the Amendment. This is what we are talking about. Hon. Members opposite may not even fully appreciate what they are doing. Although it is not for me to say, I was a little surprised to see the provisions about Surtax and the carry-forward. I shall not say more about that. The right hon. Member said that he was prepared to drop the Surtax provisions. He could not have considered the matter very seriously if he was willing immediately to drop them. The Committee should not be asked to accept payment of a company's tax to a foreign country as satisfying the liability to tax of the British taxpayer.
§ Mr. Callaghan
I have explained that it will be possible to set off Corporation Tax chargeable on the company to the limit of Corporation Tax rate in this country.
§ Mr. Shepherd
Does the right hon. Gentleman realise that he is undermining and denying the basic concept of double taxation relief, because then not only has the company trading overseas to pay the tax which may be higher in that country but also its shareholders have to pay the tax upon income and Corporation Tax as well?
§ Mr. Callaghan
Not only am I not denying the concept of double taxation relief, I am doing what I said in the Budget was my intention to do. I am bringing our system into line with the system which has existed in countries 552 operating the Corporation Tax system ever since it started.
§ Mr. Callaghan
I agree. In the United States it is higher. In India it is higher. In Malaya and in Nigeria it is the same. It may not be an answer which satisfies the hon. Member, but this happens to be the tax in the United States where we have a great deal of our investment. When the proposition is put in this way we begin to see that, whatever the merits of the case for overseas investment, which I do not deny, to seek to give the shareholder relief from his United Kingdom liability because a company has paid tax to the United States Government is a ridiculous proposition. It is for that reason if no other that I would invite my hon. Friends to resist this group of Amendments. I do not think that I can put it any more clearly than that, because that happens to be the essence of the situation.
I must, however, deal with the proposition about the future of investment. There is no doubt that because of the existence of our present system, which is extremely favourable to overseas investment, overseas investment has been made on an unselective basis. Although we have heard a great deal about the under-developed and developing countries, that unselective investment does not even go to those countries. As the hon. Member for Liverpool, Wavertree (Mr. Tilney), the right hon. Member for Mitcham (Mr. R. Carr) and the hon. Member for Cheltenham (Mr. Dodds-Parker) have said, it is the case that private investment in those countries has been falling off. The hon. Member for Wavertree gave as a reason for it that they were too Socialistic and charged too high rates of tax, but apparently the hon. Member wants us to go on investing in those countries which are too Socialistic and charge too high rates of tax even though the return on our investment is a poor one.
I feel, and I agree with part of his analysis, that the reason why investment in some of those countries is falling off and in other countries is moving ahead, is that it is more profitable in one set of countries than in another. Undoubtedly investment in the United States, which has been growing, is more profitable than investment in, say, Malawi. The question which I have to ask myself is whether in 553 our present, past and likely future situation, in view of the strain on our balance of payments, the Government should give permanently special tax advantages for investment in the United States over investment in the United Kingdom. Here we are in a situation in the United Kingdom in which we are short of capital for investment in a great many projects which are known and admitted on both sides of the Committee. We want more roads, houses, hospitals, universities—and so the cry goes on.
We need also more productive investment in our own industrial system. One thing which has been clear in the last ten or twelve years is that the rate of investment in our own industrial system has been lower than that in many other advanced countries. Why therefore in those circumstances should any Government in their right mind give more favourable treatment to those who invest in the United States than they give to those who invest in our own country?
§ Mr. R. J. Maxwell-Hyslop (Tiverton)
Would the right hon. Gentleman be good enough to explain how his argument is relevant? Surely hospitals, universities and roads are not financed by private risk capital.
§ Mr. Callaghan
I thought that the hon. Member was going to answer my question but instead he has asked me another. As he did not answer mine, I will answer his. Wherever one invests there are two parts to the investment. One is the return to the private citizen who invests. The second is the taxation which the State takes. Investment in the United States, Canada, or anywhere else means that those countries get a return from taxation, when on a similar amount invested in this country it would accrue to this country. That is how we finance our universities. It is part of the answer to those who say that one should not compare the net of tax return from overseas investment against the gross return here, that one must compare it when one is considering the return that one gets because the total product, however divided between State and individual, must be greater in this country than it is abroad. And we give relief for foreign taxation against the company's liability in this country.
554 There is no case for giving exceptional advantages. I am not saying that they should not be equal. I believe in and want to see foreign investment and investment in the Commonwealth continue. This is essential and important. I have said that so many times that I shall have used soon every cliché in the world except "God is love" in saying it. Everybody knows that it is so; but what we have to guard against is giving exceptional tax advantages to overseas investment over the advantages given to those who invest in industry in our own country. This is basically the case against the Amendment as moved.
I should like to say a few words about Commonwealth countries before I conclude. The right hon. Member for Orkney and Shetland (Mr. Grimond) put two or three points to me with which I should like to deal. One was about existing investment. He asked whether it would not be possible to make a division between existing investments and give a separate rate of tax for them as opposed to the rate of tax charged on new investment. I have considered that but I think that for all practical purposes it would be impossible to make this division. It would be very artificial. I give one illustration in passing. To take the illustration which the right hon. Gentleman himself gave us about the replanting of plantations in Malaya, it would be very difficult indeed to make a division between whether new investment in a rubber plantation in Malaya was designed to replace the existing plantation or to extend into a new field. There are other arguments which I could put to the right hon Member for Orkney and Shetland. I can only tell him that, in my view, trying to make a division really would not help us.
The right hon. Gentleman then asked whether inquiries could be made into the relationship between exports and investment, and other hon. Members raised the same point. I understand that the Federation of British Industries is to make such an inquiry. It will not be a partial inquiry, but, as I understand, it is proposed to employ independent experts who will make an objective assessment of the relationship, a relationship which, as far as I and those who have studied this matter can see, is really not 555 as close as has been alleged by hon Members opposite. My hon. Friend the Member for Birkenhead (Mr. Dell) was very clear on this subject in the remarkable speech we had from him today.
The F.B.I. intends to pursue this inquiry, and I have told those concerned—I am glad to inform the right hon. Member for Orkney and Shetland of this—that the resources of Government Departments are at their disposal in the sense of supplying statistical information which it is proper to supply. It could not go into confidential matters, of course. I do not think that we could break information down according to individual cases, but global totals, totals by country, and so on can be given. In conversations I have had with representatives of the F.B.I., I have said that they can have all the information now at the disposal of the Government which can properly be made available. I hope that the inquiry will continue, and I shall await its result with keen interest.
In the meantime, the transitional arrangements which I am proposing, and which are extremely costly, will make it quite possible for any adjustments which might be necessary to be made. I must say here that it is not right to suggest that I have acted over-hastily in this matter. Quite the reverse is true. I am equalising the taxation burden. I have already put the argument to the Committee. It is for those who claim that it is necessary to have these special tax advantages in order to secure exports to prove that something different should be done. It is for them to do that, and this is why I am very ready and happy to see the F.B.I. go ahead and do all I can. I hope that that meets the point which the right hon. Member for Orkney and Shetland put to me. No doubt, the F.B.I. will itself indicate the way in which the inquiry will be conducted.
Now, the Commonwealth countries. It is a matter of regret to me that not only has the rate of private investment in these countries been going down but it is now only one-fifth of the total overseas investment from this country, and it is on a declining scale. For the sake of our reputation, I should greatly like us to do more. Because we are an advanced nation with great productive capacity, 556 we undoubtedly have a duty to help these countries. Not only do I acknowledge this but I am proud of the fact that this country has done and is doing so much. I remind the Committee that, at present, the level of overseas aid to these countries must be running at getting on for £200 million a year out of the British Exchequer, contributed by the British taxpayer.
I have to strike a most unfortunate balance here. I hope that hon. Members opposite will not mind my saying that I should very much like to see this country being more generous and, if we had not got our balance of payments problem, we could be. It is not much use asking us to spend more on overseas aid at a time when the balance of payments is only gradually being brought under control. It is well known to the Committee that the £800 million deficit last year will, I trust, be reduced to about £300 million this year, but we shall still be in debt. We are still running at a deficit. I cannot emphasise this often enough. I am sure the Committee will agree that I have never tried to conceal the facts from it on this.
To be knowingly operating at a deficit, as we are, and which we have chosen to do because we want to keep expansion running in this country and not to destroy the confidence of industrialists, is a very serious undertaking on the part of the Government. I can only do it because I believe that we can get ourselves into equilibrium again by the end of 1966 and because we have got the resources and the capacity to enable us to finance that deficit. But it is a serious undertaking for the Government. I think that everyone on both sides of the Committee recognises that position.
To ask that I should add to the burden on the balance of payments by increasing the amount of aid in this particular year is really to ask me to take a graver risk than is justified. If we were to do so at a time when we are doing our best to save overseas expenditure in many other fields, we should not, I believe, be behaving with a proper sense of responsibility.
It has been said that foreign countries, if they see that we are not investing overseas, will believe that we are "Little Englanders". That is not my 557 experience of what foreign countries are saying. They are saying that we are doing too much overseas and should be cutting down on it. I think that they will react much more favourably to a nation which is seen to be trying to curb and control its uncontrolled overseas investment, and not to give it undue advantages, than to a nation which goes on giving such advantages even though it is heavily in debt and owes money to those nations which have lent it to us. I must say to the Committee that I cannot accept this argument.
Now for the future. I regard it as a first priority when the balance of payments is in a reasonable state—I go no further than that because I do not want to be precise about it—to give as much aid as this country can afford in pursuance of our duties and responsibilities.
The right hon. Member for Bexley made a speech at the U.N.C.T.A.D. last year which received a great deal of support and applause—and rightly so. I only wish that we could follow through. Unfortunately it is not possible to follow through in the present situation; but I want to say to the right hon. Member for Mitcham that as soon as it is possible to follow through, everyone in the Committee as a whole will want to see us pick up the threads.
I do not believe that the substantial and serious rundown of private investment in the developing countries will be accentuated by these tax changes. It would have run down naturally; indeed it has been running down for some time. It is our task, both in aid from this country as the balance of payments becomes right and also in using the additional liquidity necessary in the world, for us to try to help these countries both as a nation and internationally. I believe that is a far better way of doing it than to give special tax reliefs which will only accentuate the balance of payments problem.
I have now spoken for 25 minutes and I hope that it will be thought by the Committee—or at least a majority, if only a narrow majority—that I have satisfactorily answered the points raised. I hope right hon. and hon. Members will think that I have made an overwhelming case for not accepting the Amendment and I ask the Committee to reject it.
§ Mr. Heath
Perhaps it is convenient for me now to follow the Chancellor although I know that some of my hon. Friends who have been present the whole day are still anxious to contribute. We are delighted to see that the right hon. Gentleman has returned to a more equable mood. He has delivered a speech of considerable interest which also covered a fairly wide range. When he concludes his speech by referring to international liquidity, which no one on this side dared to raise, it no longer lies in his mouth to suggest that we wandered rather wide on the Amendment.
We have had a useful debate on one of the major and most important features of the Corporation Tax. We are debating it at a time when the Commonwealth Prime Ministers are assembling in London. I doubt whether on their agenda there is a more important subject than the impact of this tax on their own countries and the Committee has been right to devote this amount of time to it.
Perhaps I can recall to the Chancellor a French maxim with which those of us engaged in international negotiations have been familiar for some time. It is, Qui presse doit payer. It means that if you break the speed limit you must cough up. That applies to this Committee as to other things. If one tries to break its speed limit the price must be paid.
What has emerged from the debate is, first, that it has pointed, as the debate did yesterday, to the need for a full examination before a decision is taken. The Chancellor of the Exchequer mentioned this in passing and he said that we had claimed that the facts were not clear. However, this, of course, is the main point which has been made by some of his hon. Friends in speeches which were well-informed and valuable. They all said that they wanted to have the facts clear, and the only reason why they supported the Corporation Tax, as the hon. Member for Birkenhead (Mr. Dell) and, on other occasions, the hon. Member for Meriden (Mr. Rowland) have said, is that the transitional arrangements which have been made by the Chancellor will now give time for the facts to be made clear. Hon. Members opposite have said that they support the Corporation Tax because it will provide that time.
559 However, I must say that this is a very expensive and damaging way of getting time in which to examine the problem of overseas investment, its impact on this country, on the developing countries, on the Commonwealth and the world as a whole. We cannot hope to reconcile the differences between us, but I believe that the debate has pointed to the need for information, and I therefore welcome the Chancellor's assurance that he, too, welcomes the investigation which is to be made.
The second point I have to make is that there is no support for the Chancellor's policy towards overseas investment outside his own party, and even in his own party it is sometimes lacking. He rather derided my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle) for quoting the Chairman of the Booker Group in his annual report, but, of course, that was not a reference to the transitional arrangements but to the permanent effect of the tax. I can quite understand that the Chairman of the Booker Group is gratified by the concessions which the Chancellor has made and to which reference will no doubt be made on Clause 79. Many people are gratified by them and are grateful to the Chancellor for providing better transitional arrangements.
But that does not alter the fact that what the Chancellor is doing in the Clause, and what we are challenging in the Amendment, is to make a permanent arrangement which, when the transitional period of seven years is over, will be the fundamental basis of this investment. The Chancellor has been clear and frank about that. What people outside—industrial companies which have to invest overseas, or mining corporations, or oil companies, or the countries in which those companies operate—object to is the permanent basis on which overseas investment is to take place from this country in the future, and that is what we are challenging in the Amendment.
The Chancellor based the first part of his reply to the debate on the assertion that our Amendments meant that we wanted to encourage investment even more. I will come to the point of whether that is the correct interpretation of the Amendments as we understand them, but we are perfectly prepared to 560 stand corrected. Our general position is that we do not want to encourage investment even more and that we want the status quo to be broadly maintained until we can come to a position in which we can know one way or the other where investment is to pay and where not and then to express the policy which, considering the interests of this country, the Commonwealth and the developing countries together, we can say to be the right policy to be followed. Admittedly, this must depend on the circumstances of our balance of payments as well.
The Chancellor's first criticism was that the Amendments were unselective or indiscriminate. But, of course, his Bill is unselective and indiscriminate. If he accuses the present system of being unselective and indiscriminate—and I accept that criticism and it has been reiterated from both sides of the Committee—so is the Bill unselective and indiscriminate in exactly the same way.
§ Mr. Heath
It may be more unselective towards some firms than at the moment and less unselective towards others. I accept that, but over the field as a whole it is indiscriminate and unselective.
There were three features in which the Chancellor thought that the Amendments would be more encouraging. There was first the underlying tax which exists in the present situation. We are not making it more favourable than that, although more favourable than the Bill provides, restoring the status quo.
The second feature is the introduction of Surtax. The plain fact is that this situation is most unlikely to arise. It will arise only rarely. There has to be sufficient spillover available to deal not only with Income Tax but Surtax, and the number of occasions or places in which that will occur will be comparatively rare.
§ Mr. Callaghan indicated dissent.
§ Mr. Heath
That is our information. If the Chancellor doubts it, he can let us know some other time. I think it is a perfectly logical position. If the Chancellor is worried about Surtax and restoring the status quo and says it would make it more favourable, then as my 561 right hon. Friend for Handsworth, said at the beginning, we are perfectly prepared to accept it. We put it in because we thought it was logical and the number of cases where it happened would be very small.
Thirdly, he spoke of carrying forward the unused part of the relief. This again seems to be perfectly logical. On the other hand if it is not restoring the status quo but is making it even more favourable, if that can be shown, then we will not stand on that point, because broadly speaking we want to have the present arrangements until we can show a way in which there should be a selective and discriminatory form of investment. That is our objective.
§ Mr. J. T. Price
The right hon. Gentleman is changing his ground from the original position taken up.
§ Mr. Heath
What I am saying, perfectly frankly, is that I believe that the present situation ought to be maintained broadly. I do not think from the information we have that the question of Surtax is going to make very much difference. If it does and if it offends the susceptibilities of the hon. Gentleman let us merely cover it as far as Income Tax is concerned. The Chancellor will agree that is bound to be the major part in any case and, as far as the second feature is concerned, the carry forward of the unused part of the relief, that is perfectly logical, particularly in view of the low returns which some of these types of companies have in the developing countries such as Malawi, which the Chancellor has discussed.
The major part of the Chancellor's argument was this: he said that the Opposition are arguing that payment of tax by a company to a foreign Government should satisfy the requirements of taxation in this country. That was the point which he emphasised and which was also emphasised by the hon. Gentleman the Member for West Stirlingshire (Mr. W. Baxter) and this is really the main thread running through the Chancellor's argument. It has been emphasised that this position is at present the international position. It was broadly accepted in 1947 by the Labour Government and has been carried on in this country since and is the position in international affairs at 562 this moment as we understand it. [Interruption.] We will not even argue about, the international position, but I think the hon. Gentleman the Member for Manchester, Cheetham (Mr. Harold Lever) put this forward. We certainly believe it is the case and most people who have commented on the effects of this tax believe it is the case.
Even if the Chancellor does not accept that, he went on to discuss the merits of overseas investment. He does not deny the merits of overseas investment, but he went on to say that the relief of shareholders from their tax responsibility here by this taxation is ridiculous. This is a very clear position. He said that and he could not have stated it more clearly. He is saying he is prepared to forgo the advantages of overseas investment to this country, their benefit to the Commonwealth and to the developing countries of the world because he believes that shareholders here are getting a benefit which they ought not to get. That is the Chancellor's position and this is the issue which faces us at the moment.
When the Chancellor says that he is concerned with the balance of payments, may I say to him that this is what leads to our doubts about his concern in practice? He is putting this particular doctrine in front of the benefits which come to the balance of payments from overseas investment. This is really the fundamental difference between us. It is of the utmost importance that we should get this clear. There are other developments—the division between a company and its shareholders. It was held that in respect of overseas investment one can treat shareholders roughly as one likes and one does not have to look for the consequences. We do not believe this to be true and I do not want to go over that argument again, but it affects the degree of overseas investment which we shall get.
The Chancellor put to us the question of whether we should invest in the United States rather than in the United Kingdom because he chose the United States as being the place where it would be most favourable. He went on to give the sort of investment which we needed in this country. Most of the examples were for social expenditure and at the end he came on to mention plant and manufacturing industry. That, again, is indicative 563 of the same attitude of mind—the attitude that if we can get the return in this country and get the tax and build roads, as the Chancellor said, or schools, all of which are desirable, we cut out investment in the United States, which helps us in the balance of payments, which, the right hon. Gentleman says, he cannot deny. This, again, is the difference between the two sides of the Committee. It is impossible to reconcile us on this, but we must get it straight that this is the real difference which exists between us.
Before I deal with the Chancellor's reference to the Commonwealth, perhaps I may refer to the hon. Member for Birkenhead, whose speeches are always of the greatest interest. The hon. Member said that before one took part in a debate of this kind, one should get a little information and that he had got a little information before he came here. It does not need me to remind the hon. Member that a little information is a dangerous thing.
I pay tribute to the hon. Member's information, because he has specialised in these matters. My own experience, however, both in the European negotiations in dealing with the Commonwealth arrangements and in the U.N.C.T.A.D. negotiations and the G.A.T.T. negotiations, both of which were held in Geneva, is that it is extraordinarily difficult to find out detailed information and extraordinarily dangerous to generalise about these things. We all of us, perhaps, have a slight tendency to do this and one can come quickly to generalisations which afterwards can barely be substantiated.
I have been as intrigued, as the hon. Member has been, by the difference between American experience in investment abroad and the effect on American exports and British experience. What is even more interesting is which of the differences between American investment abroad and our own streams of investment abroad really lead to this difference. I believe—and this is a factor which was not mentioned by the hon. Member—that a considerable amount depends upon the industrial structure of the two countries.
It is true to say of American investment in the chemical industry in this country 564 that it is very profitable. It has led to the supply of chemical raw materials almost entirely from the United States. This is part of the industrial structure of the American firm and of American industrial traditions. In this country, we do not have the same traditions. It does not always happen—it might do with I.C.I.—that when capital is invested abroad, this country is the best place from which to get machinery, and particularly sophisticated machinery. This is not a factor or feature of investment. It is much more a characteristic of the industrial structure of this country compared with other countries.
§ Mr. Grimond
The right hon. Gentleman talks about the chemical industry and its raw material. Is it not true that the main feature of I.C.I. plant in Europe is that its raw material comes from this country?
§ Mr. Heath
I added a reservation about I.C.I. In a large part of the world, that is true. It would have been better to take an example of a different industry in which we normally have an interest abroad but for which very often the sort of plant and machinery which we can supply is not necessarily that which is required.
§ Mr. Dell
Surely, the right hon. Gentleman is making exactly the case that I and hon. Friends of mine on this side have tried to make: that for one reason or another, despite what hon. Members opposite have said, our investments overseas have not led to the sort of increase in exports which hon. Members opposite expected.
§ Mr. Heath
That is a generalisation of the kind that I should like to try to avoid. We had an example in the case of Australia. It is true—it applies to New Zealand as well, I think—that as a result of tariff policy there, certain of our industries have been very hard hit. Had the situation been left like that, our exports to the Commonwealth would have declined. They have not declined absolutely, but proportionately they would have declined even further.
It is the fact that there has been investment in actual plant producing those goods inside the tariff wall which has led to our being able to get returns from it 565 through management, "know-how," royalties, returns on dividends and, very often, the supply of parts, and so on. So, without going into details as to which country and which industry, it is extra-ordinarily difficult to reach any firm conclusions about it, and that was really the point I wanted to make about the hon. Gentleman's very interesting speech. It confirms the Chancellor's point about the value of any exploration which is made.
This leads me to the point about the Commonwealth and, in conclusion, to the general attitude towards this particular aspect of the tax. This is, as I have said, a permanent decision. The Chancellor could have kept the status quo, and could have said, "I believe that this situation is not satisfactory. We hive now got to investigate it. Then we will move on to a more discriminating, selective way of dealing with our overseas investment." He could have said that. He has chosen not to do it. I think the result is that he has upset a large part of the industry of this country; he has upset a large part of the Commonwealth and all the developing countries; and I think he is damaging British interests. He is doing this without being able to prove or disprove one way or the other what the situation is.
This I do not believe is a wise policy. The hon. Gentleman said that he would reduce overseas expenditure. There are various other measures which the Chancellor could have taken which would have a direct impact on overseas expenditure, and which, indeed, he may still wish at some future time to take. He had, as the Leader of the Liberal Party said, in any case got wide powers outside the sterling area for dealing with this particular problem. But what he is doing—and I think the Chancellor overlooked this in his concluding words—and it is one of the main objections which we have, because of the consequences of the tax, is not only cutting down future investment but is damaging investment which is already there.
It is also interpreted as an attack on the shareholders themselves. I do not want to go into details of these. I mention them only because I do not believe that what appears to be an attack on existing investment and an attack on shareholders gives foreigners any confidence whatever. This is one of the 566 fundamental features of the present situation. It is thought that legislation is being introduced which damages companies which have already invested abroad. Whether they are oil companies, whether they are companies with plantations, whether they are mineral companies, or whether they are overseas trading corporations, their activities will be damaged. It will be much more difficult for them to raise capital abroad, more difficult for them to raise capital in this country. So they will be squeezed in both ways. It will damage them, and this is part of a general attack on shareholders. This does not impress foreigners. Indeed, it raises their apprehensions.
So far as the Commonwealth is concerned, this is in fact a moment when the Chancellor could possibly have removed apprehensions which are at the moment in the Commonwealth Prime Ministers' minds—if he had not pursued this in the first instance; and he could have given a considerable inspiration to the developing Commonwealth. Indeed, I do not think it is the return from the developing Commonwealth which worries investors; I do not think that is the major part of what worries them. It is far more the political risks involved in so many developing countries.
This is really what affects investors. I believe, and this was certainly, I think it is not going too far to say, the view of those gathered in U.N.C.T.A.D. at Geneva a year ago. It is the political risks. Those countries like the United. States and Japan which have been able to get investment assurance have to a large extent had those risks removed. The present Chancellor and his predecessor were trying to get European or O.E.C.D. insurance risk arrangements, which I think would have been a very good thing. It is the political risks which often are much more damaging to private investment than the difference which there may be and which at times may be marginal between the returns from different countries, and this was recognised at Geneva, and what went with it was the belief that private investment and management and know-how and the things which grow from them bring greater benefits to developing countries than Government aid which very often, at any rate, is thought to have political strings attached to it. Therefore, as I have said, I do not believe that 567 any increased Government aid is the same when it is substituted for what has previously been private investment.
The Chancellor is obviously not going to accept the Amendment. He has missed an opportunity to remove apprehensions which exist in the minds of the Commonwealth Prime Ministers, and in the developing countries in particular. In 1962 the Commonwealth Conference discussed Europe. It was obviously a contentious matter. Its object was to make the Commonwealth stronger and to enable us to have greater investment in the Commonwealth. Since then many of the developing countries of the Commonwealth have made, and are in the process of making, their own arrangements with the European Economic Community, and, as they are independent countries and believe that this is in their own interests, I welcome the fact that they are gaining these benefits. At the coming Conference they will discuss measures which will weaken the Commonwealth, because they will lead to a diminution of investment, which affects particularly the developing countries. This I deeply regret, and I do not believe that the two things are entirely unconnected.
I agree with the Chancellor that it is difficult to carry out the U.N.C.T.A.D. undertakings with a Bill of this kind.
§ Mr. Heath
We will not go into that argument, because we have kept this debate on a fairly high and non-controversial level, but of course I am prepared to hit back if the hon. Gentleman wants it.
With this Bill it will be difficult to carry out the obligations which we accepted in the final agreement at Geneva. We believe that we should maintain the present position until we have a much more thorough understanding of the benefits, and disadvantages where they exist, of investment overseas to this country, to the Commonwealth, and to the developing countries. I believe that the Chancellor would have been wise to have had an arrangement which carried on the status quo, and not to have damaged it as he is doing. For these reasons, I urge my right hon. and hon. Friends to carry the Amendment when the appropriate time comes.
§ Question put, That those words be there inserted:—
§ The Committee divided: Ayes 193, Noes 198.571
|Division No. 177.]||AYES||[9.2 p.m.|
|Agnew, Commander Sir Peter||Buck, Antony||Errington, Sir Eric|
|Alison, Michael (Barkston Ash)||Builus, Sir Eric||Eyre, Reginald|
|Allan, Robert (Paddington, S.)||Burden, F. A.||Fell, Anthony|
|Allason, James (Hemel Hempstead)||Buxton, Ronald||Fletcher-Cooke, Charles (Darwen)|
|Anstruther-Gray, Rt. Hn. Sir W.||Campbell, Gordon||Fraser, Rt. Hn.Hugh(St'fford & Stone)|
|Astor, John||Carlisle, Mark||Fracer, Ian (Plymouth, Sutton)|
|Awdry, Daniel||Carr, Rt. Hn. Robert||Gammans, Lady|
|Baker, W. H. K.||Cary, Sir Robert||Gardner, Edward|
|Balniel, Lord||Channon, H. P. G.||Gibson-Watt, David|
|Barber, Rt. Hn. Anthony||Chataway, Christopher||Giles, Rear-Admiral Morgan|
|Barlow, Sir John||Chichester-Clark, R.||Gilmour, Ian (Norfolk, Central)|
|Batsford, Brian||Clark, William (Nottingham, S.)||Gilmour, Sir John (East Fife)|
|Bell, Ronald||Cooke, Robert||Glover, Sir Douglas|
|Bennett, Sir Frederic (Torquay)||Corfleld, F. V.||Goodhew, Victor|
|Bennett, Dr. Reginald (Gos & Fhm)||Craddock, Sir Beresford (Spelthorne)||Gower, Raymond|
|Berkeley, Humphry||Crowder, F. P.||Grant, Anthony|
|Berry, Hn. Anthony||Curran, Charles||Grant-Ferris, R.|
|Bessell, Peter||Dalkeith, Earl of||Gresham Cooke, R.|
|Bingham, R. M.||Davies, Dr. Wyndham (Perry Barr)||Grieve, Percy|
|Birch, Rt. Hn. Nigel||d'Avigdor-Coldsmid, Sir Henry||Griffiths, Peter (Smethwlck)|
|Black, Sir Cyril||Dean, Paul||Grimond, Rt. Hn. J.|
|Blaker, Peter||Deedes, Rt. Hn. W. F.||Hall, John (Wycombe)|
|Box, Donald||Dodds-Parker, Douglas||Hall-Davis, A. G. F.|
|Boyle, Rt. Hn. Sir Edward||Doughty, Charles||Hamilton, Marquess of (Fermanagh)|
|Brinton, Sir Tatton||Eden, Sir John||Hamilton, M. (Salisbury)|
|Bromley-Davenport, Lt. -Col. SirWalter||Elliot, Capt. Walter (Carshalton)||Harris, Frederic (Croydon, N.W.)|
|Brown, Sir Edward (Bath)||Elliott, R. W.(N'c'tle-upon-Tyne,N.)||Harris, Reader (Heston)|
|Bruce-Gardyne, J.||Emery, Peter||Harrison, Col. Sir Harwood (Eye)|
|Harvey, John (Walthamstow, E.)||Marten, Neil||Sharples, Richard|
|Hastings, Stephen||Mathew, Robert||Shepherd, William|
|Hawkins, Paul||Maude, Angus||Sinclair, Sir George|
|Heald, Rt. Hn. Sir Lionel||Mawby, Ray||Smith, Dudley (Br'ntf'd & Chiswick)|
|Heath, Rt. Hn. Edward||Maxwell-Hyslop, R. J.||Spearman, Sir Alexander|
|Hendry, Forbes||Maydon, Lt.-Cmdr. S. L. C.||Steel, David (Roxburgh)|
|Higgins, Terence L.||Mitchell, David||Studholme, Sir Henry|
|Hill, J. E. B. (S. Norfolk)||Monro, Hector||Summers, Sir Spencer|
|Hirst, Geoffrey||More, Jasper||Talbot, John E.|
|Hobson, Rt. Hn. Sir John||Morrison, Charles (Devizes)||Taylor, Edward M. (C'gow.Cathcart)|
|Hooson, H. E.||Mott-Radclyffe, Sir Charles||Taylor, Frank (Moss Side)|
|Hopkins, Alan||Munro-Lucas-Tooth, Sir Hugh||Temple, John M.|
|Hordem, Peter||Murton, Oscar||Thorpe, Jeremy|
|Hornby, Richard||Neave, Airey||Turton, Rt. Hn. R. H.|
|Hunt, John (Bromley)||Nicholls, Sir Harmar||Tweedsmuir, Lady|
|Hutchison, Michael Clark||Nicholson, Sir Godfrey||van Straubenzee, W. R.|
|Jenkin, Patrick (Woodford)||Nugent, Rt. Hn. Sir Richard||Vaughan-Morgan, Rt. Hn. Sir John|
|Johnston, Russell (Inverness)||Osborn, John (Hallam)||Walder, David (High Peak)|
|Jopling, Michael||Osborne, Sir Cyril (Louth)||Walker, Peter (Worcester)|
|Kerr, Sir Hamilton (Cambridge)||Page, John (Harrow, W.)||Walker-Smith, Rt. Hn. Sir Derek|
|Kershaw, Anthony||Page, R. Graham (Crosby)||Ward, Dame Irene|
|Kilfedder, James A.||Pearson, Sir Frank (Clitheroe)||Weatherill, Bernard|
|King, Evelyn (Dorset, S.)||Peel, John||Webster, David|
|Lancaster, Col. C. G.||Percival, Ian||Wells, John (Maidstone)|
|Langford-Holt, Sir John||Peyton, John||Whitelaw, William|
|Litchfield, Capt. John||Pounder, Rafton||Wills, Sir Gerald (Bridgwater)|
|Lloyd, Rt. Hn.Geoffrey(Sut'nCdfield)||Powell, Rt. Hn. J. Enoch||Wilson, Geoffrey (Truro)|
|Lloyd, Ian (P'tsm'th, Langstone)||Price, David (Eastleigh)||Wise, A. R.|
|Lloyd, Rt. Hn. Selwyn (Wirral)||Prior, J. M. L.||Woodhouse, Hon. Christopher|
|Longbottom, Charles||Pym, Francis||Woodnutt, Mark|
|Longden, Gilbert||Ramsden, Rt. Hn. James||Wylie, N. R.|
|Lubbock, Eric||Redmayne, Rt. Hn. Sir Martin||Yates, William (The Wrekin)|
|McAdden, Sir Stephen||Ridley, Hn. Nicholas||Younger, Hn. George|
|Mackie, George Y. (C'ness & S'land)||Ridsdale, Julian|
|Maclean, Sir Fitzroy||Roberts, Sir Peter (Heeley)||TELLERS FOR THE NOES:|
|Macleod, Rt. Hn. Iain||Rodgers, Sir John (Sevenoaks)||Mr. Martin McLaren and|
|McMaster, Stanley||Roots, William||Mr. Ian MacArthur.|
|Marples, Rt. Hn. Ernest||Royle, Anthony|
|Allaun, Frank (Salford, E.)||Dell, Edmund||Hughes, Emrys (S. Ayrshire)|
|Alldritt, Walter||Diamond, John||Hughes, Hector (Aberdeen, N.)|
|Allen, Scholefield (Crewe)||Dodds, Norman||Hunter, A. E. (Feltham)|
|Armstrong, Ernest||Doig, Peter||Irving, Sydney (Dartford)|
|Bacon, Miss Alice||Driberg, Tom||Jackson, Colin|
|Barnett, Joel||Duffy, Dr. A. E. P.||Janner, Sir Barnett|
|Baxter, William||Dunn, James A.||Jeger, Mrs. Lena(H'b'n&St.P'cras, S.)|
|Beaney, Alan||Dunnett, Jack||Jenkins, Hugh (Putney)|
|Bellenger, Rt. Hn. F. J.||Edelman, Maurice||Johnson, Carol (Lewisham, S.)|
|Bence, Cyril||Edwards, Rt. Hn. Ness (Caerphilly)||Johnson,James(K'ston-on-Hull, W.)|
|Benn, Rt. Hn. Anthony Wedgwood||Edwards, Robert (Bilston)||Jones, Dan (Burnley)|
|Bennett, J. (Glasgow, Bridgeton)||English, Michael||Jones, Rt. Hn. Sir Elwyn(W. Ham, S.)|
|Binns, John||Evans, Albert (Islington, S.W.)||Jones, J. Idwal (Wrexham)|
|Bishop, E. S.||Fernyhough, E.||Jones, T. W. (Merioneth)|
|Blackburn, F.||Fletcher, Sir Eric (Islington, E.)||Kelley, Richard|
|Blenkinsop, Arthur||Fletcher, Raymond (Iikeston)||Kenyon, Clifford|
|Boardman, H.||Floud, Bernard||Lawson, George|
|Boston, T. G.||Foley, Maurice||Ledger, Ron|
|Bowden, Rt. Hn. H. W. (Leics S.W.)||Foot, Michael (Ebbw Vale)||Lee, Rt. Hn. Frederick (Newton)|
|Boyden, James||Ford, Ben||Lever, Harold (Cheetham)|
|Braddock, Mrs. E. M.||Fraser, Rt. Hn. Tom (Hamilton)||Lever, L. M. (Ardwick)|
|Bradley, Tom||Freeson, Reginald||Loughlin, Charles|
|Bray, Dr. Jeremy||Galpern, Sir Myer||Mabon, Dr. J. Dickson|
|Broughton, Dr. A. D. D.||Garrett, W. E.||McBride, Neil|
|Brown, Hugh D. (Glasgow, Provan)||Garrow, A.||McCann, J.|
|Brown, R. W. (Shoreditch & Fbury)||George, Lady Megan Lloyd||MacDermot, Niall|
|Buchan, Norman (Renfrewshire, W.)||Gourlay, Harry||McGuire, Michael|
|Buchanan, Richard||Gregory, Arnold||McInnes, James|
|Butler, Herbert (Hackney, C.)||Grey, Charles||Mackenzie, Gregor (Rutherglen)|
|Callaghan, Rt. Hn. James||Griffiths, David (Rother Valley)||Mackie, John (Enfield, E.)|
|Carmichael, Neil||Griffiths, Will (M'chester, Exchange)||McLeavy, Frank|
|Carter-Jones, Lewis||Hamilton, James (Bothwell)||MacMillan, Malcolm|
|Coleman, Donald||Hamilton, William (West Fife)||Mahon, Peter (Preston, S.)|
|Conlan, Bernard||Hamling, William (Woolwich, W.)||Mahon, Simon (Bootle)|
|Corbet, Mrs. Freda||Hannan, William||Manuel, Archie|
|Craddock, George (Bradford, S.)||Harper, Joseph||Mapp, Charles|
|Crawshaw, Richard||Harrison, Walter (Wakefield)||Mason, Roy|
|Crosland, Rt. Hn. Anthony||Hattersley, Roy||Maxwell, Robert|
|Crossman, Rt. Hn. R. H. S.||Heffer, Eric S.||Mayhew, Christopher|
|Cullen, Mrs. Alice||Herbison, Rt. Hn. Margaret||Mellish, Robert|
|Dalyell, Tam||Hobden, Dennis (Brighton, K'town)||Mendelson, J. J.|
|Davies, G. Elfed (Rhondda, E.)||Holman, Percy||Miller, Dr. M. S.|
|Davies, Ifor (Gower)||Horner, John||Morris, Alfred (Wythenshawe)|
|Mulley, Rt.Hn. Frederick(SheffieldPk)||Rhodes, Geoffrey||Tomney, Frank|
|Murray, Albert||Richard, Ivor||Tuck, Raphael|
|Newens, Stan||Robertson, John (Paisley)||Varley, Eric G.|
|Norwood, Christopher||Rogers, George (Kensington, N.)||Wainwright, Edwin|
|O'Malley, Brian||Rose, Paul B.||Walden, Brian (All Saints)|
|Oram, Albert E. (E. Ham, S.)||Ross, Rt. Hn. William||Wallace, George|
|Orbach, Maurice||Sheldon, Robert||Watkins, Tudor|
|Page, Derek (King's Lynn)||Shinwell, Rt. Hn. E.||Weitzman, David|
|Paget, R. T.||Short,Rt.Hn.E.(N'c'tle-on-Tyne, C.)||Wells, William (Walsall, N.)|
|Palmer, Arthur||Silkin, John (Deptford)||Whitlock, William|
|Pannell, Rt. Hn. Charles||Silverman, Julius (Aston)||Wilkins, W. A.|
|Parker, John||Slater, Mrs. Harriet (Stoke, N.)||Williams, Clifford (Abertillery)|
|Parkin, B. T.||Small, William||Williams, Mrs. Shirley (Hitchin)|
|Pearson, Arthur (Pontypridd)||Snow, Julian||Willis, George (Edinburgh, E.)|
|Pentland, Norman||Soskice, Rt. Hn. Sir Frank||Wilson, William (Coventry, S.)|
|Popplewell, Ernest||Steele, Thomas (Dunbartonshire, W.)||Winterbottom, R. E.|
|Prentice, R. E.||Stones, William||Woodburn, Rt. Hn. A.|
|Price, J. T. (Westhoughton)||Strauss, Rt. Hn. G. R. (Vauxhall)||Woof, Robert|
|Pursey, Cmdr. Harry||Taylor, Bernard (Mansfield)||Wyatt, Woodrow|
|Randall, Harry||Thomas, George (Cardiff, W.)||Yates, Victor (Ladywood)|
|Rankin, John||Thomas, Iorwerth (Rhondda, W.)||Zilliacus, K.|
|Redhead, Edward||Thomson, George (Dundee, E.)|
|Rees, Merlyn||Thornton, Ernest||TELLERS FOR THE NOES:|
|Reynolds, G. W.||Tinn, James||Mr. Alan Fitch and|
|Mr. William Howie.|
§ Mr. Turton
I beg to move, Amendment No. 70, in page 75, line 36, to leave out from "profits" to the end of line 41.
I move this Amendment in an exploratory fashion. This paragraph is framed in an extremely odd way and seems to have some awkward results, which I hope the Chancellor or the Chief Secretary will explain. It deals with the system of Commonwealth unilateral relief which is laid down in Section 348 of the Income Tax Act, 1952. The purpose of that was to provide for the exceptional cases, such as India and Pakistan, to which we could not give double taxation relief because of the weakness of their economies. Therefore, we are here dealing with a weakness in the provision for those to whom one would like to see the greatest leniency extended in this Corporation Tax.
It is true that, although it is purposely to deal with the abolition of unilateral taxation relief, particularly to India and Pakistan, it does not do that by this subsection. It merely gives them a warning that the Government wish to deprive them of that unilateral relief. It then takes what I suggest to the Chancellor is a most peculiar and obnoxious course of saying that from such date as Parliament may hereafter determine that unilateral relief may be taken away. I hope that I shall be corrected if I am wrong, but I presume that that means that by some subordinate legislation a relief which India and Pakistan and shareholders in India and Pakistan have hitherto enjoyed will be taken away.
572 9.15 p.m.
If we are to abolish a unilateral relief which has existed since 1952, the right way is to do it by a Finance Bill at some future date and not by subordinate legislation which presumably would be taken late at—I do not know whether by the affirmative procedure or by negative procedure. Surely that is the wrong way of approaching the matter. I appeal to the Government to reconsider the matter and, if necessary, to delete the paragraph from the Bill.
How much money is involved in this form of unilateral relief? It was an exceptional case for relief when it was first devised in 1952 to deal with the very peculiar problems of the poorer Commonwealth countries. As I said on the previous Amendment, if the Chancellor made such a concession on the eve of the Commonwealth Prime Ministers' conference on a matter which would appeal to the Commonwealth, showing his good will towards investment in the Commonwealth, it would be very well received.
I believe that he could make this concession with no great damage to his Bill. If later he felt that India and Pakistan and investors in India and Pakistan should no longer enjoy this relief, and if he were still Chancellor—which I think unlikely—he could introduce the necessary provision into another Finance Bill.
§ The Financial Secretary to the Treasury (Mr. Niall MacDermot)
The Amendment seeks to retain permanently the unilaterial relief for underlying tax on investment in the Commonwealth. The 573 right hon. Member for Thirsk and Malton (Mr. Turton) asked me to explain the reasons for this provision and said that his Amendment to some extent was exploratory. I will take advantage of his offer and seek to explain the provisions to the Committee.
It must be looked at against the background of the general arrangements for relief against underlying tax. The Committee will remember from the last discussion that underlying tax is tax which is paid by an overseas company on its profits in the foreign country. At present, relief against underlying tax is granted in three ways. First, it can be done under double taxation agreements for any shareholder. That includes not only direct, trade investment but also portfolio investment, either by individuals or by companies. We have agreements of that kind with a number of countries, perhaps the most important being with America. Secondly, relief can be given unilaterally, and is given unilaterally, to any shareholder in a company resident in the Commonwealth. This again includes portfolio investment. Thirdly, it can be given either under a double taxation agreement or, if there is no double taxation agreement, then unilaterally for trade investment, direct investment, anywhere overseas; and for this purpose the rough-and-ready test which is written into the law for distinguishing what is trade investment is that if a United Kingdom company holds 25 per cent. of the voting power in the overseas company, it ranks as trade investment.
I would draw attention to two things in this connection. First, the investor in the overseas company is not put in a more favourable position than an investor in a United Kingdom company. Secondly, what we grant unilaterally within the Commonwealth is something that we are prepared to offer on a reciprocal basis to any other country—and other countries, of course, attach importance to this.
In his Budget speech, my right hon. Friend stated with regard to these classes of relief against underlying tax that in regard to the double taxation relief to any shareholder he proposed to seek to renegotiate these agreements, which will, in any event, in most cases be necessary as a result of our change over from an Income Tax to a Corporation Tax 574 system. It does not necessarily follow that as a result of these renegotiations there will be relief for portfolio investments under those agreements. With regard to the third class—if I can turn to that before dealing with the class with which the Amendment is concerned—that is to say, relief given either under double taxation relief agreements or unilaterally for trade investment, my right hon. Friend made it clear that it is proposed that that relief shall continue.
With regard to the unilateral relief, the relief to any shareholder in a company resident in the Commonwealth, he gave notice that it will be our intention to withdraw that relief at a later date. His reason for stating that it should be done at a later date is that it would be thought to be unfair to shareholders in companies resident in the Commonwealth to withdraw now and immediately something which we seek to obtain in other countries as a result of renegotiating the double taxation agreements.
It would, therefore, not be intended to withdraw this relief until we had seen what progress had been made in the renegotiation of the double taxation agreements. The withdrawal would be done only with the approval of this House. It would be done only by telling the House of the intention to do so, and the circumstances which it was thought justified it—
§ Mr. MacDermot
I should like to check on that so as to be sure I give the accurate answer. I think that I know the answer, but I want to be sure.
Perhaps while that information is being sought I can explain a little more the underlying reasons for this change, and anticipate the question I may be asked: what are the reasons for restricting in this way relief in respect of portfolio investment? We have been criticised for being undiscriminating in our tax measures as they apply to overseas investment, but this is a case in which we intend deliberately to discriminate. We intend to preserve the relief in respect of trade investment.
There are a number of reasons for that decision. Partly it is, of course, that the 575 underlying tax that is paid by a subsidiary company—and applying the 25 per cent. test as to what is a subsidiary—is, in a sense, tax paid within the company sector and to grant the relief does not conflict with the principle of Corporation Tax by separating company taxation from the individual tax paid by the shareholder. Also, I think that it has generally been agreed in this Committee that there is and can be a great difference in the effect on its returns to this country between trade investment overseas and portfolio investment. It is the trade investment which is likely to be more productive, and is designed to be productive of helping future trade between ourselves and the countries in which the investment is taking place.
Some portfolio investment may have an indirect result of that kind, but this is not its primary object. When we are seeking to put a brake on and to moderate overseas investment, this applies in particular to portfolio investment. This is in line also with the measures which my right hon. Friend announced in his Budget speech in connection with the switching of portfolio investment and provisions in connection with the switch market.
The second main reason is the one I referred to, that it would be wholly inconsistent with our new system if an investor in an overseas company could get a credit from overseas Corporation Tax when an investor in a United Kingdom company would not get a similar credit in respect of United Kingdom Corporation Tax. On the genuine trade investment the relief for the underlying tax continues. The trade investor in the overseas company would therefore be in the same position as a trade investor in a United Kingdom company. Complaints made in our previous debates in regard to lack of overspill would place a shareholder in the same position as the shareholder of a United Kingdom company.
In regard to the 25 per cent. test we have received representations in particular from some of the overseas mining companies in the Commonwealth that the 25 per cent.—which, I make clear, is not our invention but something we inherited from previous tax law—would bear too harshly on some of those companies operating within the Commonwealth. The reason is simple. There has been a 576 common practice within those companies where there is a high element of risk involved for several companies to get together and each to contribute rather less than 25 per cent. and to form a consortium. They set up a company abroad which probably one of the consortium will direct and manage. If we left the 25 per cent., none of them would get the advantage.
As a result of these representations, as hon. Members will have noticed, my right hon. Friend has put down Amendment No. 646 to Schedule 15, page 201, line 43, which reduces the 25 per cent. to 10 per cent. for the Commonwealth. We think this will afford real assistance and relief to one class of companies which were among those hardest hit.
I now have the answer to the question asked by the right hon. Member for Thirsk and Malton. In order to take the action which has been indicated an Act of Parliament would be needed before the unilateral relief for the Commonwealth could be withdrawn. I should like to look further into this advice I have been given because the provision in the Bill when it becomes law will be an Act of Parliament. I leave that as a provisional answer.
§ Mr. Turton
It is not an answer. This is not operative in the Act, it is declaratory and therefore it can have no operative effect. If the answer is that it requires another Act of Parliament, the point I made in my speech was good. This paragraph should be deleted, although no doubt the warning and very careful explanation which the hon. and learned Gentleman has given will be taken due note of by these companies enjoying unilateral relief. I also ask the hon. and learned Gentleman to give the other figures I asked for of the exact amount implicated in these proposals.
§ 9.30 p.m.
§ Mr. MacDermot
I have been looking again at the wording. It is quite clear that no other procedure is provided in the Clause. It would need to be written into an Act of Parliament, either the Finance Bill or some other Measure and therefore it is clear that Parliamentary sanction would be required. I can see the advantages in giving a formal declaration of intention of the kind that at the moment is written into the Bill. There may be some technical reason, which I 577 shall look into further, why it should be written into the Bill. I will look further into the question which the right hon. Member for Thirsk and Malton raised, which is whether it is necessary to state this intention in the Bill or whether it would be sufficient to make this declaration of intention. As I say, I can see obvious advantages in making this declaration of intention in this very formal way so that people will have it brought to their attention in a way they are likely to act upon in deciding future policies.
§ Sir Derek Walker-Smith (Hertfordshire, East)
Is the form of words used here a usual form of words? Are there any precedents for it to the hon. and Darned Gentleman's knowledge? It seems to me to be such an unusual form of words. Normally either Parliament enacts something, or enacts something in principle to be brought into effect by some Statutory Instrument or regulation. A mere declaration of this sort seems to me at least very unusual. Could the hon. and learned Gentleman illuminate us on that?
§ Mr. MacDermot
I agree with the right hon. and learned Gentleman. It is unusual, but then the situation with which it deals is unusual, namely, it is making a formal declaration of intent to alter the law at a future date. There are obviously good reasons for making the declaration in as formal a way as can be done at this stage, because clearly people who have to make business decisions and have to calculate what are likely to be the future effects of investment decisions they take should be given the maximum warning possible. But, for the reasons which I have indicated, we cannot now put, and it would not be right for us now to try to put, a date upon it, because we do not think it right to put investors in Commonwealth countries in a worse position relatively than investors in countries with which we now have double taxation agreements. Therefore, the removal of this concession will be done only when the appropriate stage is reached in the negotiation of these double taxation agreements.
§ Sir Harmar Nicholls
Surely it must be wrong to have a declaration of intention made in this way. It is hard to conceive that at a stage when we are dis- 578 cussing an Amendment in Committee on the Finance Bill a precedent of this importance could be set up in this rather casual way. I agree with my right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith). It should be either settled in principle and carried through by some form of regulation later or it might be as well to withdraw it at this stage.
§ Mr. MacDermot
If the feeling of the Committee is that it will be sufficient and satisfactory for this to be given effect to by some form of delegated legislation and by an Order brought before the House I will convey those views to my right hon. Friend, but the view that we take—and I think that it would commend itself more to the Committee—is that this is a matter of importance which involves a change in the tax law relating to those countries which it is better to say will be brought forward and dealt with in a Finance Bill or in some other way by Act of Parliament.
It is unusual, but, of course, the circumstances are unusual in that this is part of a major change which we are making in our tax system. It appears to me, and I commend it to the Committee, desirable to make this declaration of intention in the most formal way possible so that no one at a later stage, when the change comes, can say, "I did not have fair warning of this. I made an investment in 1965 or 1966 thinking that the special Commonwealth relief was to continue". If people are given fair warning by Act of Parliament of an intention to remove the relief at a future date, they will not have the same ground for complaint This is the reason why it is right to write this into the Bill.
§ Mr. Michael Clark Hutchison (Edinburgh, South)
It seems to be an entirely new constitutional development to bring this into the middle of a Finance Bill. I must ask the Financial Secretary to look at it again and, perhaps, take the matter back for reconsideration, bringing something forward at a later stage, if necessary. We cannot fiddle about with the constitution in the middle of this Finance Bill.
§ Mr. MacDermot
We are not fiddling about, and I do not agree that any new constitutional principle is involved. We 579 are making perfectly clear what is to be done and how it is to be done; the only thing left open is the date. Normally, as hon. Members have said, a matter of this kind would be dealt with by delegated legislation, and it could be dealt with by delegated legislation subject to affirmative Resolution requiring that it be brought before the House. But what we are doing is to write in even greater protection than that for the shareholders concerned by saying that this is something which must be done by Act of Parliament. But it is equally important that by Act of Parliament we should now, at the earliest possible date, give a clear warning of what we intend to do and how we intend to do it, leaving open only the question of date.
If hon. Members wish, I shall readily undertake to look into the matter further, but I hope that they, too, will look into it further and, on reflection, consider whether it is, in fact, the most satisfactory way for the protection of the shareholders concerned to deal with it as we have proposed.
A word now about what the cost of the Amendment would be. It is estimated that about half of the yield which will result from the withdrawing of relief on underlying tax would be lost if the Amendment were accepted, that is, half a figure totalling £18 million at a 35 per cent. rate of Corporation Tax and £20 million at a 40 per cent. rate. In other words, about £9 million or £10 million would be lost directly.
Moreover, it is our view that, if the Amendment were accepted, the logic of the concession would be that it would have to be extended to other overseas countries than those to which we should grant it unilaterally in the Commonwealth. [HON. MEMBERS: "Why?"] For the reason I stated at the outset when I explained the present position. We do not at present grant any concession unilaterally within the Commonwealth which we are not prepared to offer to other countries reciprocally in a double taxation agreement.
As I have said, we intend to renegotiate these agreements so as not to perpetuate that relief in respect of portfolio investment. If we granted it unilaterally to the Commonwealth, we should be 580 under great pressure, and we do not feel that we should have proper ground upon which to resist it, to grant it again on a reciprocal basis under double taxation agreements. Therefore, we should be at risk of losing the whole of this yield by withdrawing the relief from underlying tax, which is something which, for the reasons I have indicated, we should find quite unacceptable. It would not only fail to apply the kind of brake we need on portfolio investment overseas but it would also undermine the whole basis of the Corporation Tax.
§ Sir D. Walker-Smith
I rise only to add a few sentences on the constitutional point on which I ventured to intervene earlier, that is in regard to the phrase in the Clause,… as from such date as Parliament may hereafter determine …As I indicated there are two methods whereby Parliament normally and constitutionally enacts its will. One, and the principal one, is by Act of Parliament, whether it be a Finance Act or any other Statute. The other is to enact a principle in Parliament and to leave the detailed application of that principle to a statutory instrument which in itself has the force of law and is a subordinate form of Statute.
Here we are confronted with something that is neither one nor the other. It is a declaration of intent proposed to be enshrined in an Act but not apparently to be given statutory force until some time hereafter. That, so far as I know at any rate—and the hon. and learned Gentleman has not corrected me—is a practice not normally known to our Statute law. It is a practice and would be a precedent which would be fraught with certain disadvantages because, once a thing like this is written into an Act it, of course, will have statutory effect and will have to be interpreted and applied if necessary in the courts of law. I can see considerable difficulty in interpreting and applying a statutory intention which might or might not be given legislative effect hereafter.
I think that the hon. and learned Gentleman rather overlooks the point that, constitutionally a Parliament cannot bind its successors; and, though he says what Parliament will enact he does not know—no one knows—whether Parliament at 581 that stage will be taking its recommendations from him or possibly from Ministers with other views. That is a practical reason why a declaratory form of intent such as this is not appropriate to our constitutional practice.
I said in my short intervention that there were these two methods normally in our constitutional practice of giving effect to the statutory intent of Parliament—Act of Parliament or subordinate legislation in the form of Statutory Instrument. The hon. and learned Gentleman inferred from this that we might be suggesting that the latter form was appropriate here. That, of course, I do not think that anyone on this side would wish to see. It is a practice which, unfortunately, in the complications of modern society, is inevitable in a good deal of our legislation but it should be kept to a minimum and in particular excluded as far as possible from the range and ambit of our tax laws and Finance Acts. Therefore it is clear that the Chancellor in this form of words is really proposing something rather novel in our constitutional practice, which introduces a new form of words into our tax law and may be fraught with certain difficulties.
I hope that I do not do the hon. and learned Gentleman any injustice—he knows that I would not wish to do so—if I say that I got the impression that perhaps until we had this short discussion he and his fellow Ministers may not have been entirely aware of the effect of what they were doing here and the extent to which it is a deviation from normal constitutional practice and precedent. I hope, therefore, that, having regard to the length and complexity of this Bill, he will not feel that it in any way reflects upon his Ministerial competence if he undertakes to look at it again and not have any stubborn pride of authorship in the exact wording of this Clause.
§ Mr. MacDermot
The right hon. and learned Gentleman will have heard that I gave such an undertaking.
§ 9.45 p.m.
§ Mr. Harold Lever
It appears that we have stumbled on a constitutional crisis by accident, as it were. It seems rather extraordinary that, without anybody else noticing it and by reason of a casual aside, a constitutional crisis of fundamental importance has been discovered.
582 I must say that I admired the contribution of the right hon. and learned Member for Hertfordshire, East (Sir D. Walker-Smith), which had his usual lucidity. I admired even more that he managed to keep his face straight throughout the argument. He said that the courts would have great difficulty in interpreting this piece of surplusage. The answer is that the courts could not have the smallest difficulty and that a preparatory schoolboy could not have the smallest difficulty in interpreting the legal consequences of a declaration as inocuous as this and one by way of warning which happens to be embodied in a Statute dealing with tax. The idea that this produces some extraordinary mystifying and terrifying consequence to our fiscal structure is somewhat exaggerated.
I will content myself by saying that while this is a useful way of giving a warning, and I prefer it to the way in which warnings have been given in the past, and if warnings are to be given, this way gives them a certain dignity, I am not in favour of warnings being given in this way. The late and little lamented Government were apt to give warnings from time to time. There are two which come to my mind. One was on a Finance Bill, when they said that they would retrospect if necessary if avoidance of their provisions took place. That was a warning which they did not honour. The other led to the Burmah Oil Company affair and was a warning by letter which saddled the unfortunate Labour Government with the malign intentions of the Conservative Government.
§ Mr. Lever
I was about to complete the point. The point I was seeking to make was simply that the Conservative Government did not produce a good example of how a warning should be given. If this is a novel way, it is all the more welcome in that that differentiates the warning from those given by the outgoing Government.
§ Sir Harmar Nicholls
It is all very well for the hon. Member for Manchester, Cheetham (Mr. Harold Lever) during a period of repentance to throw his protective cloak around the Financial Secretary, but he was in the Committee and 583 heard the Financial Secretary say that he would consider putting this matter right by affirmative Resolution.
§ Mr. Harold Lever
What he said was that if the Committee really wanted it he would represent to his right hon. Friend that it was the wish of the Committee.
§ Sir Harmar Nicholls
No. I think that he went rather further than that. The hon. Gentleman is three-quarters of the way right, but the Financial Secretary certainly gave the impression to the Committee that he thought that this was the sort of thing which might be done if the Committee wanted it. When we are dealing with a Finance Bill and the taxation system of the country, that is something which the hon. Gentleman, if he were not feeling so repentant, would agree could not normally be contemplated.
I have every sympathy with the Financial Secretary, but my right hon. Friend the Member for Thisk and Malton (Mr. Turton) did not necessarily discover this matter by accident. The object of the Committee stage is to probe this sort of detail and find this sort of flaw. My right hon. Friend has been in the House of Commons for some year and has taken a keen and active interest and must have known that the sort of Amendment which we have moved would be likely to discover this sort of weakness. I would have thought that it was in the interests of good law that when a weakness has been disclosed there should be a clearer offer for the matter to be reconsidered than the Financial Secretary has given so far.
What saddened me about the Financial Secretary's reply was that he did not see that there was a special claim from the Commonwealth. He rather suggested that because of obligations which might have accrued to other nations he could not feel the conviction that he could argue a special case for the Commonwealth in considering this matter. If there were the strength of purpose which was evident in the speeches of the hon. Gentleman the Member for Cheetham and his friends before the election in their new support for the Commonwealth, it would be recognised that there was a special case for separating the two. If those on the Treasury Bench would look at the posi- 584 tion as it would affect India and Pakistan, they would see that there are very good reasons for trying hard to make commonwealth a special case. I was sorry that the Financial Secretary did not respond to the appeal of my right hon. Friend the Member for Thirsk and Malton.
We have the Commonwealth Conference meeting shortly, and there are many problems and difficulties. It could well be that if it succeeds we shall maintain the leadership of this great unit. On the other hand, if some of the problems which are hovering round have precedence, there could be a breakdown which could be dangerous. I believe that the great appeal made by my right hon. Friend the Member for Thirsk and Malton to take advantage of this tactical minute while the Commonwealth Prime Ministers are here would be worth being borne in mind. I hope we shall consider not only the constitutional issues put forward by my right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith), but the greater issue in relation to our standing in the world as leader of a Commonwealth group.
§ Mr. Peter Emery (Reading)
The whole Committee, including the Government Front Bench, will be particularly grateful to my right hon. Friend the Member for Thirsk and Malton (Mr. Turton) for moving this Amendment because there can be little doubt in the mind of anyone who has sat through the whole of the debate today that the Government are not absolutely certain of the final operation and the way this provision will be brought into being. What we are considering here is unilateral relief in underlying tax for Commonwealth countries. The point that needs emphasising when this matter is considered is the specific effect particularly in Pakistan and India, and of course the overseas mining interests.
This point, also emphasised by my hon. Friend the Member for Peterborough (Sir Harmar Nicholls), concerning the Commonwealth is something which many of us feel strongly about. Whilst at the same time accepting the point, made fairly reasonably, I think, by the Financial Secretary about the difficulties that this might involve with other taxation agreements, I suggest that it would be quite wrong of him to try to suggest 585 to the Committee that every double taxation agreement is the same. I think his argument falls a little in strength when he tries to suggest that one has to have the same unilateral offer for everyone. We take the point about agreements as far as portfolio investments are concerned as opposed to the investments in trade. This is a fair point and I am certain that my right hon. Friend the Member for Thirsk and Malton would feel that it was of the greatest importance that the need to ensure that the investment, as far as trade investment was concerned, was guaranteed.
There is only one other feature which I found spoilt the offer of the Financial Secretary to look again at this. I refer to his dogmatic repetition, which we have had from one Treasury Minister after another, that investment overseas must without exception be treated in exactly the same way as investment at home. We on this side of the Committee do not necessarily accept that. When it is said from the other side of the Committee, we must make quite certain that we on this side make our position quite clear. It is quite plain that we believe that at times there should be the desire to encourage investment in certain places in the world and that that incentive should be given in a manner whereby overseas investments may be treated differently to investments at home.
I fully agree with the speech of my right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith): I will not attempt to deal with the constitutional points—my right hon. and learned Friend can at all times do that much more adequately than I—but it seems to me to be strange that if in future we are to have clear warnings, they must be spelt out in the Finance Bill. Heaven help Parliaments in future if every clear warning has to be dealt with by a paragraph in the Finance Bill. I take the point made by the hon. Member for Manchester, Cheetham (Mr. Harold Lever) that he likes that kind of unilateral declaration in the Finance Bill, but it is nonsense to suggest that it is imperative that if this action should be taken or is desired by a Government to be taken, it has to be announced in the Finance Bill.
586 I come, therefore, to the last point, which brought from the Financial Secretary the forthright guarantee to look at the matter again, that when we come down to it the Government do not really know how they will carry this out. I do not want to make a point of that. Anybody could be as uncertain as the hon. and learned Gentleman on a Bill as long and as complex and with as many Amendments as this one. Therefore, I urge my right hon. Friend the Member for Thirsk and Malton to accept the definite guarantee given by the Treasury Minister. We can return to this matter on Report.
§ Mr. Turton
I understand that the Financial Secretary has given a clear undertaking that the inclusion of the paragraph will be considered before Report and that there will be another opportunity for us to reconsider the matter. On that assurance, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ The Chairman
With this Amendment, I propose that we take also the following Amendments:
Amendment No. 540, in line 7, at end insert "after 6th April 1976".
Amendment No. 533, in line 8, after "except", insert:in respect of a company or a subsidiary company which is carrying on a trade in the Commonwealth overseas and in respect of other companies".Amendment No. 541, in line 10, leave out "1966–67 "and insert" 1976–77".
Amendment No. 542, in line 15, at end add:as if references to 1965–66 and 1966–67 were references to 1975–76 and 1976–77 respectively:Provided that the reference to the years 1975–76 and 1976–77 in this subsection shall only apply to overseas trade corporations the income of which is entirely derived from operations outside the United Kingdom".The hon. Member for Middleton and Prestwich (Sir J. Barlow) has asked that I might allow a Division on Amendment No. 540. I propose to accede to this request.
§ Mr. Emery
Thank you, Dr. King. This brings the Committee to consider in 587 full the question of overseas trading companies. We have seen references in debates on other subjects to O.T.C.s, but this is the one specific place in the Finance Bill where the Committee has to decide whether O.T.C.s should continue or should be done away with.
It is of interest to consider one or two statements concerning the background of overseas trading corporations. In April 1957, when overseas trading corporations were first considered and were brought within the Budget, there were two references to which I wish to draw the Committee's attention. The first was by my right hon. Friend the Member for Monmouth (Mr. Thorneycroft) who was then Chancellor of the Exchequer, who said:With 50 million people living here upon a small island, and dependent on external trade and confidence in sterling, it is this which is always uppermost in the mind of any Chancellor.My right hon. Friend went on to say thatduring the second half of the year, countries outside the sterling area reduced their holdings of sterling by £84 million, and that there were other large adverse capital movements. It was these factors which were responsible for most of the strain on our reserves."—[OFFICIAL REPORT, 9th April, 1957; Vol. 568, c. 965–6.]10.0 p.m.
I point this out particularly to make the Committee realise that when legislation dealing with O.T.C.s was brought in there were problems of the same sort—not quite as acute, I agree—as the Government are having to deal with at the moment, and in which abolition of overseas trading corporations might possibly assist, in dealing with the balance of payments.
What really is the background to the provision for O.T.C.s? It comes, as I am certain I only remind the Committee, in the Final Report of the Royal Commission on the Taxation of Profits and Income. There are in this three points I should like to draw to the Committee's attention. It was the recommendation of the Royal Commission that:We are now in a position to state what action we recommend in this difficult matter.That is, of overseas investments.We think that there should be a change in the present system that will make it possible to allow a tax exemption in respect of some overseas profits.588 That, I think, is quite clear, and it was to deal with that that we had the specific recommendations made in the Budget of my right hon. Friend the Member for Monmouth.
It is the essential points behind this which must be considered and which I should like to draw to the attention of the Committee. The Royal Commission said it wished to state quite plainly the essential points of its recommendation, and it said:We think that the present distinction between resident and non-resident trading companies is an unfortunate one in so far as it is made to depend on the site at which central management and control are exercised. It is not in the true interests of this country that overseas business should be discouraged from having its central management and control here, a tax liability which rests wholly on that distinction ought not to be continued.That, I think, is quite clear. Do the Government now deny that it is in the interests of this country to encourage overseas businesses to have their central control and management in the United Kingdom? In other words, are they getting away from that specific recommendation? If that is so—for myself I cannot think it can be the case—I really would like to know where the situation has altered so much since 1957 that they can go against the views of the Royal Commission.
The second recommendation was:… if central management and control are to be exercised here without tax liability necessarily resulting, it is very important that the conditions should be strictly defined within which any such exemption is to be permitted. It follows from this that, apart from the exercise of management and control, only such activities within the United Kingdom should be within the exemption as the economic interests of this country are seen to demand.This is a matter where there could be misuse, and what I would ask the Financial Secretary is, which companies have acted in a way which might be considered to be an abuse and which necessitates the alteration? Are there examples which he can quote? I shall myself deal with one specific matter. I would very much like to know what are the reasons which justify the Government in this instance also, and in departing from the majority view of the Royal Commission.
The third recommendation was:Any scheme that is put into operation on these lines touches economic issues of 589 great importance. … Such a scheme can only be justified in the long run by its contributon towards success. … It is by this that it will have to be judged rather than by theoretical arguments of equity.I suggest to the Financial Secretary that there have been definite economic advantages. I do not want to over-play my hand. These are not as large as some of the advocates of the legislation dealing with overseas trade corporations originally suggested, but I believe that there have been direct advantages. These are things which the Committee understands, and if they are to be done away with, it is only right and proper that the Financial Secretary should tell us how the Government are going to provide for these advantages in the future.
It should be clearly stated that during the debates at that time, which were led mainly by Mr. Gordon Walker, it was suggested that if we were not to have the O.T.C. legislation, this should be met by direct grant from the Government. If it is to be by direct grant, this does not mean that we will have any saving for the balance of payments. If the recommendations made by Mr. Gordon Walker are to be followed through, the Committee has a right to be told.
§ Sir Harmar Nicholls
My hon. Friend is taking unfair advantage of Mr. Gordon Walker by making it public that he was the sponsor.
§ Mr. Emery
At no time would I wish to embarrass anybody, but, as my hon. Friend will realise, it is difficult to give Mr. Gordon Walker notice that I was going to raise the matter.
It is true that the minority Report of he Royal Commission did not exclusively back up this specific recommendation. Let us be fair. I am not trying to mislead the Committee on this matter. The minority Report, signed by George Woodcock, H. L. Bullock, and Nicholas Kaldor, said in paragraph 179:We agree with the view that the variety of practice of the tax treatment of the so-called 'overseas profits' in different countries, described by the Majority, along with the growing practice of export subsidisation in its manifold forms, puts this country at a disadvantage in its overseas trading activities. We believe however that the remedy should be sought in international efforts to secure the suppression of such practices, and the adoption of conventions ensuring uniformity of treatment, rather than in their imitation.590 I have read the whole paragraph so that I cannot be accused of selecting odd pieces which are beneficial to my case.
Have these practices been suppressed since 1957? Obviously the answer is "No". Is there a greater uniformity of treatment? The answer to that is "Yes, because of the 1957 legislation bringing in overseas development companies". It is therefore fairly obvious that the Committee needs to have put before it a much better case than we have had so far for the abolition of the O.T.C. legislation.
The Financial Secretary may recall that on 10th May he said:The Corporation Tax will act as a brake, but will not prevent desirable overseas investment."—[OFFICIAL REPORT, 10th May, 1965; Vol. 712, c. 57.]I remind him of that because it seems that some of the most desirable overseas investment is that carried out by the overseas trade corporations. It makes nonsense of what the hon. and learned Gentleman has said if he now wants to do away with this form of overseas investment which, in the view of many hon. Members on this side of the Committee, is one of the most desirable forms of overseas investment.
We should realise that it is not only we in this Committee who feel strongly about this matter. A document which the National Association of British Manufacturers has sent to the Chancellor of the Exchequer says:The Association regrets the abolition of O.T.C. status; this may well drive companies to seek to transfer control abroad and it may become increasingly difficult for the Treasury to resist this. In addition, it appears that the maximum rate of relief in respect of income from abroad will be the corporation tax rate and any excess overseas tax may not be applied in reduction of the tax payable on dividends.We must point out to the Treasury that doing away with O.T.C.s is bound to mean that the value of the shares of these companies is likely to fall. In so doing, because of the taxation position which the Government are now bringing in by the Bill we are arriving at a position in which these overseas trade corporations will be much more likely to be taken over by overseas investment than retained by British investors.
I cannot believe that that is the desire of the Treasury, or that it has thought fully enough about this aspect of the matter. I said that I thought 591 it was important that the Financial Secretary should tell us whether he saw any direct abuses that required the abolition of this legislation. In all fairness, I must point out that there have been accusations that at least one or two companies have been able, by the regulations, to average their foreign tax paid. An obvious example is India, with a 70 per cent. taxation position, in conjunction with, say, Hong Kong, with 12½ per cent. They have been able to average this tax. Putting an average on the same amount of investment will obviously work out at a 41 per cent. tax payment. If we had a 50 per cent. tax position in the United Kingdom it would mean that full relief from taxation could be obtained on both lots of investment. It may be that this was not the intention for O.T.C.s when they were originally brought in.
Secondly, here has been a certain difficulty in the definition of distributions. There has been some doubt and criticism about this. But both these could be dealt with quite easily by regulation. I do not believe that there is any sense in doing away with the whole O.T.C. procedure for overseas investment in order to meet either of those abuses. It is, therefore, imperative that the Government should be able to make out a case which clearly meets the points originally set out in the Royal Commission on the Taxation of Profits and Income.
I want to say four more things. [Interruption.] I can say more, but I am trying to be reasonable. I am trying to overcome, without objection, the running conversation which some hon. Members opposite seem to want to carry on. It is sometimes more polite to have these conversations outside the Chamber, but if hon. Gentlemen wish to have them here it does not upset us, because those of us who are really serious about the Bill are determined not to deal with foolish political argument but to try to present a fair and proper case on the Amendments. This is what the country wants and this is what the Committee wants. It is certainly what I am trying to do.
It seems to me that we have to consider, in overseas trading corporations, the position of non-resident shareholders, 592 where companies desire to operate with headquarters in the United Kingdom. O.T.C. procedure is the one procedure which allows for this point to be met. If this is done away with, I do not see how the Government will be able to find any way of encouraging overseas shareholders—perhaps in a majority—to keep the operating company headquarters in the United Kingdom. Therefore, there must be that benefit, which has at no time been considered by the Chancellor of the Exchequer.
The second thing which I would say to the Financial Secretary in concluding is that this is an attack on some of the smaller companies. This is important, because, initially, the O.T.C. procedure benefited a considerable number of larger companies operating overseas. But with the advent of nationalism in these countries on their independence, it has now become much more evident that these companies can operate more efficiently by not remaining as O.T.C.s but changing their operation to subsidiaries partially owned, partially financed, and partially managed by the countries in which they are operating. This is specifically so with the larger companies, whether Shell or the mining companies. This is the pattern.
Therefore, the people who have not done this are much more likely to be the smaller companies operating in the O.T.C. ambit. Again, it seems that the O.T.C. procedure is needed specifically for investment in the least developed of the developing countries. This is important. This is the one way in which we can try to encourage into the least developed countries capital and capital investment. We know that there are difficulties. We have had facts from the hon. Member for Birkenhead (Mr. Dell) to show that less and less capital is going into these areas, but this is one of the ways in which the O.T.C. procedure would allow that to continue.
I am in no way trying to exaggerate the case. Only a small amount of money is involved. After all, it was quite obvious from the Financial Statement of 1965–66, page 15, that the estimated effect of the abolition of O.T.C.s in a full year will be a benefit of £2 million in taxation. This, therefore, is peanuts in the light of this Budget. We should hear in mind 593 this small amount and the fact that O.T.C.s were brought in in order to ensure that we could give benefits to investment in these areas as well as the fact that all that will be gained in taxation is £2 million.
One has to set against this the benefits of our investment. I have not dealt with exports which may accrue from this sort of investment. We have had that argument time and time again and I do not want to weary the Committee. I have tried to present the exact points which bear on O.T.C.s and which have not been raised before. There are three other Amendments associated with this one. I have not tried to deal with them. I hope that the hon. Members who are sponsoring these Amendments will be able to make their own points, and I do not intend to duplicate them in what I have said.
Therefore, purely on our own Amendment, I would urge the Government carefully to consider accepting our recommendation that what it gains in savings of the balance of payments or increasing the taxation by doing away with O.T.C.s, it certainly loses a lot of respect which we have in the countries where O.T.C.s are doing good. At this time, with the Commonwealth Prime Ministers' Conference about to start, I should have thought that it would have been a very small concession for the Chancellor of the Exchequer to have announced that he intends that the O.T.C. procedure should continue.
§ Sir John Barlow (Middleton and Prestwich)
I have had an interest in this subject for very many years. I remember putting down Amendments to Finance Bills about ten or eleven years ago to try to secure what was promised for O.T.C. companies in 1956 and became law in 1957. As the Committee knows, I have a personal interest in several O.T.C. companies. That gives me the advantage of speaking with a certain amount of knowledge.
The abuses which we have seen of the O.T.C. company scheme have been very small, and it is taking a sledge hammer to crack a nut to abolish the whole scheme in order to remedy the few shortcomings which have existed. The U.T.C. scheme has been of immense advantage both to this country and to 594 the overseas companies in which they have operated. Had it not been for the overseas trading corporation tax concession, many companies would have left London and would have gone to the countries in which they operate. I am glad to say that they are still here.
During the last few years, with the increase in the feeling of nationalism, developing countries have attached a considerable amount of prestige to having control in their own capitals of companies operating in their territory. We see it in the Far East and in Africa. There is continual pressure to draw the registration of companies from London to the country in which they operate.
I am convinced that in many cases it is far better that the registration should remain in London. These companies—I believe there are about 800 of them—have been built up in many cases over a very long period, and they have been very successfully run. There is no doubt that there is a tendency for them to emigrate from this country, and that may be a good thing, but it would be a great drawback if they were forced out through lack of reasonable taxation treatment in this country.
The O.T.C. companies were largely brought into this country because locally controlled and run companies abroad could frequently pay very much higher dividends and less tax than companies controlled from this country. Not only did the local shareholders benefit substantially but in many cases foreign shareholders could invest in those countries far more lucratively than they could invest through London registered companies.
The suggestion that the tax concession for these companies should be abolished is short-sighted. Originally it was suggested that it should be abolished over a period of five years. That has been extended slightly, but the period is still quite insufficient. If the Government will adopt the Amendment which has been moved, I shall be delighted not to press my Amendments; otherwise I shall be forced to persist with them. I believe that since the Budget proposal to abolish overseas trade corporations, many and strong representations have come from the countries that will be vitally involved.
595 A number of countries have a considerable interest in this matter. Ceylon exists largely by its exports of tea and rubber. They amount to about 78 per cent. of her total exports. If O.T.C.s status is abolished, either the dividends that are allowed to be sent to this country will be diminished or the upkeep of the gardens will have to suffer. They cannot continue as they have done until recently.
India is the biggest tea growing country in the world. Each year it produces about 760 million lb. of tea, of which 500 million lb. are exported. The value of that export is about £99 million, and it is about one-fifth of the total of India's exports. We probably all know of the difficulties of development, and of raising the standard of living there. The value of the tea gardens has been largely built up by the ploughing back of profits in the form of modernisation and extension during the last 30 or 40 years. The abolition of O.T.C.s will make it very much more difficult for these gardens to continue at their present high standard.
The rubber estates in Malaysia were largely established just before and after the First World War by companies registered in London. The total amount of capital put up in those early days was in the region of £70 million. Some of that investment was lost, but I understand that since 1930 no new money has been sent out there for the development of rubber—or, for that matter, of tin. Because of the ploughing back of profits, Malaysia has some of the best rubber estates in the world. The production on the European estates is about twice as great as that of the native estates—which, incidentally, get a very great deal of help by the example of and the experiments on the European estates.
The amount of profits returned from Malaysia is estimated at about £15 million a year, and another £15 million is estimated to come from exports, insurance, shipping and invisible exports. It would therefore appear that from an original investment of about £70 million we get an annual return of about £30 million which is very valuable indeed. If the O.T.C.s are abolished, the tax there accepted, and the whole of the rest of the profits declared as dividends, it will mean 596 taxation amounting to about 65 per cent. here compared with 40 per cent. in Malaysia, so that there will obviously be a very strong urge to move the control of the companies from London to Malaysia.
Already the value of many rubber shares has diminished substantially since the announcement was made—in some cases up to about one-third. There are indications that there are syndicates being formed in Malaysia to buy up and take over London-registered rubber companies; and they will get them at far below the real market price merely because of this taxation proposal of the Government.
§ Mr. MacDermot
I follow what the hon. Gentleman is saying about the threat of take-over, and I hope to deal with that later. He was saying earlier that there would be a move to emigrate. Can he show how it would be to the tax advantage of the shareholders of an O.T.C. to emigrate from here to Malaysia?
§ Sir J. Barlow
The Chinese in Malaysia could afford to pay far more for the estates and get a far higher yield than the British shareholder, and for that reason the Malays would get control. We have seen a certain amount of that in the past.
§ Mr. MacDermot
The hon. Gentleman is dealing with the take-over point. I was asking him to go back to his point about emigrating. He suggested that the abolition of O.T.C. status would provide an incentive for emigration. I do not understand why it would be to the advantage of the shareholders of an existing O.T.C. to emigrate to Malaysia.
§ Sir J. Barlow
It would not be to the advantage of British shareholders to emigrate, or for the company to emigrate, but it would be to the advantage of local capital in Malaysia to buy these estates at cut-throat prices. I know of certain cases of mining companies in which more than 50 per cent. of the shareholding is already held abroad, and great pressure would be brought to bear if and when O.T.C. status were abolished. If over 50 per cent. is held abroad already, it is comparatively easy for those 597 Commonwealth overseas shareholders to force the removal of the central office; and there is every indication that that wit' come about before very long. Either dividends of rubber companies would have to be reduced by about one-third, or the very necessary replanting of rubber would have to be cut to meet the situation if O.T.C. status is abolished.
§ Mr. Julian Ridsdale (Harwich)
Is my hon. Friend aware that the Tunku Abdul Rahman, on television tonight, in a programme in which the Prime Minister appeared, objected in very much the same terms as my hon. Friend is now doing, and the Prime Minister said that these Amendments would meet some of the objections which the Tunku had made?
§ Sir J. Barlow
I am very interested to hear that. This country owes a great debt to Malaysia and the rubber industry. In the six years immediately after the war, when American dollars were so difficult to secure, Malaysian rubber produced about £80 million worth of American dollars annually. That was more than all the. exports from this country to the United States at that time.
Owing to its prosperity in the past, Malaysia has very wisely built up large credit balances. I believe that they are in the region of £400 million in sterling in London, and the net figure is in the region of £200 million. If Malaysia has that herself, other countries probably have substantial balances as well. If they dislike intensely the abolition of O.T.C. status, it is probable that they will make strong representations, to say the least. Anyone who knows about banking would be reluctant to turn away loyal depositors at a time such as this, but I will not 598 develop this theme. Have representations on these lines come from Malaysia and other countries?
I think I am right in saying that when the Chancellor spoke on Second Reading he indicated that the outflow of money, largely through O.T.C.s, had increased phenomenally in the last few years. I have with me some figures of certain mining companies which invested large sums many years ago. They show the outflow in the last 10 years. Of three companies, the outflow in the first in the last 10 years was nil and the inflow £20 million, the outflow in the second was £5 million and the income £30 million and the outflow in the third was £58 million and the inflow £87 million.
Mining, tea and rubber are all showing the fruits of investments made long ago. At the same time, money has been ploughed back, profits have been developed, reasonable dividends have been paid for very many years and great assistance has been given to the countries which we are trying to help to develop. In recent years we were told time and again by hon. Gentlemen opposite, when they were in Opposition, that we were not doing nearly enough to help the developing countries. In the cases I have described, we have for years been helping them and ourselves. It has been to our mutual advantage. Now the Government, with one swing of the hand, are trying to spoil all this, if not stop it.
I hope that the Government will think again on this matter. Their action will create immense ill feeling among overseas countries. It will not only destroy the golden eggs but sell the goose for a mess of pottage.
§ Mr. John Harvey
It is reasonable to contend that the Government have been prejudiced, almost from the beginning, against the whole concept of the O.T.C. I suppose that the Bill is merely a logical sequel to the views which hon. Gentlemen opposite have held all along.
It is relevant that when Mr. Gordon Walker led for the then Opposition, in May, 1957, he referred to the O.T.C.s as representing the most controversial aspect of that year's Finance Bill. Nevertheless, he said:We think that there is a case for helping United Kingdom-based companies that operate overseas. This practice has spread very far, and is widespread in other countries with which our companies are competing".—[OFFICIAL REPORT, 7th May 1957; Vol. 569, c. 825–6.]Despite what was said on that occasion we now find, as my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow) said, that all the good work of the past could mean nothing, with perhaps many companies deciding to move from this to other countries. This could all happen because of two separate aspects of the Bill—the abolition of O.T.C.s and the application of the Corporation Tax with the narrowing of the difference, from the point of view of company taxation, between the taxation rates here and the rates in other countries. The advantages may be so narrowed that the benefit of the O.T.C. arrangement may in many cases be lost.
Earlier today, the Chancellor suggested that the Corporation Tax would not be levied in this country at as high a rate as in some other countries, ignoring the fact that personal taxation is so much higher here. Because of the level of taxation in this country, there will still be the danger, whether one abolishes the O.T.C. arrangement or not, that control of companies from London may well be subject to transfers and take-over bids which will in themselves cost this country quite a bit of money.
I suspect that the Chancellor does not intend to be conciliatory over this Amendment. Usually, the concessions, if one can give that name to taking away less than one had first intended to take, are announced over the weekend; and this is not among them. My hon. 600 Friend has tried to persuade the Financial Secretary that this sort of action causes a great deal of disquiet in many overseas countries and developing countries. It gives them grave cause to doubt our long-term interest in their future. Yet there is no division of opinion in the Committee in wanting to take a genuine long-term interest in their future. If we can only have an assurance from the Financial Secretary that he will look at this matter again between now and Report, that will be something.
I put three points to the hon. and learned Gentleman for his serious consideration. First, the Bill makes no provision to deal with an O.T.C. which may have accumulated losses. It is reasonable to ask that consideration be given to the position of O.T.C.s which have not thus far been able to get off the ground. The initial years are often the most difficult, and for something to be cut off in this way calls for a quid pro quo from the Government.
Second, we have already, in another context, arranged to afford a tailing-off period of seven years in order that benefits under a former order of things may be continued while companies work out their salvations under the new régime. Is it not possible to have a similar tailing-off period of seven years for overseas trading corporations? It would be of great help to those which have only just started developing an industry in one country or another. One could accept in return that no new O.T.C. undertaking should be encouraged in any such tailing-off period.
Third, if the O.T.C. provisions are to be cancelled, the Chancellor ought to consider some relaxation of the provisions of Section 468 of the Income Tax Act, 1952, which at present requires a United Kingdom company which wishes to set up a company abroad to obtain permission from the Treasury. In equity, if the O.T.C. arrangement is to be dismantled, the Chancellor should give careful thought to these three suggestions.
§ 10.45 p.m.
§ Mr. Turton
As this Amendment is being taken with Amendment 533, I would remind the Committee that this subsection is the "weed killer" subsection to which my right hon. Friend the Member for Birmingham, Handsworth 601 (Sir E. Boyle) alluded earlier. This is the subsection which prompted Sir Jock Campbell to say that in his view this would have deleterious effect generally on overseas investment in the Commonwealth and would cause a number of companies to hand over and get rid of their interests to foreign concerns. That is why I would have thought the whole Committee would be anxious to scrutinise very carefully this proposal to abolish overseas trading corporations.
If the Government are determined to abolish overseas trade corporations, then the purpose of the Amendment is to exempt overseas trade corporations in the Commonwealth. My hon. Friends and I take the view that we have a rôle to play in the developing countries of the Commonwealth and that the overseas trade corporations are the best way of fulfilling that rôle.
I gather from the intervention of the Chancellor earlier that Sir Jock Campbell had been rather worried because his comments in his annual report had shown that he was no longer voting Labour.
§ Mr. MacDermot
The right hon. Gentleman misunderstands. My right hon. Friend's complaint was that the Press reported fully his chairman's speech which had been published before the recent concessions were announced. At that time Sir Jock Campbell made a further statement welcoming these concessions and he issued a Press hand-out which, with the exception of one national newspaper, the Press failed to give any publicity to and thereby gave an entirely false impression.
§ Mr. Turton
This may apply to the "weed killer". He said that the effect of this provision was to encourage British companies to be got rid of to foreign interests, which is the very point which my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow) was making. I can quite understand the protestations of Sir Jock Campbell that he is still going to vote Labour. Those of us who remember his article in the Observer "Why I am Voting Labour" started:My younger son asked me why on earth I was going to vote Labour about a week be fore the 'Observer' asked me to write this article.
§ The Temporary Chairman (Sir Harry Legge-Bourke)
I would ask the right hon. Gentleman to remember that we are relating the discussion to whether or not subsection (3) should stand part of the Clause. I do not think Sir Jock Campbell is in the Clause.
§ Mr. Turton
With respect, Sir Harry, that is the whole point. Sir Jock Campbell's remarks were directed to the dangerous effect this subsection will have on overseas trading corporations and companies working and trading overseas like Booker Brothers.
§ The Temporary Chairman
I would accept, of course, from the right hon. Gentleman that Sir Jock Campbell may have made some remarks relevant to the Clause. As long as he keeps his comments to that all will be well.
§ Mr. Turton
Sir Jock Campbell wrote:'Everybody at school,' he added, 'thinks you're barmy!'That, I think, explains the intervention of my right hon. Friend the Member for Handsworth, and also the intervention of the Chancellor. We will leave it there.
Here the Government are making a direct attack on Commonwealth investment and on companies trading in the Commonwealth. I believe that a great deal of our influence in the world has arisen from the work of these companies which have been enjoying the benefits of the overseas trade corporations.
If that benefit is to he withdrawn by the Government, I challenge them either to bring in comparable benefits to encourage development by British companies in the developing Commonwealth or to say that they are definitely against Commonwealth Development, which is something quite contrary to everything they said when they were in opposition.
I see no justification for this. As I have said before, I can see a justification for this Committee taking great care that we do not waste our investment capacity at the present time in view of the balance of payments, but I suggest that this subsection is damaging our balance of payments position and that one of the reasons for the bad trade figures announced yesterday is that this Bill obviously is intended to damage Britain's 603 role in investing overseas and has caused a lack of confidence in Britain throughout the world.
§ Mr. Harold Lever
It is reassuring that the junior school remains loyal to Conservative principles however much their influenced has diminished in more adult circles. I do not rise to deal with the merits of the subsection. I have the wrong reflexes, Sir Harry. I am rather in favour of leaving the maximum of tax reliefs and even considering increasing them but it is not always possible to do that. I rise to deal with one short point worth considering.
Some companies brought their business to this country because of the overseas trading corporation provisions. I want to ask my hon. and learned Friend to undertake that, in the case of companies which came here on the faith that they could enjoy the privileges given overseas trading corporations, no obstacle will be placed in the way of their returning to a foreign domicile of their choice provided they can satisfy the Revenue or some judicial department of the Revenue that they came here in good faith in order to take advantage of the O.T.C. provisions.
It would be quite wrong if a company were lured to this country because of these provisions and then when those provisions were withdrawn we were to enforce against it statutory difficulties in removing its domicile from this country.
§ Mr. MacDermot
I dislike answering hypothetical questions. I do not know whether my hon. Friend or any other hon. Member can give me an example of any such companies.
§ Mr. Lever
I deplore bandying about the affairs of individual companies across the Floor of the Committee. I do not intend to take part in it. I shall ask my hon. and learned Friend to accept my assurance that I do not raise this matter as an exercise in hypothetics. I happen to know one case at any rate where a man claims that his company came to this country precisely because of these facilities. All I want is an assurance as a matter of principle, if such cases do exist, we shall not have it said against us that we brought people here, as it were, by false pretences and that some 604 arrangements will be made to give fair play to those who can genuinely satisfy the authorities that they came here in order to obtain these facilities which are now being withdrawn.
§ Mr. John Wells
My right hon. Friend the Member for Thirsk and Malton (Mr. Turton) has dealt with the Commonwealth aspect. I want to deal briefly with the effect on Ceylon alone. It has long been a tradition of retiring planters and planters about to retire in Ceylon to invest their savings in plantation companies. Many of these plantation companies derived benefits from the O.T.C. system and with this provision these retiring planters will be in an even worse financial position than they are in today. I would draw the attention of the Financial Secretary to some of the simple facts of life.
As far as these people are concerned the Ceylon Government, or the previous Ceylon Government, as advised by our Government's present advisers allowed these people to bring out what they call a lakh and a half of rupees, that is, approximately £15,000, on retirement. This represents their life savings. They come to this country where they have not been insured under the Health Service, where they draw no retirement benefits, and they are faced with buying a house and insuring themselves, and providing out of the residue of this money for a pension. They are going to be in a very much worse position than many people with humble executive appointments in our own country. This subsection will have a very adverse effect on those companies, from which these retired people draw the bulk of their income.
Secondly, it will have an adverse effect on the essential need for modernising the tea gardens. Many London-based tea companies have been waiting to see what would be the outcome of the recent Ceylon elections and, now they have seen, they are prepared to invest widely and substantially in the tea plantations there. But with this subsection thrust before them it will be virtually impossible for them to maintain their renewals and replacements in the gardens and continue to pay the dividends, which it has been traditional for the holders of their shares to expect.
605 People who buy shares in a tropical company realise that they are taking a heavy risk and they expect to have a substantial return in those years when they get a good return. I would remind the Financial Secretary that this subsection will have a bad effect, both on the economy of Ceylon and upon the position of retired British subjects who have given their life's work to that island. I hope the Government will review this again before the Report stage. If they cannot review it again, for some reason which the Financial Secretary may give us later, I hope that they will look at the particular plight of these two bodies of people in our Commonwealth, namely, the retired planters and the tea garden estate managers.
§ 11.0 p.m.
§ Mr. David Webster (Weston-super-Mare)
I am happy to support my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow), who has allowed me to put my name to his Amendment. I want, first, to talk about the Malaysian situation and the rubber plantations. Unlike my hon. Friend, I have no interest at stake here, but I think that to take away the status of the overseas trading corporations is very much against the policy which the Government are at present pursuing in Malaysia. If one takes away their status then the dividend cover will be reduced considerably and, possibly, the dividened itself will be reduced. That is as it may be, but it will certainly mean that there will be less to plough back for replanting these rubber plantations.
At the time of the Communist uprising in Malaya one of the great features of the Templer plan was not only to crush the rising but to get the villagers on our side by introducing a major replanting operation with assistance from this country. Now at one stroke of the pen we are taking away our ability to do this while at the same time the Prime Minister states that he supports Vietnam and the situation in Malaysia. He is, as far as I can see, going to hand over Malaysia on a plate.
I would remind the Financial Secretary that Malaysia has earned tremendous reserves and banked them in this country and has also been a large dollar earner. 606 The price of natural rubber may fluctuate considerably and it may be at a disadvantage as against synthetic rubber, but I would have thought that to take away the overseas trading corporation status of Malaysian rubber companies would deal a body blow and mean a very serious loss to Malaysia's economy.
To come to the other product, tin—and again I have no interest whatever to declare—the tin companies have considerable expenditure on river dredgers. For them the Bill means, if their sometimes slender dividend cover is cut, or if they cannot maintain a dividend, a reduction in their reserves. Copra plantations, fibre plantations, will also be very much damaged, and this in an area which cannot depend on manufactured products; but which depends very much on raw material products. It will be dealt a really shattering blow by the Government's proposals. The whole of the present policy of the Government of trying to protect the Far East will be undermined by the Government's own economic tactic. I am quite convinced that we shall have another Pavlovian display by the Government.
It was said that Sir Jock Campbell did not make cheerful enough remarks when the Chancellor gave concessions in the past. This is because the Chancellor makes a practice of making concessions at 11 o'clock at night. Having first of all given us absolutely the worst possible consideration and the worst possible terms in the Bill, he then brings in a concession and expects everybody to cheer. The fact is he causes so much unsettlement. I hope he will be here shortly and in a better mood than he was earlier on and will make some concession upon this point. We heard from the Chancellor the day before yesterday that we were round the corner. Round the bend would perhaps be a more appropriate expression. The abolition of overseas trading company status is a longterm project, he says. It does not in any way solve the problem of the present-time and is thoroughly irrelevant and probably doctrinaire.
We have heard a good deal about oil companies today, and I shall not repeat all that, but we have also heard over the last three years from the present Prime Minister that the Commonwealth is the thing for him. First we heard it during 607 the Common Market discussions, because it was a way in which he could try to stultify the Common Market discussions. Then we heard it again during the election. Now that that is out of the way we hear nothing very much to the advantage of the Commonwealth. The only thing which seems to have happened is that we have given the Beatles the M.B.E. If we take away overseas trading company status we shall reduce London's status as a great financial centre. The Chancellor at present is doing everything within his power to try to save the £ and the currency. He should remember that if he takes away overseas trading company status from these companies he will reduce our chances of remaining a reserve currency. This is something for which he should have some concern.
We hear rather frightening noises from other parts of the world about trade booming, but it may not boom for all that time. I am not trying to knock anybody. I am quoting Mr. McChesney Martin, Chairman of the Federal Reserve Board. Not only he but other economists are anxious that there may be a turndown of international trade, and anything which is done to reduce overseas trading company status at the present time is going to add to that sort of pressure. I believe that there is a risk that it might happen towards the end of this year, and if the Government do not make some concession, they will be responsible in a considerable way for adding to this problem.
§ Mr. MacDermot
We have had a fairly full debate on these three Amendments, and I have been asked a considerable number of questions. It might, therefore, be convenient if I sought to answer them at this stage.
The main Amendment, which was moved by the hon. Member for Reading (Mr. Peter Emery), would omit from the Bill the provision abolishing overseas trade corporation status. As the Committee is aware, this status is granted to a company resident here, but which trades solely overseas, and, provided it qualifies for the status, the effect is that it is not liable to either Income Tax or Profits Tax here. The dividends, when distributed, are liable to tax, but the shareholder can set off against his 608 liability to Income Tax here any foreign tax which has been paid. The effect of this, in particular, is to give a strong inducement to people to invest in overseas trade corporations which are trading in countries where the rate of tax is lower than the United Kingdom rate.
The important point here is to see what effect the introduction of our Corporation Tax system has upon the O.T.C. companies. To put the matter quite shortly, the position is that as far as the companies are concerned, the advantage of O.T.C. status will largely disappear. This is reflected as a matter of £ s. d. in the fact that, as has already been announced by my right hon. Friend, the removal of the exemption of O.T.C.s from the liability to tax in relation to Corporation Tax involves merely the sum of £2 million a year. The removal of the advantage to the shareholder involves a greater sum, depending of course on the rate of the liability to tax, but it is estimated that the tax involved on distributed dividends to shareholders is between £25 million and £37 million.
The effect of the main Amendment in this respect is a little obscure. It is not clear from the Amendment, nor am I clear from the hon. Gentleman's speech whether the intention is merely to exempt O.T.C. profits from Income Tax—in which case the Amendment would have relatively little effect—or whether the intention is to preserve the existing treatment of dividends by which credit is given for the overseas tax. If the latter is intended, it is wholly unacceptable, for the reasons stated in the debate that we had recently on the question of overspill, namely, that it will conflict entirely with the whole principle of the separation of company from shareholder taxation.
The criticisms which have been made of the abolition of O.T.C. status concern two different classes of company, depending on how they are affected. In the O.T.C.s operating in countries where there is a higher rate of taxation than we have, the problem is essentially the one which we have been discussing in the former set of Amendments, namely, the question of overspill.
The objection is exactly the same, and the problem is the same as that of other 609 companies which will lose the advantage of overspill and will not be able to set off the foreign tax against the liability of the shareholder to United Kingdom tax. There is nothing I can add to the reasons which have already been given why we must reject these arguments. But most O.T.C.s are operating in countries where the overseas tax rate is about the same as ours is likely to be.
To give some examples—the tax rate in Malaya is 40 per cent., in Nigeria it is 40 per cent., in Australia it is 42.5 per cent., and so on.
§ Mr. MacDermot
In Ceylon it is immensely high, but any difficulties which shareholders in Ceylon companies are having at the moment are due to the activities of the Ceylon Government rather than the United Kingdom Government.
§ Mr. MacDermot
Perhaps if they had taken some of the advice that has been given and stood by it they would not be in the difficulty they are in now.
The problem with these companies is that they have been high distributors. In other words, they are faced with the same problem of the effect of Corporation Tax upon high distributors that United Kingdom companies will have. It is a problem peculiar to overseas trade corporations, and the whole object and purpose of the introduction of the Corporation Tax is to provide an incentive for companies to plough back rather than distribute.
Their problem is not a special one, other than that there are special problems for them in connection with transitional relief. This is a point which I was particularly asked to deal with by the hon. Member for Walthamstow, East (Mr. John Harvey). Representations have been made to my right hon. Friend pointing cut that owing to the special tax position of O.T.C.s up to now they would derive less advantage from the transitional relief provisions in the Bill than other companies who are faced with this problem which high distributors have as a result of the introduction of Corporation Tax.
610 My right hon. Friend has been impressed by these arguments, and on the Order Paper there appear, in the new Schedule, special additional transitional relief provisions. It would be out of order for me to go into them in detail, but, summarising them, the effect will be that these companies will be given relief under Clause 79, on the assumption that in the base year the overseas tax on exempt trading income was equivalent to the then rates of Income Tax and Profits Tax in this country, which in most cases will be a combined rate of 53¾ per cent. The result is that the O.T.C.s will receive the same kind of easement that United Kingdom companies would receive from the effect of the fall in the rate of company taxation. The fact that it is the high distributors who are really suffering and complaining shows that the O.T.C. scheme has largely failed in its object.
I come now to my answers to the main questions put by the hon. Member for Reading. He quoted from a speech made by his right hon. Friend the Member for Monmouth (Mr. Thorneycroft) when introducing the O.T.C. scheme. I want to supplement his quotation with another. The right hon. Gentleman made it clear when introducing the scheme that its object was to help United Kingdom companies to compete more effectively with locally-based companies operating under easier tax rules in relation to ploughback of profits. In commending his proposals to this Committee, he said:I believe them to be a justifiable reform in our tax system and a legitimate help to companies that plough back their profits overseas in competition with those that operate under easier tax laws."—[OFFICIAL REPORT, 9th April, 1957; Vol. 568, c. 992.]The hon. Member for Weston-super-Mare (Mr. Webster) and other hon. Members, speaking in support of these Amendments, indicated that it was on their policy of plough-back that these O.T.C. companies would suffer. Experience has shown—and the figures show, I think—that instead of using the considerable tax advantage of the O.T.C. scheme in order to increase their plough-back, the O.T.C. companies as a whole have used this tax advantage to swell the distributions to their shareholders.
611 11.15 p.m.
Comparing the rate of distribution of O.T.C. companies with those of other companies operating overseas, one finds that they have distributed a much higher proportion of their net earnings than United Kingdom companies operating overseas taken as a whole, and a considerably higher proportion than nonresident subsidiaries of United Kingdom parent companies. Taking all companies as a whole, the ratio is distribution of net dividends 48.5 per cent. and retentions 51.5 per cent. This compares with the sort of figure for all United Kingdom companies of distributions between 45 and 50 per cent. The nonresident subsidiaries of United Kingdom companies distributed only 43 per cent. and their retentions were 57 per cent.
Turning to the O.T.C. companies, their net dividend has been 68 per cent. and their retention 32 per cent. —
§ Mr. John Wells rose—
§ Mr. MacDermot
I will finish this point, if I may.
These figures are even more striking if one looks at the distribution pattern of a selective sample—a representative sample selected from overseas trade corporations and comparing their distributions before and after the introduction of O.T.C. legislation. Their distributions before show that their net dividends were 22 per cent. and their retentions 19.5 per cent. This is after paying tax of 58.4 per cent. on their total profits. As a result of the introduction of the O.T.C. scheme, their tax liability was reduced to only 41.7 per cent. of their net profits. However, their distribution of net dividends rose from 22 per cent. to 35 per cent. while their retentions rose only from 19.5 per cent. to 23 per cent.
This shows, quite clearly, that three-quarters of the gain was used in order to increase dividends, and only one-quarter in order to increase retentions.
§ Mr. John Wells
That was the precise point which I was going to ask the Financial Secretary—to give us the figure before the introduction of the O.T.C. legislation and after. Could he say whether this selective sample—I think that that was the phrase he used—refers to all O.T.C.s over the whole range of overseas coun- 612 tries, or does it refer specifically to tropical countries and companies? I believe that the percentage for tropical countries would not at all bear out the figures which he has just given.
§ Mr. MacDermot
No, it is not confined to a particular class of O.T.C. company. It is a representative sample—I made a slip of the tongue in saying a "selective" sample. [Interruption.] Hon. Members can form their own conclusions. Perhaps they can do what has not been done yet and that is to bring forward examples to the Committee to indicate that, as a result of the O.T.C. legislation, what they consider to be representative companies have increased their plough-back. I was asked to give information and what information I have shows that the trend has been the other way.
This leads to the second main argument put against the abolition of O.T.C. status, which is that it would harm the developing countries. If the evidence was that the O.T.C.s had used the advantage to increase their plough-back, the argument would have a good deal more force than it has, but I do accept that the action which we have taken in introducing Corporation Tax will have a moderating effect on the O.T.C.s, as it will on all overseas investment. This is a matter which we have already debated at great length today and the Committee will not want me to go over the general argument again. It is also our intention to help developing countries within the limit of our ability, a matter to which my right hon. Friend referred to earlier. He said, as he has said before, that he will watch the position carefully and be ready to consider whether any new action is needed.
In this connection, it is right to point out that the companies which are investing in overseas countries with a high rate of taxation—the examples of Ceylon and India were given—will be worse off than those operating in the United Kingdom or in countries which have a similar rate of taxation to ours. This is due to the high overseas rates of taxation. I would only say that if the overseas countries want to encourage United Kingdom investment, it is up to them to consider what should be the right rate of taxation for them to impose on overseas investment, rather than 613 for them to expect the United Kingdom to give special tax reliefs in order to remove the disincentive effect of their own high rates of taxation.
It has been argued that the effect of the abolition of O.T.C. status would be to make those companies vulnerable to take over. That argument has been referred to, I think, by the Malaysian Chamber of Commerce and by a number of hon. Members. It relates to companies which have in the past been high distributors. It is said that as a result of this change they will be forced to reduce their dividends in order to maintain their retentions, and that this will result in a drop in the share values and expose them to that risk of take-over.
I would say that these are companies whose shares have been liable in the past to wide fluctuations and no action has been taken by investors abroad to make a take-over bid and seize control of the companies on those occasions when the share values have stood lower than the real value of the underlying assets. There seems very little ground, therefore, for the assumption that this would now be the result for those companies—
§ Sir J. Barlow
I can assure the hon. and learned Gentleman from very practical experience that in the past there have been a considerable number of takeover bidders—some of them successful and others not—when the prices of shares have been low. There were times five or six years ago when the assets of a London registered company were as much as the value of the shares, which placed the value of the estate at nothing. Provided the take-over bidders could get sufficient shares at 10 per cent. or 20 per cent. above the market value of the shares they could get the estates in Malaysia for virtually nothing—as some did. I have had considerable experience both of offering and of being shot at, so I know something about it. I can assure the Financial Secretary that he is not correct in a what he says.
§ Mr. George Y. Mackie
Surely there is a big difference between a take-over when shares are depressed because of political conditions, or because of the rubber market, and when there is depression of shares because of a change of taxation in this country?
§ Mr. MacDermot
There is, of course, a difference. But if the hon. Member for Middleton and Prestwich (Sir J. Barlow) is correct, he is supplying the answer to the hon. Member.
I do not deny that there may be circumstances in which there will be pressure of this kind. All I am saying is that it is our considered view that these fears have been exaggerated. We do not think the removal of O.T.C. status will have the effect which is suggested.
This argument is coupled with the argument that the result of the abolition of O.T.C. status will provide an incentive to these companies to emigrate. I intervened to seek information as to how it was suggested it would be to the tax advantage of shareholders here for these companies to emigrate. It certainly appeared to me, on considering the matter, that it would be only in cases where a large proportion of the shareholders of a company were overseas residents that there would be likely to be any real incentive or pressure for emigration. I think that from the examples given in committee that it was those cases, which I imagine are rather exceptional cases, that were being pleaded for.
My hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) asked me specifically to deal with the case of a company which had been lured here by the attraction of the tax advantage of O.T.C. status and whether that would be taken into account if an application were made for Treasury permission to emigrate under Section 468. I cannot commit anyone in advance on that, but it would obviously be a relevant consideration and one that would be taken into account in considering an applicaton of that kind.
The hon. Member for Walthamstow, East asked me to deal with the question of losses and whether some consideration could be given to accumulated losses to companies on abolition of status. I do not think that is a matter that would be right or in accordance with principle. The fact is that these companies have been exempt from liability to British tax. There is no reason, in these circumstances, why they should be allowed to carry forward losses they may have made in the past against liability to tax in the future, when they have been wholly exempt from liability up to now.
615 The final argument was put by the hon. Member for Reading in his speech. He pointed out that the introduction of the O.T.C. scheme was something that was carrying out the recommendation of the majority of the Royal Commission of 1955. I remember the debates on the original O.T.C. scheme because it was the first Finance Bill I attended, having appeared as a result of a by-election shortly before. The hon. Member quoted from Mr. Patrick Gordon Walker's speeches on that occasion. I would like to conclude by quoting some words of his on this subject.
On the Second Reading of the Finance Bill in 1957, when dealing with the proposal for the O.T.C. scheme, Mr. Gordon Walker was expressing his fears that it was rash to provide too much incentive to overseas investment, and he said:If we have too much overseas investment it must be at the expense of home investment. There is a great deal of evidence that overseas investment is now, in spite of what everyone is saying, running at about as high a level as we can afford. So far as I can make out, in the years 1953 to 1956 overseas investment was, on an average, about £200 million a year, which was more than twice the balance of payments surplus on current account.Over the last 10 years overseas investment has been running at considerably more than twice what we have been earning on current account. He went on:The amount that we are earning on current balances in our balance of payments must set some limit to the amount of overseas investment that we can make in any particular period. If in those circumstances overseas investment is too far increased, it will give us a very grave balance of payments problem because an increase in overseas investment reduces the foreign exchange available to buy imports. … We are worried about the short-run strain, especially with our very depleted resources. Even the long-term effects can be grave if home investment is falling, because home investment is the source of all our future output."—[OFFICIAL REPORT, 7th May, 1957; Vol. 569, c. 828–9.]Those fears that he expressed have, I think, been fully justified, and also justified the opposition to the introduction of the O.T.C. scheme which we made when we were in Opposition. So it is not that we have set out in this Finance Bill to single out O.T.C. schemes for any special treatment and to abolish them. What 616 we have done is to introduce the Corporation Tax system which will really in itself remove the advantage which the O.T.C. scheme gave to such companies. For the same reasons that we opposed then the specially favourable treatment, we do not see any reason for seeking at this stage to renew it by making some special exception for them from the general provisions of the Corporation Tax.
The hon. Member for Middleton and Prestwich referred to the Amendment which would have the effect of delaying for 10 years the abolition of the O.T.C. scheme. All I say about that is that, subject to the transitional relief that we have extended, if it is right to abolish this scheme, as we believe it is, now is the time to do it when we are going over to the new taxation system.
The right hon. Member for Thirsk and Malton (Mr. Turton) spoke to the Amendment, a variant of that one, which would continue the O.T.C. scheme for the Commonwealth. The fact is, of course, that the great majority of O.T.C. companies are operating within the Commonwealth. I can illustrate that by saying, as I have explained already, that the exemption of O.T.C.s from the operation of the Corporation Tax scheme would cost some £2 million. If we were to leave it for Commonwealth O.T.C.s alone, it would be some £1½ million, or three quarters of the total.
So it is not really as though there is some small class here for which we are being asked to make a special exemption. This would not be justifiable. If we thought it right to leave the scheme for these Commonwealth O.T.C.s, we should be accepting the argument that it was right to leave it for all O.T.C.s. For the reason that I have given, we do not think it is right, and I must advise the Committee to reject the Amendments.
§ Sir E. Boyle
My hon. Friend the Member for Reading (Mr. Peter Emery) moved the Amendment with a speech which I think the Committee found valuable, and I am sure that we are grateful to the Financial Secretary for having answered many of his points. But it must be becoming obvious to the Committee that we have quite a hard night and early morning ahead of us, and, therefore, I hope the Committee will not think me 617 discourteous if I do not reply to the debate with a speech as long as that which the Financial Secretary has just made. As the Financial Secretary has clearly explained, the companies that we are considering in these Amendments are United Kingdom companies controlled and managed from this country, but having all their actual trading operations abroad.
Perhaps it is worth remembering that when the O.T.C. scheme was introduced in the 1957 Finance Act, although admittedly it attracted a good deal of criticism from the Opposition of that time, nonetheless my right hon. Friend the Member for Monmouth (Mr. Thorneycroft) brought in the O.T.C. scheme at a time when there was a good deal of criticism on the grounds not that we were treating overseas profits and overseas investments too leniently but, on the contrary, that they were being too heavily taxed. As my right hon. Friend the Member for Monmouth pointed out in the Budget debate, the position had been much criticised over many years on the ground that the United Kingdom concern trading in an overseas country where tax rates were lower than ours was at a disadvantage compared with local competitors. That was distinctly the feeling at the time and it found echoes in the Royal Corn-mission Report, not only the majority Report but the often quoted minority Report as well.
In paragraph 175 of the minority Report, the Report which set out the case for a Capital Gains Tax amongst other things, the authors said:We appreciate the economic advantage of removing a discouragement to maintaining the central management of a concern in this country in the case of a British company that derives all, or substantially all, its income from overseas operations …It is true, as the Financial Secretary reminded us, that there was a good deal of criticism from the Opposition in those debates. On the other hand, I recall an Amendment which Mr. Gordon Walker himself moved, which would have preserved O.T.C.s at any rate in the Commonwealth. His Amendment to the Finance Bill of 1957 linked with the speech and the Amendment which my right hon. Friend the Member for Thirsk and Malton (Mr. Turton) moved tonight.
618 We should not be under any doubts as to the importance which some Commonwealth countries attach to O.T.C.s. I think my right hon. Friend the Member for Bexley (Mr. Heath) has already referred to the aide memoire which the Finance Minister of Malaysia has sent to the Chancellor of the Exchequer on this subject. It is interesting that the Finance Minister of Malaysia has said that it is quite right that the Malaysian Federal Government should do everything that it can to assist such companies should they wish to transfer to Malaysia.
I do not think we ought to be under any doubt at all about the importance of this aspect of Clause 60. My hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow) explained clearly the history of this matter and also the very distinguished part that many of these companies have played in Commonwealth countries.
Before I come to my last remarks I should like to refer to one or two detailed points which have been made in the debate. We are glad to hear from the Financial Secretary of the new provisions in connection with Clause 79 that the Chancellor has brought in. I am not sure whether the Financial Secretary fully realised the point that my hon. Friend the Member for Walthamstow, East (Mr. John Harvey) had in mind when he talked about losses. I think my hon. Friend's point was that some O.T.C.s might well at the moment be in the investment stage of a development which is as yet making no profits, and this is a serious matter which merits special consideration by the Government. I press the hon. and learned Gentleman to say that he will look at this again before Report, because there is a perfectly real point here of the situation that could arise in the case of a number of O.T.C.s.
Also on the question of Section 468, this may possibly have a rather bigger reference than the Financial Secretary suggested. If this Amendment is defeated and the Government go ahead with their plans for bringing O.T.C. status to an end, this will put more strain on Section 468. It will raise all the arguments which many of us can remember over many years in these debates about companies wishing to emigrate. I can remember the many long debates which we had in 1951 on what was Clause 33 619 of the Finance Bill of that year. This is a difficult matter, but undoubtedly the Government's intention will put more strain on Section 468.
Incidentally, this would be all the more so but for the fact that as a Government we never extended O.T.C. status beyond what was reasonable. Many people would say that we were too restrictive in not including, for example, finance houses within the O.T.C. status. There was a case for the limitation which my right hon. Friend the Member for Monmouth put, but no one could say that this was a status which was in any way extended too widely.
The Financial Secretary asked what we had in mind in putting down this Amendment: did we, in the light of the Corporation Tax, simply wish to exempt O.T.C. profits, or did we wish to preserve the existing treatment of dividends? I will give the Financial Secretary an answer, and it is the opposite side of the coin which he produced at the end of his speech. We were concerned not just with exempting O.T.C. profits, but with the existing treatment of dividends. Having devoted some hours to the previous group of Amendments, in which we objected to the treatment under the Corporation Tax of overseas investment from the point of view of the company and the shareholder, we would have been entirely inconsistent if we then took a completely different line on O.T.Cs. and merely concerned ourselves with O.T.C. profits.
The Financial Secretary is quite right in saying that if one is merely concerned with the profits of O.T.Cs. the rate of Corporation Tax, even under this Government, is not likely to be so high that a very large point will arise. Our moving of this Amendment is linked to our complaints about the Government's treatment of overspill and their attitude to double taxation in this Clause.
The Financial Secretary showed clearly and frankly towards the end of his speech that this subsection is a part of the overseas consequentials, the overseas implications, of bringing in the Corporation Tax. We should be wrong to let this Amendment go without a Division because I believe that if the Government of the day decide to bring 620 O.T.C. status to an end, and if the Opposition let it go without a Division, it is a very clear intimation that this is something tacitly acquiesced in on both sides of the Committee. I would therefore advise the Committee to divide both on the Amendment to leave out subsection (3) and the Amendment moved by my hon. Friend the Member for Middleton and Prestwich.
But we have an additional reason for wishing to divide the Committee. As the Financial Secretary has clearly shown that this subsection is part and parcel of the Government's attitude to the tax treatment of companies operating overseas—a treatment which we have protested about earlier today—I would ask my hon. Friends to carry the Amendment into the Division Lobby.
§ 11.45 p.m.
§ Mr. Geoffrey Hirst (Shipley)
I will not detain the Committee for long. Throughout our discussion of the Amendment I have sought to speak. The last time I rose the Financial Secretary cut me out, by no means for the first time in our deliberations in Committee. I assure the hon. and learned Gentleman that it is not easy to cut me out of this sort of debate.
I am glad that my right hon. Friend the Member for Birmingham, Hands-worth (Sir E. Boyle) indicated that we will divide on this Amendment and the one being discussed with it. Although I do not have a personal interest to declare in O.T.C.s, I have for long been interested in this matter. Like my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow), I have moved many technical Amendments when we have previously discussed O.T.C. legislation.
The Financial Secretary's observations revealed once again that the Government do not have a clear picture of the trading pattern of this country and what their proposals will mean to the large number of companies concerned, particularly those which operate in the Commonwealth. The hon. and learned Gentleman cannot dismiss the matter with a few statistics. He will know that if he has read the recent statements issued by the Rubber Growers' Association, the Hudson Bay Company and so on. Nor can 621 he defend the Government on the basis of what has happened in the past because rubber prices have been falling and fears about take-overs have not existed. There is all the difference in the world between a reduction of share prices because of a fall in rubber prices, with a consequential lowering of prices throughout the world, and a political move by the Government to depress the prices of British company shares.
We have heard a lot about portfolio investments, but that is not a one-way traffic. There are a great many holding companies which have been highly successful and which have attracted a great deal of investment to this country It is obvious—and the Financial Secretary admitted it—that this is another effort to divide the shareholder from the company. This makes absolute nonsense of the free enterprise system, and if hon. Gentlemen opposite do not believe in that system, they should rewrite
§ their election manifesto in more honest terms.
§ Mr. MacDermot
Would the hon. Gentleman say whether he considers that there is a free enterprise system in America?
§ Mr. MacDermot
The Americans have a Corporation Tax which separates the taxation of companies—[Interruption]—from the taxation of shareholders.
§ Question put, That the words proposed be left out, to the end of line 7, stand part of the Clause:—
§ The Committee divided: Ayes 159, Noes 152.623
|Division No. 178.]||AYES||[11.48 p.m.|
|Allaun, Frank (Salford, E.)||Fletcher, Sir Eric (Islington, E.)||McBride, Neil|
|Alldritt, Walter||Fletcher, Raymond (Ilkeston)||McCann, J.|
|Allen, Scholefield (Crewe)||Floud, Bernard||MacDermot, Niall|
|Armstrong, Ernest||Foley, Maurice||McGuire, Michael|
|Atkinson, Norman||Foot, Michael (Ebbw Vale)||McInnes, James|
|Barnett, Joel||Ford, Ben||Mackenzie, Gregor (Rutherglen)|
|Baxter, William||Fraser, Rt. Hn. Tom (Hamilton)||Mackie, John (Enfield, E.)|
|Bence, Cyril||Freeson, Reginald||MacMillan, Malcolm|
|Benn, Rt. Hn. Anthony Wedgwood||Garrett, W. E.||Mahon, Peter (Preston, S.)|
|Bennett, J. (Glasgow, Bridgeton)||Garrow, A.||Mahon, Simon (Bootle)|
|Binns, John||George, Lady Megan Lloyd||Manuel, Archie|
|Bishop, E. S.||Gourlay, Harry||Mapp, Charles|
|Blenkinsop, Arthur||Gregory, Arnold||Mason, Roy|
|Boston, T. G.||Grey, Charles||Maxwell, Robert|
|Bradley, Tom||Griffiths, David (Rother Valley)||Mayhew, Christopher|
|Bray, Dr. Jeremy||Griffiths, Will (M'chester, Exchange)||Mellish, Robert|
|Brown, Hugh D. (Glasgow, Provan)||Hamilton, James (Bothwell)||Mendelson, J. J.|
|Brown, R. W. (Shoreditch & Fbury)||Hamilton, William (West Fife)||Miller, Dr. M. S.|
|Buchan, Norman (Renfrewshire, W.)||Hamling, William (Woolwich, W.)||Morris, Alfred (Wythenshawe)|
|Buchanan, Richard||Hannan, William||Mulley, Rt. Hn. Frederick (SheffieldPk)|
|Butler, Herbert (Hackney, C.)||Harper, Joseph||Murray, Albert|
|Butler, Mrs. Joyce (Wood Green)||Hattersley, Roy||Norwood, Christopher|
|Callaghan, Rt. Hn. James||Hazell, Bert||O'Malley, Brian|
|Carmichael, Neil||Heffer, Eric S.||Oram, Albert E. (E. Ham, S.)|
|Coleman, Donald||Herbison, Rt. Hn. Margaret||Orbach, Maurice|
|Conlan, Bernard||Hobden, Dennis (Brighton, K'town)||Page, Derek (King's Lynn)|
|Corbet, Mrs. Freda||Holman, Percy||Paget, R. T.|
|Crawshaw, Richard||Horner, John||Palmer, Arthur|
|Crosland, Rt. Hn. Anthony||Howie, W.||Pannell, Rt. Hn. Charles|
|Cullen, Mrs. Alice||Hughes, Emrys (S. Ayrshire)||Parker, John|
|Dalyell, Tam||Irving, Sydney (Dartford)||Parkin, B. T.|
|Davies, G. Elfed (Rhondda, E.)||Jeger, Mrs. Lena (H'b'n&St.P'cras, S.)||Pentland, Norman|
|Dell, Edmund||Jenkins, Hugh (Putney)||Prentice, R. E.|
|Diamond, John||Johnson, Carol (Lewisham, S.)||Pursey, Cmdr. Harry|
|Dodds, Norman||Johnson, James (K'ston-on-Hull, W.)||Rees, Merlyn|
|Doig, Peter||Jones, Rt. Hn. Sir Elwyn(W.Ham, S.)||Reynolds, G. W.|
|Driberg, Tom||Jones, J. Idwal (Wrexham)||Richard, Ivor|
|Duffy, Dr. A. E. P.||Jones, T. W. (Merioneth)||Robertson, John (Paisley)|
|Dunn, James A.||Kelley, Richard||Rogers, George (Kensington, N.)|
|Dunnett, Jack||Kerr, Mrs. Anne (R'ter & Chatham)||Sheldon, Robert|
|Edelman, Maurice||Ledger, Ron||Shore, Peter (Stepney)|
|Edwards, Robert (Bilston)||Lever, Harold (Cheetham)||Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)|
|English, Michael||Lipton, Marcus||Silkin, John (Deptford)|
|Evans, Albert (Islington, S.W.)||Loughlin, Charles||Silverman, Julius (Aston)|
|Fitch, Alan (Wigan)||Mabon, Dr. J. Dickton||Skeffington, Arthur|
|Slater, Mrs. Harriet (Stoke, N.)||Varley, Eric G.||Williams, Mrs. Shirley (Hitchin)|
|Small, William||Wainwright, Edwin||Woodburn, Rt. Hn. A.|
|Snow, Julian||Walden, Brian (All Saints)||Woof, Robert|
|Steele, Thomas (Dunbartonshire, W.)||Wallace, George||Wyatt, Woodrow|
|Strauss, Rt. Hn. G. R. (Vauxhall)||Weatherill, Bernard||Yates, Victor (Ladywood)|
|Thomas, Iorwerth (Rhondda, W.)||Weitzman, David||Zilliacus, K.|
|Thomson, George (Dundee, E.)||Wells, William (Walsall, N.)||TELLERS FOR THE NOES:|
|Tomney, Frank||Whitlock, William||Mr. George Lawson and|
|Tuck, Raphael||Wilkins, W. A.||Mr. Ifor Davies.|
|Agnew, Commander Sir Peter||Gilmour, Sir John (East Fife)||More, Jasper|
|Alison, Michael (Barkston Ash)||Glover, Sir Douglas||Morrison, Charles (Devizes)|
|Allan, Robert (Paddington, S.)||Glyn, Sir Richard||Mott-Radclyffe, Sir Charles|
|Allason, James (Hemel Hempstead)||Goodhew, Victor||Munro-Lucas-Tooth, Sir Hugh|
|Anstruther-Gray, Rt. Hn. Sir W.||Grant, Anthony||Murton, Oscar|
|Awdry, Daniel||Grant-Ferris, R.||Neave, Airey|
|Baker, W. H. K.||Gresham Cooke, R.||Noble, Rt. Hn. Michael|
|Barber, Rt. Hn. Anthony||Grieve, Percy||Onslow, Cranley|
|Barlow, Sir John||Griffiths, Peter (Smethwick)||Osborn, John (Hallam)|
|Batsford, Brian||Grimond, Rt. Hn. J.||Osborne, Sir Cyril (Louth)|
|Bell, Ronald||Hall, John (Wycombe)||Page, R. Graham (Crosby)|
|Bennett, Dr. Reginald (Gos & Fhm)||Hall-Davis, A. G. F.||Peel, John|
|Berry, Hn. Anthony||Hamilton, Marquess of (Fermanagh)||Percival, Ian|
|Bessell, Peter||Harrison, Col. Sir Harwood (Eye)||Peyton, John|
|Bingham, R. M.||Harvey, John (Walthamstow, E.)||Pounder, Rafton|
|Birch, Rt. Hn. Nigel||Hastings, Stephen||Powell, Rt. Hn. J. Enoch|
|Black, Sir Cyril||Hawkins, Paul||Price, David (Eastleigh)|
|Blaker, Peter||Heald, Rt. Hn. Sir Lionel||Prior, J. M. L.|
|Box, Donald||Heath, Rt. Hn. Edward||Pym, Francis|
|Boyle, Rt. Hn. Sir Edward||Hendry, Forbes||Redmayne, Rt. Hn. Sir Martin|
|Brinton, Sir Tatton||Higgins, Terence L.||Ridley, Hn. Nicholas|
|Brown, Sir Edward (Bath)||Hill, J. E. B. (S. Norfolk)||Ridsdale, Julian|
|Bruce-Gardyne, J.||Hirst, Geoffrey||Roberts, Sir Peter (Heeley)|
|Buck, Antony||Hobson, Rt. Hn. Sir John||Rodgers, Sir John (Sevenoaks)|
|Buxton, Ronald||Hordern, Peter||Roots, William|
|Carlisle, Mark||Hornby, Richard||Scott-Hopkins, James|
|Carr, Rt. Hn. Robert||Hunt, John (Bromley)||Sharples, Richard|
|Channon, H. P. G.||Jenkin, Patrick (Woodford)||Shepherd, William|
|Chataway, Christopher||Johnston, Russell (Inverness)||Sinclair, Sir George|
|Chichester-Clark, R.||Jopling, Michael||Smith, Dudley (Br'ntf'd & Chiswick)|
|Clark, William (Nottingham, S.)||Kerr, Sir Hamilton (Cambridge)||Steel, David (Roxburgh)|
|Cordle, John||Kershaw, Anthony||Studholme, Sir Henry|
|Corfield, F. V.||King, Evelyn (Dorset, S.)||Summers, Sir Spencer|
|Crawley, Aidan||Kirk, Peter||Talbot, John E.|
|Crowder, F. P.||Lancaster, Col. C. G.||Taylor, Edward M. (G'gow, Cathcart)|
|Curran, Charles||Langford-Holt, Sir John||Taylor, Frank (Moss Side)|
|Dalkeith, Earl of||Lloyd, Rt. Hn.Geoffrey (Sut'nC'dfield)||Thorpe, Jeremy|
|Davies, Dr. Wyndham (Perry Barr)||Longbottom, Charles||Turton, Rt. Hn. R. H.|
|Dean, Paul||Longden, Gilbert||van Straubenzee, W. R.|
|Deedet, Rt. Hn. W. F.||Lubbock, Eric||Walder, David (High Peak)|
|Eden, Sir John||MacArthur, Ian||Walker, Peter (Worcester)|
|Elliot, Capt. Walter (Carshalton)||Mackie, George Y. (C'ness & S'land)||Ward, Dame Irene|
|Emery, Peter||Maclean, Sir Fitzroy||Webster, David|
|Errington, Sir Eric||Macleod, Rt. Hn. Iain||Whitelaw, William|
|Eyre, Reginald||Marples, Rt. Hn. Ernest||Wilson, Geoffrey (Truro)|
|Fell, Anthony||Mathew, Robert||Wise, A. R.|
|Fletcher-cooke, Charles (Darwen)||Maude, Angus||Yates, William (The Wrekin)|
|Foster, Sir John||Mawby, Ray||Younger, Hn. George|
|Fraser,Rt.Hn.Hugh(St'fford & Stone)||Maxwell-Hyslop, R. J.|
|Fraser, Ian (Plymouth, Sutton)||Maydon, Lt.-Cmdr. S. L. C.||TELLERS FOR THE NOES:|
|Gibson-Watt, David||Mitchell, David||Mr. Martin McLaren and|
|Gilmour, Ian (Norfolk, Central)||Monro, Hector||Mr. R. W. Elliott.|
Amendment proposed: In page 76, line 7, at end insert:
after 6th April 1976".—[So. J. Barlow.]
§ Question put, That those words be there inserted:—
§ The Committee divided: Ayes 152, Noes 158.627
|Division No. 179.]||AYES||[11.59 p.m.|
|Agnew, Commander Sir Peter||Batsford, Brian||Box, Donald|
|Alison, Michael (Barkston Ash)||Bell, Ronald||Boyle, Rt. Hn. Sir Edward|
|Allan, Robert (Paddington, S.)||Bennett, Dr. Reginald (Gos & Fhm)||Brintorr, sir Tatton|
|Allason, James (Hemel Hempstead)||Berry, Hn. Anthony||Brown, Sir Edward (Bath)|
|Anstruther-Gray, Rt. Hn. Sir W.||Bessell, Peter||Bruce-Gardyne, J.|
|Awdry, Daniel||Bingham, R. M.||BucK, Antony|
|Baker, W. H. K.||Birch, Rt. Hn. Nigel||Buxton, Ronald|
|Barber, Rt. Hn. Anthony||Black, Sir Cyril||Carlisle, Mark|
|Barlow, Sir John||Blaker, Peter||Carr, Rt. Hn. Robert|
|Channon, H. P. G.||Heath, Rt. Hn. Edward||Osborne, Sir Cyril (Louth)|
|Chataway, Christopher||Hendry, Forbes||Page, R. Graham (Crosby)|
|Chichester-Clark, R.||Higgins, Terence L.||Peel, John|
|Clark, William (Nottingham, S.)||Hill, J. E. B. (S. Norfolk)||Percival, Ian|
|Cordle, John||Hirst, Geoffrey||Peyton, John|
|Corfield, F. V.||Hobson, Rt. Hn. Sir John||Pounder, Rafton|
|Crawley, Airdan||Hordern Peter||Powell, Rt. Hn. J. Enoch|
|Crowder, F. P.||Hornby, Richard||Price, David (Eastleigh)|
|Curran, Charles||Hunt, John (Bromley)||Prior, J. M. L.|
|Dalkeith, Earl of||Jenkin, Patrick (Woodford)||Pym, Francis|
|Davies, Dr. Wyndham (Perry Barr)||Johnston, Russell (Inverness)||Redmayne, Rt. Hn. Sir Martin|
|Dean, Paul||Jopling, Michael||Ridley, Hn. Nicholas|
|Deedes, Rt. Hn. W. F.||Kerr, Sir Hamilton (Cambridge)||Ridsdale, Julian|
|Eden, Sir John||Kershaw, Anthony||Roberts, Sir Peter (Heeley)|
|Elliot, Capt. Walter (Carshalton)||King, Evelyn (Dorset, S.)||Rodgers, Sir John (Sevenoaks)|
|Emery, Peter||Kirk, Peter||Roots, William|
|Errington, Sir Eric||Lancaster, Col. C. G.||Scott-Hopkins, James|
|Eyre, Reginald||Langford-Holt, Sir John||Sharples, Richard|
|Fell, Anthony||Lloyd,Rt.Hn.Geoffrey(Sut'nC'dfield)||Shepherd, William|
|Fletcher-Cooke, Charles (Darwen)||Longbottom, Charles||Sinclair, Sir George|
|Foster, Sir John||Longden, Gilbert||Smith, Dudley (Br'ntf'd & Chiswick)|
|Fraser, Rt. Hn. Hugh (St'fford & Stone)||Lubbock, Eric||Steel, David (Roxburgh)|
|Fraser, Ian (Plymouth, Sutton)||MacArthur, Ian||Studholme, Sir Henry|
|Gibson-Watt, David||Mackie, George Y. (C'ness & S'land)||Summers, Sir Spencer|
|Gilmour, Ian (Norfolk, Central)||Maclean, Sir Fitzroy||Talbot, John E.|
|Gilmour, Sir John (East Fife)||Macleod, Rt. Hn. lain||Taylor, Edward M. (G'gow,Cathcart)|
|Glover, Sir Douglas||Marples, Rt. Hn. Ernest||Taylor, Frank (Moss Side)|
|Glyn, Sir Richard||Mathew, Robert||Thorpe, Jeremy|
|Goodhew, Victor||Maude, Angus||Turton, Rt. Hn. R. H.|
|Grant, Anthony||Mawby, Ray||van Straubenzee, W. R.|
|Grant-Ferris, R.||Maxwell-Hyslop, R. J.||Walder, David (High Peak)|
|Gresham Cooke, R.||Maydon, Lt.-Cmdr. S. L. C.||Walker, Peter (Worcester)|
|Grieve, Percy||Mitchell, David||Ward, Dame Irene|
|Griffiths, Peter (Smethwick)||Monro, Hector||Webster, David|
|Grimond, Rt. Hn. J.||More, Jasper||Whitelaw, William|
|Hall, John (Wycombe)||Morrison, Charles (Devizes)||Wilson, Geoffrey (Truro)|
|Hall-Davis, A. G. F.||Mott-Radclyffe, Sir Charles||Wise, A. R.|
|Hamilton, Marquess of (Fermanagh)||Munro-Lucas-Tooth, Sir Hugh||Yates, William (The Wrekin)|
|Harrison, Col. Sir Harwood (Eye)||Murton, Oscar||Younger, Hn. George|
|Harvey, John (Walthamstow, E.)||Neave, Airey|
|Hastings, Stephen||Noble, Rt. Hn. Michael||TELLERS FOR THE NOES:|
|Hawkins, Paul||Onslow, Cranley||Mr. Martin McLaren and|
|Heald, Rt. Hn. Sir Lionel||Osborn, John (Hallam)||Mr. R. W. Elliott.|
|Allaun, Frank (Salford, E.)||Dunn, James A.||Jenkins, Hugh (Putney)|
|Alldrltt, Walter||Dunnett, Jack||Johnson, Carol (Lewisham, S.)|
|Allen, Scholefield (Crewe)||Edelman, Maurice||Johnson, James (K'ston-on-Hull, W.)|
|Armstrong, Ernest||Edwards, Robert (Bilston)||Jones, Rt. Hn. SirElwyn (W. Ham, S.)|
|Atkinson, Norman||English, Michael||Jones, J. Idwal (Wrexham)|
|Barnett, Joel||Evans, Albert (Islington, S.W.)||Jones, T. W. (Merioneth)|
|Baxter, William||Fitch, Alan (Wigan)||Kelley, Richard|
|Bence, Cyril||Fletcher, Sir Eric (lslington, E.)||Kerr Mrt. Anne (R'ter & Chatham)|
|Benn, Rt. Hn. Anthony Wedgwood||Fletcher, Raymond (Iikeston)||Ledger, Ron|
|Bennett, J. (Glasgow, Bridgeton)||Floud, Bernard||Lever, Harold (Cheetham)|
|Binns, John||Foley, Maurice||Lipton, Marcus|
|Bishop, E. S.||Foot, Michael (Ebbw Vale)||Loughlin, Charles|
|Blenkinsop, Arthur||Ford, Ben||Mabon, Dr. J. Dickson|
|Boston, T. G.||Fraser, Rt. Hn. Tom (Hamilton)||McBride, Neil|
|Bradley, Tom||Freeson, Reginald||McCann, J.|
|Bray, Dr. Jeremy||Garrett, W. E.||MacDermot, Niall|
|Brown, Hugh D. (Glasgow, Provan)||Garrow, A.||McGuire, Michael|
|Brown, R. W. (Shoreditch & Fbury)||George, Lady Megan Lloyd||Mclnnes, James|
|Buchan, Norman (Renfrewshire. W.)||Gourlay, Harry||MacKenzie, Gregor (Rutherglen)|
|Buchanan, Richard||Gregory, Arnold||Mackie, John (Enfleld, E.)|
|Butler, Herbert (Hackney, C.)||Grey, Charles||MacMillan, Malcolm|
|Butler, Mrs. Joyce (Wood Green)||Griffiths, Will (M'chester, Exchange)||Mahon, Peter (Preston, S.)|
|Callaghan, Rt. Hn. James||Hamilton, James (Bothwell)||Mahon, Simon (Bootle)|
|Carmichael, Neil||Hamilton, William (West Fife)||Manuel, Archie|
|Coleman, Donald||Hamling, William (Woolwich, W.)||Mapp, Charles|
|Conlan, Bernard||Hannan, William||Mason, Roy|
|Corbet, Mrs. Freda||Harper, Joseph||Maxwell, Robert|
|Crawshaw, Richard||Hattersley, Roy||Mayhew, Christopher|
|Crosland, Rt. Hn. Anthony||Hazell, Bert||Mellish, Robert|
|Cullen, Mrs. Alice||Heffer, Eric S.||Mendelson, J. J.|
|Dalyell, Tam||Herbison, Rt. Hn. Margaret||Miller, Dr. M. S.|
|Davies, G. Elfed (Rhondda, E.)||Hobden, Dennis (Brighton, K'town.)||Morris, Alfred (Wythenshawe)|
|Dell, Edmund||Holman, Percy||Mulley,Rt.Hn.Frederick(SheffieldPk)|
|Diamond, John||Horner, John||Murray, Albert|
|Dodds, Norman||Howie, W.||Norwood, Christopher|
|Doig, Peter||Hughes, Emrys (S. Ayrshire)||O'Malley, Brian|
|Driberg, Tom||Irving, Sydney (Dartford)||Oram, Albert E. (E. Ham, S.)|
|Duffy, Dr. A. E. P.||Jeger, Mrs. Lena (H'b'n&St. P'cras, S.)||Orbach, Maurice|
|Page, Derek (King's Lynn)||Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)||Wallace, George|
|Paget, R. T.||Silkin, John (Deptford)||Watkins, Tudor|
|Palmer, Arthur||Silverman, Julius (Aston)||Weitzman, David|
|Pannell, Rt. Hn. Charles||Skeffington, Arthur||Wells, William (Walsall, N.)|
|Parker, John||Slater, Mrs. Harriet (Stoke, N.)||Whitlock, William|
|Parkin, B. T.||Small, William||Wilkins, W. A.|
|Pentland, Norman||Snow, Julian||Williams, Mrs. Shirley (Hitchin)|
|Prentice, R. E.||Steele, Thomas (Dunbartonshire, W.)||Woodburn, Rt. Hn. A.|
|Pursey, Cmdr. Harry||Strauss, Rt. Hn. G. R. (Vauxhall)||Woof, Robert|
|Rees, Merlyn||Thomas, Iorwerth (Rhondda, W.)||Wyatt, Woodrow|
|Reynolds, G. W.||Thomson, George (Dundee, E.)||Yates, Victor (Ladywood)|
|Richard, Ivor||Tomney, Frank||Zilliacus, K.|
|Robertson, John (Paisley)||Tuck, Raphael|
|Rogers, George (Kensington, N.)||Varley, Eric G.||TELLERS FOR THE NOES:|
|Sheldon, Robert||Wainwright, Edwin||Mr. George Lawson and|
|Shore, Peter (Stepney)||Walden, Brian (All Saints)||Mr. Ifor Davies.|
§ Question proposed, That the Clause stand part of the Bill.
§ Sir E. Boyle
I appreciate that we have been discussing this Clause for some hours and that the Committee will wish to come to a conclusion on it, but I should just like very briefly to ask the Government about one topic which has not so far, I think, figured in our discussion at all, namely, the Government's intentions about double taxation agreements with overseas countries, which, I would suggest, is very much within the ambit of subsection (1). This is a complex and technical issue, but I think I can put it in just a minute or two.
As I understand the position regarding portfolio investment, at present British companies, as it were, viewed from abroad, have their retentions taxed at 56¼ per cent., their distributed profits taxed at 15 per cent., and then there is withholding tax of 41¼ per cent. on dividends. The overseas investor can offset the 41 per cent. withholding tax against his own tax liability, if he has one. That is the present position. Then we have the new system which is envisaged in this Finance Bill. A company will, from the same standpoint, that is to say, looking at it from the point of view of someone abroad, have its retentions taxed at 40 per cent., its distributed profits taxed at 40 per cent., plus withholding tax of 41¼ per cent., pending negotiation of double taxation relief agreements with the various countries concerned.
As I understand the position, after the negotiation of agreements, the standard rate of withholding tax will be replaced by a new proper withholding tax at a lower level. I wanted to ask the Government if they could give some intimation of what this will be. My information is that it certainly will not be less than 628 15 per cent., is not likely to be more than 30 per cent., and that most people expect it to be round about 25 per cent. But whatever happens, the overseas investor is likely to be deterred by the fact that his dividend, even if he claims back withholding tax, will have suffered the irreducible minimum of 40 per cent. tax.
Of course, if withholding tax is as high as 25 per cent., or is anything above 16¼ per cent., the United Kingdom balance of payments will benefit from the fact that the Treasury is taking a bigger slice of the gross dividend payable to foreign shareholders, but in considering the balance of payments aspect of this one has got to consider the fact that this aspect is certain to be more than outweighed by the lower attractiveness, the diminishing attractiveness, of portfolio investment in Britain and the consequent effect on the balance of payments.
We have been considering the impact of the new arrangements for Corporation Tax on the balance of payments. Therefore, I think it is important that the Committee should hear something on this subject, which is highly relevant to the general effect the new scheme of Corporation Tax will have.
§ Mr. MacDermot
The right hon. Gentleman has had the advantage of having occupied my post before me, and I am sure he will be the first to realise the awkwardness of the situation in which he has placed me by asking me to elaborate to the Committee upon the intentions of the Government in a matter which is the subject of negotiations, some of which have already commenced, others of which will have to be undertaken. He has set out very fairly what are the balancing considerations which we shall have to have regard to. In this, as in many other other matters, one has got to weigh up 629 what may seem immediate short-term advantages against longer-term advantages to be gained from a different course. I am afraid that I cannot respond to his invitation in any way by suggesting any figures, because, of course, these would be relevant to our negotiating position. All I can say is teat the considerations to which he has alluded are very present to our minds, and we hope that we shall be able to negotiate satisfactory agreements with the other countries concerned, beginning—and perhaps most important, of course—with the United States of America.
§ Sir E. Boyle
And negotiating very carefully with our partners in O.E.C.D., which is of very great importance?
§ Mr. MacDermot
I quite agree. I think that for reasons which will be obvious, perhaps, the first one we must Live attention to is that with the United States, but, of course, the O.E.C.D. ones will be of great importance, too, and these, we hope, will follow quickly.
§ 12.15 a.m.
§ Mr. Maxwell-Hyslop
There are two points that I wish to raise on this Clause. First, I think it will be common to both sides of the Committee that there is not by any means catholic knowledge of the contents of the Bill, and even less is there an understanding of the taxation laws of foreign countries. This puts British firms which wish to open subsidiary companies in foreign countries in the difficult position of having to master not only British tax law, but also, for example, Brazilian tax law, because unless and until both have been mastered, they are unable to ascertain what will be the net return which they are likely to be able to give to their shareholders for the capital investment concerned. This adds a great additional hazard to those companies which wish to invest abroad, and it is an additional reason why extra relief should be given, rather an extra discouragement.
During the debate yesterday, and for a few minutes today, one class of subsidiary company abroad did not receive the attention which is due to it. There are a number of industries in this country which can sell abroad extensively only if they set up service organisations in customer countries. In many cases these service organisations will not show any 630 significant working profit, at any rate for a number of years, on their own operations, but, as experience has shown, it is essential to set them up if one is to compete effectively against very intense American competition.
I am thinking particularly of the aircraft industry where, because of the large capital sums involved, it is essential that the aircraft and their engines should be out of commission for the minimum possible time for servicing and overhaul. Experience has shown that it is often necessary to set up subsidiary companies abroad, not so much to handle sales, as to handle the servicing and overhaul of these products once they have been exported.
This is very often an extremely risky undertaking commercially. It is risky because, having set up an overhaul base, there is nothing to prevent large airline customers themselves then undertaking the overhaul of those engines or aircraft, and leaving the subsidiary company owning a large plant for which there is inadequate, or indeed no, throughput. This is not hypothetical. It has happened in a number of cases, and British firms which have struggled hard to break into and retain this export market have been left with burnt fingers as a result. I therefore urge the Financial Secretary to realise that it is inadequate merely to look at the profitability of the projected company, or of an existing company, when weighing the merits of the Clause. The total effect on the British export effort must be considered.
When I say that it must be considered, I should add that it is much easier to consider it, than to evaluate it. It is very difficult to prove, after a series of sales have been made, that they would not have been made had it not been for the servicing facilities which were set up concommitantly with them; and yet people who have had experience of trying to export in this very competitive market know that unless these facilities are provided, sales will not be made. Moreover, when these facilities are provided, it is necessary to ensure that they continue to be used, and the only effective way of doing that is to involve local capital in them, rather than have them as wholly-owned subsidiaries.
This presents such extremely complex problems for the companies concerned 631 in estimating what scale of investment, if any, is justified, that to add additional hazards of domestic tax by means of legislation in the form of this Clause is likely to result in firms deciding against this type of enterprise, not only to the
§ long-term, but also to the short-term disadvantage of our balance of payments.
§ Question put, That the Clause stand part of the Bill.
§ The Committee divided: Ayes 152, Noes 141.633
|Division No. 180.]||AYES||[12.19 a.m.|
|Allaun, Frank (Salford, E.)||Garrett, W. E.||Miller, Dr. M. S.|
|Alldritt, Walter||Garrow, A.||Morris, Alfred (Wythenshawe)|
|Allen, Scholefield (Crewe)||George, Lady Megan Lloyd||Mulley, Rt. Hn. Frederick (SheffieldPk)|
|Armstrong, Ernest||Gourlay, Harry||Murray, Albert|
|Atkinson, Norman||Gregory, Arnold||Norwood, Christopher|
|Baxter, William||Grey, Charles||O'Malley, Brian|
|Bence, Cyril||Griffiths, Will (M'chester, Exchange)||Oram, Albert E. (E. Ham, S.)|
|Benn, Rt. Hn. Anthony Wedgwood||Hamilton, James (Bothwell)||Orbach, Maurice|
|Bennett, J. (Glasgow, Bridgeton)||Hamilton, William (West Fife)||Paget, R. T.|
|Binns, John||Hamling, William (Woolwich, W.)||Palmer, Arthur|
|Bishop, E. S.||Hannan, William||Pannell, Rt. Hn. Charles|
|Blenkinsop, Arthur||Hattersley, Roy||Parker, John|
|Boston, T. G.||Hazell, Bert||Parkin, B. T.|
|Bradley, Tom||Heffer, Eric S.||Pentland, Norman|
|Bray, Dr. Jeremy||Herbison, Rt. Hn. Margaret||Prentice, R. E.|
|Brown, Hugh D. (Glasgow, Provan)||Hobden, Dennis (Brighton, K'town)||Pursey, Cmdr. Harry|
|Brown, R. W. (Shoreditch & Fbury)||Holman, Percy||Rees, Merlyn|
|Buchan, Norman (Renfrewshire, W.)||Horner, John||Reynolds, C. W.|
|Buchanan, Richard||Howie, W.||Richard, Ivor|
|Butler, Herbert (Hackney, C.)||Hughes, Emrys (S. Ayrshire)||Robertson, John (Paisley)|
|Butler, Mrs. Joyce (Wood Green)||Irving, Sydney (Dartford)||Sheldon, Robert|
|Callaghan, Rt. Hn. James||Jeger, Mrs. Lena (H'b'n&St. P'cras, S.)||Shore, Peter (Stepney)|
|Carmichael, Neil||Jenkins, Hugh (Putney)||Short,Rt. Hn. E. (N'c'tle-on-Tyne,C.)|
|Coleman, Donald||Johnson, Carol (Lewisham, S.)||SilKin, John (Deptford)|
|Conlan, Bernard||Johnson, james (K'ston-on-Hull, W.)||Silverman, Julius (Aston)|
|Corbet, Mrs. Freda||Jones, J. Idwal (Wrexham)||Skeffington, Arthur|
|Crawshaw, Richard||Jones, T. W. (Merioneth)||Slater, Mrs. Harriet (Stoke, N.)|
|Crosland, Rt. Hn. Anthony||Kelley, Richard||Small, William|
|Cullen, Mrs. Alice||Kerr, Mrs. Anne (R'ter & Chatham)||Snow, Julian|
|Dalyell, Tam||Lawson, George||Steele, Thomas (Dunbartonshire, W.)|
|Davies, G. Elfed (Rhondda, E.)||Ledger, Ron||Strauss, Rt. Hn. G. R. (Vauxhall)|
|Davies, Ifor (Gower)||Lee, Rt. Hn. Frederick (Newton)||Thomson, George (Dundee, E.)|
|Dell, Edmund||Lever, Harold (Cheetham)||Tuck, Raphael|
|Diamond, John||Lipton, Marcus||Varley, Eric G.|
|Dodds, Norman||Loughlin, Charles||Wainwright, Edwin|
|Doig, Peter||Mabon, Dr. J. Dickson||Walden, Brian (All Saints)|
|Driberg, Tom||McBride, Neil||Wallace, George|
|Duffy, Dr. A. E. P.||MacDermot, Niall||Watkins, Tudor|
|Dunn, James A.||McGuire, Michael||Weitzman, David|
|Dunnett, Jack||Mclnnes, James||Wells, William (Walsall, N.)|
|Edelman, Maurice||Mackenzie, Gregor (Rutherglen)||Whitlock, William|
|Edwards, Robert (Bilston)||Mackie, John (Enfield, E.)||Wilkins, W. A.|
|English, Michael||MacMillan, Malcolm||Williams, Mrs. Shirley (Hitchin)|
|Evans, Albert (Islington, S.W.)||Mahon, Peter (Preston, S.)||Woodburn, Rt. Hn. A.|
|Fitch, Alan (Wigan)||Mahon, Simon (Bootle)||Woof, Robert|
|Fletcher, Sir Eric (Islington, E.)||Manuel, Archie||Wyatt, Woodrow|
|Fletcher, Raymond (Iikeston)||Mapp, Charles||Yates, Victor (Ladywood)|
|Floud, Bernard||Mason, Roy||Zilliacus, K.|
|Foley, Maurice||Maxwell, Robert|
|Foot, Michael (Ebbw Vale)||Mayhew, Christopher||TELLERS FOR THE NOES:|
|Fraser, Rt. Hn. Tom (Hamilton)||Mellish, Robert||Mr. John McCann and|
|Freeson, Reginald||Mendelson, J. J.||Mr. Joseph Harper.|
|Agnew, Commander Sir Peter||Black, Sir Cyril||Clark, William (Nottingham, S.)|
|Alison, Michael (Barkston Ash)||Blaker, Peter||Cordle, John|
|Allan, Robert (Paddington, S.)||Box, Donald||Corfield, F. V.|
|Allason, James (Hemel Hempstead)||Boyle, Rt. Hn. Sir Edward||Crowder, F. P.|
|Anstruther-Gray, Rt. Hn. Sir W.||Brinton, Sir Tatton||Curran, Charles|
|Awdry, Daniel||Brown, Sir Edward (Bath)||Dalkeith, Earl of|
|Baker, W. H. K.||Bruce-Gardyne, J.||Davies, Dr. Wyndham (Perry Barr)|
|Barber, Rt. Hon. Anthony||Buck, Antony||Dean, Paul|
|Barlow, Sir John||Buxton, Ronald||Deedes, Rt. Hn. W. F.|
|Batsford, Brian||Carlisle, Mark||Eden, Sir John|
|Bell, Ronald||Carr, Rt. Hn. Robert||Elliott, R. W. (N'c'tle-upon-Tyne,N.)|
|Berry, Hn. Anthony||Channon, H. P. G.||Emery, Peter|
|Bingham, R. M.||Chataway, Christopher||Errington, Sir Eric|
|Birch, Rt. Hn. Nigel||Chichester-Clark, R.||Eyre, Reginald|
|Fell, Anthony||Kirk, Peter||Prior, J. M. L.|
|Fletchcr-Cooke, Charles (Darwen)||Lancaster, Col. C. G.||Pym, Francis|
|Fraser, Rt. Hn. Hugh (st'fford & Stone)||Langford-Holt, Sir John||Redmayne, Rt. Hn. Sir Martin|
|Fraser, Ian (Plymouth, Sutton)||Lloyd, Rt. Hn. Geoffrey (Sut'nC'dfield)||Ridley, Hn. Nicholas|
|Gilmour, Ian (Norfolk, Central)||Longbottom, Charles||Ridsdale, Julian|
|Gilmour, Sir John (East Fife)||Longden, Gilbert||Roberts, Sir Peter (Heeley)|
|Glover, Sir Douglas||Lubbock, Eric||Roots, William|
|Glyn, Sir Richard||MacArthur, Ian||Scott-Hopkins, James|
|Goodhew, Victor||Mackie, George Y. (C'ness & S'land)||Sharples, Richard|
|Grant, Anthony||McLaren, Martin||Shepherd, William|
|Grant-Ferris, R.||Maclean, Sir Fitzroy||Sinclair, Sir George|
|Gresham Cooke, R.||Macleod, Rt. Hn. Iain||Steel, David (Roxburgh)|
|Grieve, Percy||Marples, Rt. Hn. Ernest||Studholme, Sir Henry|
|Griffiths, Peter (Smethwick)||Mathew, Robert||Summers, Sir Spencer|
|Grimond, Rt. Hn. J.||Maude, Angus||Talbot, John E.|
|Hall, John (Wycombe)||Mawby, Ray||Taylor, Edward M. (G'gow, Catheart)|
|Hall-Davis, A. G. F.||Maxwell-Hyslop, R. J.||Taylor, Frank (Moss Side)|
|Hamilton, Marquess of (Fermanagh)||Maydon, Lt.-Cmdr. S. L. C.||Thorpe, Jeremy|
|Harvey, John (Walthamstow, E.)||Mitchell, David||Turton, Rt. Hn. R. H.|
|Hastings, Stephen||Monro, Hector||van Straubenzee, W. R.|
|Hawkins, Paul||Morrison, Charles (Devizes)||Walder, David (High Peak)|
|Heald, Rt. Hn. Sir Lionel||Mott-Radclyffe, Sir Charles||Walker, Peter (Worcester)|
|Heath, Rt. Hn. Edward||Munro-Lucas-Tooth, Sir Hugh||Ward, Dame Irene|
|Hendry, Forbes||Murton, Oscar||Webster, David|
|Higgins, Terence L.||Neave, Airey||Whitelaw, William|
|Hirst, Geoffrey||Noble, Rt. Hn. Michael||Wilson, Geoffrey (Truro)|
|Hobson, Rt. Hn. Sir John||Onslow, Cranley||Wise, A. R.|
|Hordern, Peter||Osborn, John (Hallam)||Yates, William (The Wrekin)|
|Hornby, Richard||Page, R. Graham (Crosby)||Younger, Hn. George|
|Hunt, John (Bromley)||Peel, John|
|Jenkin, Patrick (Woodford)||Percival, Ian|
|Johnston, Russell (Inverness)||Peyton, John||TELLERS FOR THE NOES:|
|Kerr, Sir Hamilton (Cambridge)||Pounder, Rafton||Mr. Jasper More and|
|Kershaw, Anthony||Powell, Rt. Hn. J. Enoch||Mr. Dudley Smith.|
|King, Evelyn (Dorset, S.)||Price, David (Eastleigh)|