(2) For section 508 (extension of relief to United Kingdom and third country taxes) there shall be substituted the following section:—
508.—(1) Where a company resident outside the United Kingdom (in this section referred to as 'the overseas company') pays a dividend to a company resident in the United Kingdom (in this section referred to as 'the United Kingdom company') and the overseas company is related to the United Kingdom company, then, for the purpose of allowing credit under any arrangement against corporation tax in respect of the dividend, there shall be taken into account, as if it were tax payable under the law of the territory in which the overseas company is resident,—
§ (2) Where the overseas company has received a dividend from a third company and the third company is related to the overseas company, then, subject to subsection (4) below, there shall be treated for the purposes of subsection (1) above as tax paid by the overseas company in respect of its profits any underlying tax payable by the third company, to the extent that it would be taken into account under this Part of this Act if the dividend had been paid by a company resident outside the United Kingdom to a company resident in the United Kingdom and arrangements had provided for underlying tax to be taken into account.
§ (3) Where the third company has received a dividend from a fourth company and the fourth company is related to the third com 948 pany, then, subject to subsection (4) below, tax payable by the fourth company shall similarly be treated for the purposes of subsection (2) above as tax paid by the third company; and so on for successive companies each of which is related to the one before.
§ (4) Subsections (2) and (3) above are subject to the following limitations—
- (a) no tax shall be taken into account in respect of a dividend paid by a company resident in the United Kingdom except United Kingdom corporation tax and any tax for which that company is entitled to credit under this Part of this Act; and
- (b) no tax shall be taken into account in respect of a dividend paid by a company resident outside the United Kingdom to another such company unless it could have been taken into account under the other provisions of this Part of this Act had the other company been resident in the United Kingdom.
§ (5) For the purposes of this section a company is related to another company if that other company—
- (a) controls directly or indirectly, or
- (b) is a subsidiary of a company which controls directly or indirectly,
§ (3) In section 498(4) for the words from 'not less than 25 per cent.' to 'of the Commonwealth territories' there shall be substituted the words 'not less than 10 per cent. of the voting power in the company paying the dividend'.
§ (4) In section 507, in subsection (1), for the words '25 per cent.' there shall be substituted the words '10 per cent.' and subsections (2) and (3) shall be omitted.
§ Brought up, and read the First time.
§ The Financial Secretary to the Treasury (Mr. Patrick Jenkin)
I beg to move, That the Clause be read a Second time.
It would be for the convenience of the House if I dealt with the matter fairly briefly as I do not anticipate that there will be any matters of contention arising. You have indicated, Mr. Speaker, that we can also take new Clause 31–
§ Extension of unilateral relief from double taxation
§ In subsection (4) of section 498 Income and Corporation Taxes Act 1970 (Unilateral relief for double taxation) after the first mention of the word 'territories' and before the word 'any' insert the words: 'or holds an investment in the equity of the first mentioned company, the cost or market value whereof 949 at any time during the second company's chargeable accounting period is at least £1 million'. If I may, I will catch your eye again at the end of the debate so that I may reply to any points made relating to that Clause.
New Clause 12 refers to the entitlement of companies with investments overseas to relief for what is called underlying taxation, that is, the company tax paid by the foreign associate. Hitherto there have been a number of different provisions, depending on the country in which the overseas associate is operating and allowing different percentages of shareholding which entitle the United Kingdom company to claim relief for the underlying tax. This Clause implements the intention which the Government set out in the White Paper entitled "British Private Investment in Developing Countries", Cmnd. 4656 published in April of this year. There we said that we felt that with
… the growth of consortium investment and local participation in many developing countries, there is a case for extending the lower 10 per cent. limit more widely. The Government will be proposing an amendment to the Finance Bill accordingly.
§ The Clause goes further than the White Paper. It first replaces the 25 per cent. test with the 10 per cent. test in all cases. There would be very few 25 per cent. cases left if we merely eliminated them from developing countries. Secondly, we are putting on the Statute Book in an extended form what has hitherto operated as an Inland Revenue concession designed to deal with cases where voting control was held through a chain of companies. This does not alter the practice but we are constantly under pressure from the Public Accounts Committee to put into statutory form those arrangements which have operated sometimes over many years as concessions. I think the House will applaud the fact that we have taken this opportunity to write this concession into the Statute Book. This forms the bulk of the Clause.
I was intrigued to look up the record on the 10 per cent./25 per cent. point. I find that it is five years ago almost to the day when from the other Dispatch Box I suggested to the then Government that the time had come for the elimination of what I called the few isolated cases where the 25 per cent. is the rule.
Mr. Niall McDermot, one of my predecessors as Financial Secretary, replied:
I do not say that there will never come a day, when we have renegotiated these new agreements, when what is left of the unilateral system may not be adjusted to a level different from the prevailing one, but I do not think that this is the moment to seek to make such an adjustment."—[OFFICIAL REPORT, 21st June, 1966; Vol. 730, c. 521–2.]
In the view of the Government the time has come to make this change.
§ 4.30 p.m.
§ Mr. William Clark (Surrey, East)
I congratulate and thank my hon. Friend for introducing this new Clause. I would like to refer to the 10 per cent. holding because in many cases there can be a company which invests in an overseas company and has an initial 10 per cent. holding under which it qualifies for relief. Sometimes the overseas company may have a rights issue or a new share issue and the investment of the British company is diluted so that it is less than 10 per cent. Has the time not arrived for us to write into the Bill a figure of investment? In new Clause 31 I have suggested a figure of £1 million cost or market value. I am not wedded to the figure of £1 million. It could be less. It could be £250,000. I hope, however, that the point can be looked at because although a company may start with a 10 per cent. holding it might be that the 10 per cent. is diluted by an issue of shares in a company, where a British company has little say despite the fact of the 10 per cent. holding.
§ Mr. Dick Douglas (Clackmannan and East Stirlingshire)
I do not want to detain the House unduly on this new Clause, but there are one or two questions I should like to put. As the Minister has indicated, it extends certain provisions beyond the field of developing countries and I wanted to ask whether it in any way involves reciprocal arrangements particularly with European countries if existing members of the E.E.C. should develop with developing countries arrangements similar to the type of arrangements under the Clause.
Secondly, how does the Minister see the investigating procedures to ascertain the reduction from the 25 per cent. voting control?
§ Mr. Patrick Jenkin
Perhaps I may be allowed to deal first with questions of 951 the hon. Member for East Stirlingshire (Mr. Douglas). He is quite right when he implied that one of the factors which would determine the Government's view whether to accord the 10 per cent. test rather than the 25 per cent. would have been whether in the course of negotiations of double taxation conventions it would have been possible to ensure corresponding advantage to this country. The passage I read from Mr. MacDermot's speech indicated that while there were a great many of these agreements still to be negotiated the then Government did not feel it right to take this step. In many cases, we were able to negotiate 10 per cent. and get something for it in return. In others, we were not. We have taken the view that there would be scant prospect of getting anything further now, and, therefore, it would be right that we should make a rule universally rather than have very few cases left over where the 25 per cent. or, indeed, another test, might operate.
I would insert in parenthesis that the Republic of Ireland is a special case where special rules apply. This is not affected by the new Clause.
On the hon. Gentleman's second point about the investigating procedures, I do not think there would be anything new here. The Revenue will have to be satisfied that the necessary 10 per cent. voting control is exercised before giving the United Kingdom shareholding company relief for underlying tax. I do not anticipate any difficulty here.
I come to the point raised by my hon. Friend the Member for Surrey, East (Mr. William Clark). This is one which, naturally, he will realise, if he has studied the record, Ministers would have considered most carefully, because when we were in Opposition we advanced, both in the House and in the Committee, a similar proposition on the grounds that if one were going to draw a distinction between what one might call trading investment and portfolio investment, it would perhaps, so the argument runs, be unreal to continue to a voting test. There must be cases where less than a 10 per cent. shareholding could nevertheless be described as a trade investment. It would be unfair that the investment should be denied relief for underlying tax.
952 The point my hon. Friend made is, what of the case which starts with more than 10 per cent. and perhaps by a rights issue the United Kingdom shareholding company share is reduced and is not able to take up a share below 10 per cent.? The argument always advanced against this by our predecessors, and one which does seem to me to have a good deal of force in it, is that if one were to take the test, whether it be £1 million, as my hon. Friend mentioned, or £250,000 as he has also mentioned, inevitably one is drawing a distinction between a big company to the disadvantage of a small company. If one is going to allow a big company with less than 10 per cent. holding relief for underlying tax, the small company might even have a bigger share of the equity than a large company, and would be denied it.
Inevitably one would be creating new anomalies, anomalies, perhaps, different from the sort which exist already under the 10 per cent. rule, but, at the same time, it would be even more difficult to defend—for instance in the case which my hon. Friend mentioned of a rights issue which a United Kingdom shareholding company does not take up. It is not immediately obvious that it would be easier for a small company to take up a rights issue in an overseas company than it is for a big company. Indeed, many people might think that the opposite is the case. By putting in an absolute amount, £1 million or what have you, we would be emphasising the advantage which a big company would already have to the detriment of the small company. Therefore I have been convinced by the arguments that it would be wrong to depart from the usual test which I think is almost universally applied in double taxation conventions throughout the world, the distinction between direct and portfolio investment, namely, by reference to the voting control.
As I indicated earlier, we are refining this and making statutory extra statutory concessions with the definition of voting control. We are now making the 10 per cent. rule universal, and I think this is right.
These are matters which will fall to be considered in the light of Corporation tax reform. I should not like anyone to think that the changes foreshadowed in the 953 Green Paper are likely to lead to any significant changes in taxation of portfolio investment. It would be wrong to leave the House with any such impression.
I hope that, in the circumstances, my hon. Friend will think it right not to press his Amendment.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.