§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Lang.]11.20 pm
§ Mr. Michael Grylls (Surrey, North-West)
The story of this United States taxation, which I am delighted to be able to raise in the House today, began when President Reagan was Governor of California. At that time, the Franchise Tax Board of California began to overstep the bounds of reasonableness and to use the vexatious system of taxation which became known as the world-wide reporting system. Governor Reagan opposed such action, but at that time the tax board was autonomous.
Other states then realised that there was the loophole exploited by the California board through the world-wide reporting system to raise revenue to which, in the view of most people, it was not entitled and the system began to be copied throughout the United States.
United Kingdom companies operating in the United States would have been saved from this taxation inequity by article 9(4) of a treaty between the United Kingdom and the United States which would have prohibited individual American states from using such a world-wide combined reporting system in assessing taxation for United Kingdom companies.
The House will recall that that treaty was signed on 31 December 1975 but was not ratified until nearly five years later. In 1978, however, the United States Senate removed from the treaty the clauses prohibiting the world-wide reporting system, although the majority of senators favoured the prohibition. Britain was then asked to accept the treaty after the removal of that vital part which would have saved our companies having to face that system. We were assured, however, that the United States Congress would resolve the situation by legislation and that it was really just a hiccup in the Senate.
The problem that I have outlined has been closely followed by the House—rightly, as we have a duty to protect our big trading companies overseas. On 19 July 1979, 129 hon. Members joined me in signing an early-day motion expressing the view that a vital feature of any relationship between the United Kingdom and the United States regarding relief from double taxation should include the prohibition of a world-wide reporting system. I hope to show that the views expressed in that early-day motion are every bit as valid or even more valid today than they were then.
Following the early-day motion and the debate, a number of hon. Members, including myself and the late Sir Graham Page, as well as the then Minister of State, Treasury, visited Washington in September 1979 and January 1980. I say this merely to demonstrate the position. During our visits, we and the Minister of State were assured that legislation was not far off.
On 18 February 1980 the House debated ratification of the treaty. I well remember telling the House of the assurances that I had received on my earlier visit to Washington and the assurances that I had had from the Chairmen of Ways and Means there that hearings would begin that very spring.
When I took part in the debate in February 1980, I remember saying that the message should be that we should accept the treaty and the convention because they had immense importance outside the world-wide reporting 824 system, and were important to Third world countries. Therefore, we should accept the treaty but rely on our friends to sort out this thorny and difficult problem so that United States-United Kingdom relations could return to a fair and friendly basis.
Many in the House today will believe that they have been badly let down by our friends on the other side of the Atlantic who have not delivered the legislation, despite the assurances which were given and the fact that we took the treaty in the belief that the Americans would sort it out.
During that debate the then Minister said:To those who remain concerned about the unitary question, I say that there is no disposition on the part of the Government to let the issue die. If the House approves the convention and if it is ratified thereafter, we shall be prepared to place on record, for all to see, our reservations on the unitary system. The Administration in the United States were left in no doubt by what I told them.†We do not propose to bury the issue if the House gives its approval to the convention and the three protocols. I have indicated the various ways in which we propose to pursue the issue in the years to come.I hope very much that the problem will be solved for us in large measure by the Hughes/Mori Bill."—[Official Report, 18 February 1980; Vol. 979, c. 179–99.]The Hughes/Mori Bill was legislation going through the Californian senate. The Minister was right, and if that legislation had been passed and been successful it would at least have solved the problem in California. Unfortunately, the Bill was not passed, so the problem was not even partially solved. We were left with failure by the United States side and so far, I regret to say, a failure by our Government to get the United States to introduce the legislation.
When the ratification took place on 25 March 1980, the British Government rightly expressed their strong disapproval of the world-wide combined reporting system in a note. It concluded:It must be emphasised however that the acceptance of the Senate reservation in no way implies approval of the unitary basis and that it is the urgent request of Her Majesty's Government for the reasons given above that the Government of the United States should use its best endeavours to eliminate the international application of the unitary basis of taxation.The Government were right to put in that reservation.
The present chairman of the Committee on Ways and Means in the United States recommended in 1977, when he was head of the task force to look into the question of foreign source income, that legislation should be enacted to prohibit this world-wide combined reporting system. In the United States Congress the chairman has received in the past two months written requests for hearings from members of his party who are members of the Committee and sponsoring a new Bill through Congress—H.R. 1983. I regret to say that to date there has been no response to this request to have hearings and proceed to that legislation in the United States.
There has been one more step. The Departments of Justice, Commerce, State and Treasury and the Trade Representatives Office of the Reagan administration all agreed to enter an amicus brief by the United States Solicitor-General, the senior law officer in the United States, in a case currently before the United States Supreme Court. That was filed in January of this year and was an important step. I hope that it will result in at least some changes in the world-wide reporting system.
However, it was strange, and I wish to quote from a letter that I have received from the Under-Secretary of the 825 Treasury in Washington in the last two days. He referred to the amicus curiae brief that had been filed by the United States Solicitor-General and said:The amicus brief argues that state use of the so called worldwide combined unitary method may result in multiple international taxation and impairs uniformity in the conduct of U.S. international tax policy.This is a quirk in the present situation in the American Administration. The Under-Secretary goes on to say:The Administration has not taken a position on the Mathias-Conable legislation.That is current legislation before the Congress. He states:The legislation raises difficult issues involving the desired relationship between the taxing powers of the states and the international economic relations of the United States. Those issues are of acute importance and sensitivity, particularly in light of the President's recently announced New Federalism initiatives for returning revenue sources and programme responsibility to the states. The Treasury Department is currently conducting a thorough, objective study of these issues.I think that the House of Commons in London would say to the United States Government in all seriousness that they cannot relinquish their right to determine international economic policy. They cannot shrug that off, leave it in the hands of the States and leave foreign companies at their beck and call and taxed in that strange way.
Where does that leave us? Parliament has been patient since 1975. This short debate gives us the opportunity to make it crystal clear to the United States Government that we cannot continue to accept the use of combined worldwide reporting systems by individual States while the United States Government have agreed in over 40 treaties not to use it. We are not alone in our opposition. Recently there have been treaties between the United States and France and Canada. The European Community on behalf of its member States has presented two successive demarches to the United States Government seeking a solution to the problem.
We have been patient because we are dealing with friends. We took our friends on trust. Unfortunately, in this instance our friends have not delivered. The only thing left to the British House of Commons—there will be increasing pressure on us to do this—is for us to take our own legislative action to apply a combined world-wide reporting system to United States companies that operate in Britain.
I do not hide from the House the fact that I would much regret having to do that, but the pressure is such and the damage that has been done to British companies is so serious that the only leverage that we have on Congress is to do to them what they have done to us. Then perhaps mutually we can both agree to stop doing it.
I realise that when the President comes to Britain in a week or two there will be many things for him and the Prime Minister to discuss, but I hope that my hon. Friend the Financial Secretary will be able to give me an assurance that my right hon. and learned Friend the Chancellor of the Exchequer will be able to raise the matter with Treasury Secretary Donald Regan, if he accompanies the President to the Versailles talks in France or earlier in London. I hope that my right hon. and learned Friend will say to him loud and clear that the patience of the House of Commons is running out. We have been overpatient. Unless action is taken quickly in the United States, we shall have to take action here because we believe that that is the only way in which we can protect 826 our companies, which have been the subject of the system. Almost without exception they have agreed that it is grossly unfair, it distorts international trade and is damaging to the friendly business relations that we wish to continue with the United States.
I ask my hon. Friend whether once again he would strongly make that view known to the United States Government and take advantage of the forthcoming visit to do that.
§ The Financial Secretary to the Treasury (Mr. Nicholas Ridley)
I congratulate my hon. Friend the Member for Surrey, North (Mr. Grylls) on securing the debate and on choosing a subject that I think is of great importance. It is useful to have this chance to put on the record the Government's continuing concern about the situation.
The use by certain States of the United States of the worldwide combined reporting system in conjunction with the unitary basis of taxation has been a long-standing issue between the United Kingdom and the United States of America. This basis is contrary to generally accepted international principles endorsed by the OECD.
The problems associated with the unitary basis of taxation are, first, that the State usually takes a larger share of profits than would be appropriate on normal internationally accepted principles. Secondly, the true commercial results of the business operated in the State are ignored. Thirdly, unrelieved double taxation could occur by the attribution of a share in already taxed world profits. Fourthly, there are excessive compliance costs in supplying worldwide data. Fifthly, it may set a precedent for other countries to use this arbitrary method.
As my hon. Friend said, the UK/USA double taxation convention as originally drafted would have excluded this method of taxation. The United States Senate rejected the treaty's application to State taxation on constitutional grounds. It threw out the famous article 94. The convention as now in force therefore only debars the United Kingdom and United States federal Governments from using the unitary basis in certain circumstances, and not, therefore, the States.
During the debate in the House on 18 February 1980 on the convention, the Government undertook not to let the issue die. The proposed United States legislation supported by the Carter Administration failed because of the Presidential election. Details of the representations to the present United States Administration are contained in the written answers which I have given on various dates. I shall run through the more salient of them.
In reply to a question from my hon. Friend, I stated:The Government have strongly urged the United States Government to introduce or support legislation to prevent the application by States of a unitary basis of taxation to British companies, not least because of the representations received from British industry. Within the last six months fresh approaches have been made, both orally and in writing, to the present Administration, and these include a note presented by the United Kingdom on behalf of the European Community expressing the joint concern of the ten Governments."—[Official Report, 11 December 1981; Vol. 14, c. 511.]As President of the European Community, we persuaded the other countries, and they joined with us, to leave a note with the Treasury in Washington urging it to do something about this.
Secondly, my right hon. and learned Friend the Chancellor of the Exchequer wrote to the Secretary of the 827 United States Treasury reiterating our concern, and giving him firm support on the matter of the amicus curiae brief which was lodged by the United States Government with the Supreme Court in the case of Chicago Bridge and Iron Company v Caterpillar Tractor Company et al. This brief was referred to by my hon. Friend. The brief challenges the constitutional validity of the application of the unitary apportionment method to multinational groups of companies. I have arranged for a copy of the brief, which includes as appendices the note presented on behalf of the European Community and my right hon. and learned Friend's letter, to be placed in the Library.
In addition to what the Government have done formally, I assure my hon. Friend that there have been many informal approaches to the American Government, making clear our concern at the lack of progress and the worries about how much longer we must wait for something to be done about this matter. We have not been alone. The CBI has done much to try to persuade the American Government of the rightness of our case. My hon. Friend the Member for Surrey, North-West has done an especially effective and energetic job in single-handedly trying to promote this cause both in Britian and in America. So also did the late Sir Graham Page, whose memory we all cherish so much. He and my hon. Friend fought a splendid crusade.
The American Solicitor-General has now filed the amicus curiae brief in the Chicago Bridge and lion Co. v Caterpillar Tractor Company State of Illinois case. That brief includes in the appendices the letter from my right hon. and learned Friend the Chancellor of the Exchequer, which challenges the constitutional validity of the application of the unitary proportion method to multinational groups of companies. The Supreme Court decision is expected in June.
It might help if I quote a few lines from my right hon. and learned Friend's letter to Mr. Donald Regan:It also introduces an undesirably asymmetric element"—that is unitary taxation—into the tax relationship between our two countries, since the unitary basis of taxation with worldwide combined reporting is not used by the United Kingdom at any level of government. This 828 imbalance is causing increasing concern, not only on the part of British companies which have made representations about it, but in Parliament where Questions have been asked.Now Adjournment debates have been raised, not least by my hon. Friend the Member for Surrey, North-West.
It may be unrealistic to expect any positive steps by the American Administration to support the two Bills now before Congress which would curb the unitary method of taxation until the Chicago Bridge case decision is known. If that decision does not resolve the issue to our satisfaction, the Government will redouble their efforts to press the American Administration to act. My hon. Friend has put forward several constructive suggestions, for which I am grateful. I shall certainly send a report of his speech to the American embassy so that it is relayed immediately to Washington, where the Adminstration can read of the strong feelings that he and many hen. Members, as well as businesses, share in this matter. I shall also bring to my right hon. and learned Friend the Chancellor's attention his suggestion that he should raise the matter with Mr. Donald Regan when he is here in the summer. I shall ask him to take particular note of that.
My hon. Friend went a little further and suggested that we might have to resort to some retaliation or enactment of similar legislation against American companies if they do not desist from doing this in some American states. I hope that it will not come to that, but I note the growing irritation. We shall make it clear to the American Government that the criticisms, as expressed by my hon. Friend, are mounting and that we cannot forever accept this assymetry in our taxation arrangements arid the deletion of article 9(4) from a treaty that was freely negotiated by both Governments and then altered unilaterally by one of the legislatures. If one of the legislatures in Washington feels able to alter treaties, the re is no reason why one of our Houses of Parliament should not have the same views in due course.
I am grateful to my hon. Friend and we shall redouble our efforts in the ways that I have suggested.
§ Question put and agreed to.
§ Adjourned accordingly at sixteen minutes to Twelve o' clock.